If you are like many that are new to technical trading in the markets, the flow of the “indicator madness” is unavoidable.
Virtually every stock market education service on the Internet, TV shows like CNBC, technical analysis trading platforms, or that old medium called books use indicators and analysis tools to help you predict trends and turning points.
With so much information about all the different indicators and analysis tools available, you may have even googled, what are the best indicators?
Or you may be searching for what the best settings are for these indicators.
With so many different indicators and the endless settings to “optimize” them, has the indicator madness begun to set in?
You might even be considering buying a set of "proprietary indicators" that promise to end the search and deliver a stream of profitable trades.
1) Bollinger Bands.
2) Ichimoku Kinko Hyo (AKA Ichimoku Cloud)
3) Relative Strength Index (RSI)
4) Moving Average Convergence Divergence (MACD)
5) Parabolic Stop and Reverse (SAR)
7) Average Directional Index (ADX)
BONUS: Trading with multiple indicators.
How to Stop the Indicator Madness
It simple, but you have to take some risk.
So there’s no money at risk, but there is a leap of faith to try something different.
The risk is going to be to remove all the indicators and lines from your charts.
Now, start looking for stocks or whatever you trade that have created a turning point or what’s commonly known as a reversal.
These can form in various ways: they can be as simple two or three bar reversal, or it can take multiple bars for the move actually to begin once the turn starts.
But don’t get hung up on the details right now.
What you are going to find is that the vast majority of the time, these reversals happen at a prior reversal point or area of price congestion.
In other words, where there’s been a turn or a stalled in the past, that is where another stall and potential reversal would occur again.
Whether the trend is up, down or sideways will affect the reversal, but for now, let’s stick with this simple but powerful concept that requires you to “look to the left” and see what’s there.
Let's review a sideways trend and an uptrend example.
Sideways Trading Range example
In the example above, using the chart of Goldman Sachs (GS), the move up further to the left created several consolidations.
When prices turned down from the high (blue star), they moved down through the first area to the left and then stalled just below the second. The fact that they didn’t stop there was an indication that sellers have taken control.
For that reason, the stabilization under the red arrow had lower odds of moving back to the high. MT Tip: Deep retracements through support are bearish.
The next reversal and turning point occurred at the last support area to the left.
Notice that this turning point (green triangle) took just over two weeks, which is not uncommon after such a deep move lower.
Our main focus here is what occurs when prices move to an area to the left.
Of course, It is possible that GS could have continued lower.
However, the congestion to the left had to be respected.
The building of new support in the area of the prior support resulted in a retracement back to the old high (purple down arrow) where it stalled.
To the left is where prices fell from previously, not a surprise.
The fall back down to the prior base is where prices stabilized and reversed (yellow triangle) last Friday.
Uptrend Trading Example
In the chart above of Arch Cap Group (ACGL) is an uptrend of higher highs and higher lows.
In an uptrend, the focus is where prices pull back to either the old high that we refer to as Minor Support (mS), or the prior low where the move initiated from that we refer to as Major Support (MS).
Pullbacks to mS show stronger demand than pullbacks to MS.
MT Tip: The shallower pullback, the greater the demand and the stronger the trend. The strongest trends do not pull back at all; they move sideways and then higher again.
The strongest trends create support, rather than retrace to it.
As prices trended up and pulled back, the majority of pullbacks retraced to MS.
Notice that the strongest move up only pulled back (green triangle) to mS.
The retracement from that high (purple arrow down) retraced back to MS.
Keep it Simple Stupid (KISS)
In this Chart of the Week, I have shown you one of the most powerful concepts technical analysis that you can use to anticipate reversal points.
We always wait for a reversal pattern to form before entering. And the entry for a Buy Setup is always above a prior candle’s high.
The combination of trend analysis in multiple time frames, the broader market direction, and relative strength or weakness will add to our odds of success.
I’ve used the daily time frame to explain the concept of looking to the left; however, if you’re an intra-day trader, the concept works in the same way.