Divergence
By Ryan Litchfield
So why do we need indicators if we can trade profitably without them? Good question. The answer is that once you have developed good trading skills (able to identify profitable targets, entry and exit points, set stops and trade neutral) you can adjust the size or confidence in the trade by consulting certain indicators. By that I mean that when the stock signals a direction the indicators can give you a sense of how strong the signal is. You may then trade 500 shares or 2,000 depending on the strength of the indicator and your confidence level.
The bottom line is that I do not trade or advocate making trades based on indicators only. The stock movement is the ultimate decision maker. I do not care if 35 indicators say the stock is going up. I will trade when it does and if it goes down I will trade it down. I have witnessed a great many occurrences of stocks trading against the prediction of the indicators. So much so that I strongly advocate the indicators be treated as consultants not directors.
I prefer to use a small group of indicators that are time tested and predictive. I want specialists in key fields of interest like having a small medical clinic with the best neurologist, best oncologists etc. I also do not want to cloud the issue by getting too many opinions. For example I don’t want five neurologists; I just want a great one.
Indicators primarily focus on changes in behavior and trend strength. In other words, is it getting ready to change and/or how strong is the current move? This reflects what people want to know about a stock or a market. This is key to why I cleaned out my indicator closet and tried to make my trading life more simple and manageable. I had accumulated four over bought / over sold indicators, a few trend strength indicators etc. What survived was the Three Amigos who were later joined by a fourth making the Four Musketeers. I use these, as I said, as consultants and never let them override trading what the stock is actually doing.
I use these four musketeers along with candles and volume, however, I do not consider candlesticks and volume as separate technical indicators. I consider candles just a clarification of the line chart. It adds great value to the interpretation of the mood and momentum of the traders. Volume is not a technical indicator per se. Ooooh, blasphemous statement to some. Hold on now… It is a single data point, like pulse, where as all other indicators are made up of multiple data stream comparisons to make disease diagnosis. So I do not lean on volume too much as it is just a measure of interest level and fluctuations can be misleading and can be the result of very significant of very benign events. Let me explain, volume that coincides with news is like predicting rain by looking out side and stating whether it is raining or not. The barometer is the predictive indicator that suggested it yesterday. The most important volume activity would be significant variations of normal activity absent any news, or in opposition to the expected result from the news. The strongest volume signal actually comes when it remains normal in the face of significant price movement either up or down. That gives the strongest confirmation of the move.
The bottom line is that I do not trade or advocate making trades based on indicators only. The stock movement is the ultimate decision maker. I do not care if 35 indicators say the stock is going up. I will trade when it does and if it goes down I will trade it down. I have witnessed a great many occurrences of stocks trading against the prediction of the indicators. So much so that I strongly advocate the indicators be treated as consultants not directors.
I prefer to use a small group of indicators that are time tested and predictive. I want specialists in key fields of interest like having a small medical clinic with the best neurologist, best oncologists etc. I also do not want to cloud the issue by getting too many opinions. For example I don’t want five neurologists; I just want a great one.
Indicators primarily focus on changes in behavior and trend strength. In other words, is it getting ready to change and/or how strong is the current move? This reflects what people want to know about a stock or a market. This is key to why I cleaned out my indicator closet and tried to make my trading life more simple and manageable. I had accumulated four over bought / over sold indicators, a few trend strength indicators etc. What survived was the Three Amigos who were later joined by a fourth making the Four Musketeers. I use these, as I said, as consultants and never let them override trading what the stock is actually doing.
I use these four musketeers along with candles and volume, however, I do not consider candlesticks and volume as separate technical indicators. I consider candles just a clarification of the line chart. It adds great value to the interpretation of the mood and momentum of the traders. Volume is not a technical indicator per se. Ooooh, blasphemous statement to some. Hold on now… It is a single data point, like pulse, where as all other indicators are made up of multiple data stream comparisons to make disease diagnosis. So I do not lean on volume too much as it is just a measure of interest level and fluctuations can be misleading and can be the result of very significant of very benign events. Let me explain, volume that coincides with news is like predicting rain by looking out side and stating whether it is raining or not. The barometer is the predictive indicator that suggested it yesterday. The most important volume activity would be significant variations of normal activity absent any news, or in opposition to the expected result from the news. The strongest volume signal actually comes when it remains normal in the face of significant price movement either up or down. That gives the strongest confirmation of the move.
