Thursday, September 06, 2007

Indicators are not the be-all and end-all!

Lately I've received many e-mails and comments asking me why I made a trade when so-and-so indicator was divergent or not giving a buy or sell signal. This comment left by Rey is a good example:

"It looks like I don't see eye to eye with you sometimes regarding going long on stocks that are about to break out with divergance such as MACD, OBV or any others... all the books I have read teaches don't get in on break out if there is majar divergence...what am I missing here?

and also what is your favorit book(I was just layed off work so I got some more time to fill) and what softtware do you use to find and analyze stocks if I may ask..."


As I've stated before, I use indicators as a secondary tool. Sometimes I don't even look at them. I am a slave to price and volume patterns, along with support and resistance.

Earlier in my trading career (if you can call it that), I placed more emphasis on indicators than I do now. If there is an indicator out there that I have not studied or used, I would be surprised. As I've evolved as a trader, I've taken a more intuitive and simplistic approach. As a consequence of viewing, literally, over a million charts, I trust what my eyes tell me. I'm not going to back out of a trade I like because one or two indicators give me a negative signal. Especially when I could probably find an indicator or two that give the exact opposite signal!

That's not to say indicators have no value. I do like to use OBV, Stochastics and RSI (the only three I use regularly). However, I am not a slave to them, and will defer to my own judgment if it tells me to do the opposite of what these computations tell me to do.

That's exactly why I traded GRMN, on the $105 breakout, although there was a divergence. The stock hit $108 today. Divergence be damned!

The four five books that I recommend most are on the top right margin of the blog. It's tough to pick one, but if I had to, it would be one of Thomas Bulkowksi's chart pattern books. The Farley book is good, if you have some background and don't mind reading through dense material that at times doesn't make sense.

I use Telechart for my evening chart reviews and scans.

5 comments:

Anonymous said...

Hello,
Would you be able to comment on a pullback entry on LFC and BCSI? both broke out a few days ago and reaching a support level. But the pullbac on BCSI in past 2 days was on increasing volume. LFC looks OK, it pulled back on low volume.

chris said...

Do you ever use TeleChart's MS and BOP in your analysis? Worden seems to be a really big fan of TSV in relation to SMAs.

What's a good book on learning all the technical indicators(Stochastics, OBV, Bollinger Bands, RSI)? Is there one book that covers all the indicators in depth?

The Market Speculator said...

Chris,
TSV usually, but not always, moves in line with OBV, so it's a matter of using what you like.

I do look at BP for assessing accumulation/distribution patterns. However, I gain more from just eyeballing volume and price movement than I do from bp.

I really good "starter" book for indicators is "Technical analysis for dummies" by Barberea Rockefeller. Also check out the investopedia site and Farley's HardRightEdge.com.

The Market Speculator said...

Anonymous:
Funny you mention those two stocks, as I had to take a hard look at them today. I am holding the remaining shares of my LFC trade. I've decided to stay in as long as the stock stays above $68. Your analysis of this stock is going to depend on the market. If the market tanks next week, LFC will go down with it (as will most China stocks).

I almost entered BSCI today. My gut tells me the pullback is over and we'll see a retest of the high. However, the entry is to far from breakout support to get a really good reward to risk ratio, so I passed.

Anonymous said...

yeah i'm extremely tempted to enter BCSI when i post it, but the volume was to low so i wasnt sure. It just went up $1 from the time i post it. ah..