What is the Most Important Indicator of All?
Most stock market traders have a favorite technical indicator.
The one that they have the most confidence in. The one that, from experience, they trust the most. Or the one that they always look at first.
For some it is the RSI. Others like the Stochastic or the MACD . Or one of the literally hundreds of other indicators that are available.
Well, I love the MACD. And the Stochastic is also a favorite.
But there is one indicator that I refer to more often than any other. However, before I tell you what it is, it is important that this discussion is placed in context.
I always stress with the traders that I mentor that the most important part of your analysis is price action.
By this I mean that the very first thing you should look at is the shape of the stock's chart. And any patterns that you may be able to identify.
In particular, look for trends and consolidation. Candlestick reversal patterns and support and resistance levels. And be particularly aware of all time or 52-week highs or lows.
Also, be on the lookout for double tops and bottoms and triangles and head and shoulder patterns.
Because it is only in the context of the basic price action that you can make your trading decisions. And it is only from this understanding that you should begin to apply your technical indicators.
So, establish the context for your further analysis. Indeed, use this first process as a screening device.
Because, unless the chart immediately "speaks" to you, you should eliminate the stock from any further review.
What I mean by this is that unless there is a clear reversal pattern or potential for a breakout, move on. Don't waste time analyzing charts that have no likelihood of immediate movement.
And one of the best patterns for short-term trading is the channel. Always keep an eye out for these and when you find one, give serious consideration to trading them. Now, let's get back to our earlier discussion. What is the most important indicator?
Well, whilst this might surprise some of you, I believe it is volume.
You see volume is an indication of the strength of price action. A market needs high volume or increasing volume to sustain a movement in price.
So we want to see volume moving in the direction of the price. Increasing both in an uptrend and also a downtrend.
But realize that it takes more effort to push prices higher than it does to cause them to drop. So increasing volume is more significant in an uptrend than a downtrend.
If volume is diverging from the trend [going down instead of up] then we would normally not carry out any further analysis. Because the lack of volume means that there is a lower probability of price movement in the direction of the current trend.
Note however, that divergence can be an indication that a trend is about to end. So this can be an early sign of a reversal.
Another important aspect to volume that is often overlooked is in regard to retracements. Because the volume during retracements gives us a significant indication of the strength of the overall trend.
A strong uptrend should have higher volume on the upward legs of the trend and lower volume on the downward or corrective legs. Similarly in a downtrend.
Volume is best plotted below your chart as a histogram, or series of vertical lines.
And it helps to add a moving average line over the histogram to smooth the volume readings. I use a 3 day MA but you can experiment to see what works best for you.
But most importantly, always consider volume before entering a trade.
David Chandler For free mini-course on stock and options trading click the following link: http://www.StockMarketGenie.com http://stockmarketgenie.blogspot.com/ Ordinary People Making Extraordinary Profits! The above comments are offered for educational purposes only. We are not providing you with financial advice. We are simply sharing with you what has and hasn't worked for us personally. If you wish to trade or invest in the stock market you should obtain advice from a registered licensed advisor.
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
Mutual Funds: The Modern Den of Thieves!
Mutual funds were created with the idea that one person can specialize and manage the investments of a large pool of money from multiple investors. Before the great depression mutual funds were called investment pools and mutual fund managers were called pool operators.
Bottoms Ups
If you have talked to a stock broker or financial planner in the last few days I will bet they all agree that there are some great bargains out there and now is the time to start buying in anticipation that the market will go back up. You will also find agreement from the talking heads on CNBC and those talk radio station stock mavens.
Good News?
As the man said, "I've got some good news and I've got some bad news. What do you want to hear first?" It was replied, "Tell me the good news first".
Performance Funds
Mutual funds are doing more and more to discourage investors from leaving them and taking their money to a better performing fund. What does better performing mean? It has nothing to do with who the manager is, what the expense ratio is or how well they performed over the past 5 or 10 years.
Different Ways of Buying Stocks
Let's say you are interested in this one company. You read its annual report, like what you see and your calculation indicates that the stock is trading way below its fair value.
Stock Investment Advice
Stock investment advice is easy to find. Do you get cold called by brokers with the latest investment tip? I have, as have countless others around the globe.
How to Make Big Money Safely in Stock Market
(1) Stock Market is Tough Place to Make Any Money ConsistentlyNASDAQ or SP&500 averaged about -6% per year for 5 years between 1999 and 2003. Many individual investors who made killing in the internet bubble period got wiped out during those 5 years.
What is a Trading Plan - and Why You Need One?
How do you make money without picking tops and bottoms?I am glad you asked..
Investing in the Stock Market - When To!
Is really not as important as to how you invest in the stock market. And how you invest in the stock market should take into consideration what goals you are setting for that stock market investment.
Stock Market Insanity
Let's first define insanity. It is doing the same thing over and over and expecting a different result.
Online Broker Trade History Not Doing the Job
Let me start by saying that..
No Load Mutual Funds: Investment Hype vs. Investment Help
With the internet such a huge part of our daily lives, many investors have access to a wide range of instant investment information.Whether you're into stocks, bonds, mutual funds, futures or options, there are tons of electronic investment newsletters offering to turn your small stake into a giant fortune.
The Club
Yesterday I received my monthly issue of MONEY magazine. This issue has the special feature called "The Ultimate Investment Club" that highlights their picks for the top mutual fund managers.
Analyzing Growth Stocks: An Important Focus For Any Investor
Analyzing growth stocks is an important focus for any investor. This is especially important, since stocks are an irreplaceable part of any good investment plan, and since unbiased stock research is hard to find.
Box Of Chocolates
Ever have one of those sample boxes of candy? Each little piece is beautifully wrapped in colorful foil or decorated with an interesting design. Taste just one.
Protect Your 401K
Checked your 401K lately? Going back to about a year ago many of these retirement accounts have shrunk by 30%, some even more. What Happened?You have been putting money in for years and your employer may have been contributing to your plan also.
365/7/24
What does it take to be a stock trader? It takes a total mental commitment to the task. It becomes a complete way of life.
Are You A Stockaholic?
Today's society gives special recognition to alcoholics, sexaholics, binge-aholics, shopaholics, chocaholics and other "-aholics". What about stockaholics? Stockaholics are people who are overly obsessive about their stock market investments.
Basics of Stock Market
Financial markets provide their participants with the most favorable conditions for purchase/sale of financial instruments they have inside. Their major functions are: guaranteeing liquidity, forming assets prices within establishing proposition and demand and decreasing of operational expenses, incurred by the participants of the market.
Online Trading Strategy: Collecting Cash when Stocks Go UP - It PAYS to Know More than Others
When it comes to stock market trading it PAYS to have more knowledge than the rest of the pack. Pure gold can be harvested in each profitable trade that you accomplish.