7 Tips How to Choose Stock Indicators

Best Indicator is Balance of Power for Trading

Stock indicators are one of the most useful tools for Individual Investors and Retail Traders. However choosing the right indicators for your Trading Style and Strategies can be a daunting task. There are over 250 indicators available for stock, index, market, and options analysis so I am providing helpful 7 tips how to choose stock indicators.

Most beginners simply use what they hear about in a weekend seminar, or read about on the internet. Unfortunately, just because an indicator is popular does not mean it is the best indicator for your Trading Style. More often than not when a trader uses an indicator that is widely promoted, they are unknowingly setting themselves up for chronic mediocre profits and whipsaw trades.

Consider the following 7 tips how to choose stock indicators for selecting the best ones for investing and trading in the automated market of today.

1. What is the Market Condition? This is not the uptrend or downtrend, but the overall condition of the market which is derived from the Market Participant Cycle. There are distinctly 9 Market Participant Groups. Where, when, and how they buy or sell dictates which of the 6 Market Conditions is present at any given time.

Usually a Market Condition will dominate from several weeks to several months or longer. Above all else, the Market Condition dictates what indicators will work ideally at that time.

2. What was the indicator writer’s intent? This is critical to know because each writer developed their indicator based on a specific Market Condition that was present at that time. They saw Price and Volume behaving a certain way, and wrote an indicator to expose that pattern and what it meant for investing or trading.

3. What are the limitations of the indicator? Every indicator has strengths and weaknesses. As an example, it has been proven empirically that MACD only works during a momentum uptrend. It fails dismally for selling short trading, and creates whipsaw trades during Trading Range and Platform Market Conditions. Knowing the limitations helps traders avoid using that indicator in the wrong Market Conditions.

4. What Market Data is present and used in the formula? Traders do not need to be mathematicians or learn how to write indicators, but they do need to know what data is included in the indicator. Price and Time indicators tend to lag as price must first move before the indicator can display the pattern in a line or histogram. Volume and Time indicators in our automated marketplace tend to lead price to some extent, due to how large lots buy and sell. Volume, Price, and Time indicators are the new Hybrid indicators leading price, because they incorporate all of the Market Data into their formulas.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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