Signals
Within The Noise
Technical tools must address both
numbers and emotions to locate promising trade setups. While state of the
art software builds very complex buy or sell signals, most technical
indicators miss important elements of the crowd behavior that ultimately
drives price change. For this essential task, turn to the visual
examination of recurring price and volume patterns. But don’t rely on
patterns alone. Instead, combine both forms of analysis and command a
highly accurate trading system.
Effective pattern analysis uncovers
crowd behavior by finding positive feedback (signal) within the random
price movement (noise) of stock charts. Classic formations contain
response fractals that predict how volatility and price movement will
evolve over time. A seasoned pattern reader can ignore mathematics (and
fundamentals) when underlying price development paints a clear picture.
But most traders still need to apply math-based technical indicators to
confirm important observations.
Each technical indicator has its own
unique fingerprint. These can be found in their repetitive
patterns. In fact, many print formations very similar to price bars. For
example, On Balance Volume often develops a head and
shoulders formation that has great predictive value. But even the best
math-based indicators contain both signal and noise. Learn their unique
patterns to determine when to listen to their message and when to ignore
them.
Every good analysis should validate
current conditions through both forward (strength)
oscillators and backward (momentum) indicators. Use popular
oscillating tools, such as Relative Strength Index (RSI) and
Stochastics, to identify overbought/oversold markets. Moving
Averages and Moving Average Convergence-Divergence
(MACD) provide the horsepower needed to look back and measure momentum
change. Or just draw simple trendlines and channels in all time frames and
use those instead as your momentum indicators.
Bollinger Bands
offer important feedback to the short-term trader. This
modern tool measures divergence between price movement and the underlying
trend. It displays output by wrapping around the price bars themselves.
Use these bands in conjunction with candlestick charting as a powerful
swing prediction system. These lesser-known indicators reveal valuable
chart landscape features and should find a place in every trader's
toolbox.
Stock analysis tools can be applied
equally to all time frames. Day traders should pack as much information as
they can into their 5-min price charts. Very short-term Bollinger Bands
effectively capture intraday support and resistance while a 5-bar
Stochastics measures the oscillation of buying and selling behavior.
