Top 10 Rules for using Stock Chart Indicators Effectively.

Dear investor, use these rules to using Charting Indicators and you will be using a wealth of experience that comes only with years of trading!

“There is no liberation without labor…and there is no freedom which is free.”
Siri Singh

There are a lot of stock chart indicators out there; we cannot cover them all in the detail, however, the principles of using indicators are as follows

1. Understand How Chart Indicators Are Calculated

Understand how the stock chart indicators you are using are calculated and what they are designed to achieve. Some indicators are price only such as MACD, some indicators use price and volume in the calculations like Money Flow or OBV.  Understanding this difference is key.

2 – Use Divergence

When an oscillating indicator moves in the opposite direction to price, this is a vital sign. See all previous articles to review how divergences are used correctly.

3 – Backtest the Indicators

Did your selected indicators work on this stock in the past? Scroll backward to 1 year before. Then scroll forward day by day or week by week to see the indicator change, and then ask yourself.

  • What is this indicator telling me?
  • Would I buy/sell this stock based on the information shown?
  • If the indicators worked on this stock in the past, it may have a better chance of working in the future.
  • Related Article: The Best Backtesting Stockware for Stocks

4 – Use a Family of Indicators

Never use 1 indicator alone, use multiple indicators, they should mostly confirm each other. Use them as a suite of self-checks before making a decision.

5 – Use Indicators on Multiple Time-frames

Indicators can tell you different things when viewed through different time frames either 1 day, 5 days, monthly, yearly. Using different time frames you can review how far back a trend goes, and see if your hypothesis stands the test of time. Beware that reviewing trends further back than 2 years may render the data irrelevant. Sometimes markets have a very short memory and stocks can completely change character.

Some indicators are proprietary and come only with “Pay For” applications. The person who has a larger portfolio way do well to invest in a solution that provides professional-quality charting information. Telechart from the Worden Brothers is one such tool, that I believe delivers a superior Trading and investment framework.

The Worden Family has 2 particular indicators worthy of special mention, Time Segmented Volume (TSV) & Money Stream (MS). These indicators really deliver the goods and are alone worth the $29 per month subscription, never mind the rest of the application which is one of the finest solutions available to the private investor.

6 – Use Custom Timescales

You need to tune the timescales or parameters on the indicators so that they reflect the timescale that you want to invest.

  • If you are buying a stock for the long term (2-10 years), use longer-term time frames and base your decisions primarily on fundamentals, then on chart patterns.
  • If you are buying Mid-Term (6 months – 2 years), use Earnings Momentum in the last 6 quarters, plus the chart indicators, Moving Averages 50, 100, 200 days)
  • If you are buying short term (1 week to 6 months) use indicators that are tuned for the short term, Moving averages 10 & 20 Days, Money Flow, MACD (10:30:5), Stochastics.
  • If you are a day trader you are usually full-time, stressed out, and trading Real-Time / Intraday, which requires special software, and a penchant for losing money. The Liberated Stock Trader is not for you.

7 – Price is the Most Important Indicator

Price is the most important indicator of all, it does not matter what the other indicators say, if your stock is moving against you take action, do not blame the indicators.

8 – Be aware of the Market’s Influence

Be aware of the influence of the market over your stock, if it is a disaster day on the markets, it does not matter what the indicators tell you will happen, your stock can get dragged down with the masses.

9 – Pre-Define a Set of Trading Rules

Predefine a set of rules for the trade and test the rules.

For example:

  • MA 10 & 20 Cross Over
  • MACD shows a positive Divergence over 8 weeks
  • RSI shows a positive divergence

10 – Understand the meaning of supply and demand

Supply and demand can be gauged by using the Volume indicator in conjunction with price.  You need to understand that fluctuations in volume and price have a relationship and have a meaning.

Good luck, and may the Trend be with you.

Any questions, leave a comment!

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