All stock movement can be characterized
as alternating between trend and range. This observation is true for all
time frames. Markets move through a constant cycle of synergy, balance and
conflict as trend intensity and direction shift alignment through
different period views. The strongest trends arise when multiple time
frames stack up into directional positive feedback. The most
persistent ranges emerge when discontinuity increases the noise of
negative feedback through many periods and stalls price change.
Technical indicators have difficulty
viewing both trend and range at the same time. As a result, important
formulae tend to align along specialized paths that focus on one or the
other. Use trend-following tools such as moving averages,
MACD and price ROC to look into the rear view mirror and establish trend
strength, momentum and direction. Then reach forward with RSI, Stochastics
and other oscillators to inspect swing range cycles that
trap markets between measurable extremes.
You can investigate a poorly understood
quirk of market behavior using a third class of indicators. Standard
deviation and reversion to the mean reveal a strong
bias for markets to return to neutral states following supply/demand price
swings. Traders exploit this market behavior when they can locate extreme
Price channel construction provides an
excellent source for deviation analysis. Popular tools such as Bollinger
Bands identify price imbalance where reversals should occur. They also
point to narrow congestion where breakouts will develop. Even a simple
Parallel Price Channel will locate natural price extremes where the best
trading opportunities exist.
View all three sets of indicators on a
single price chart for a quick snapshot of the current trend. When all
views converge and are verified by the price pattern, the odds for a sharp
directional move greatly increase.