HAVE A MARVELOUS THURSDAY

 10 RULES OF TECHNICAL TRADING (CONTD)

8. Know the Warning Signs Trade MACD. The Moving Average Convergence Divergence (MACD) indicator combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal may be justified when the faster line crosses above the slower and both lines are below zero. A sell signal may be appropriate when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. A MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a “histogram” because vertical bars are used to show the difference between the two lines on the chart.
MACD helps with identifying when a trend reversal is likely. I like to use MACD on longer term charts but have not found it too effective a method on shorter time frames.

                                                                                                   

9. Trend or Not a Trend Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.
Quite obviously, when looking at a price chart, almost everyone can see if a trend is up or down. The ADX allows traders to be more specific by quantifying the strength of a trend. It also sheds light on whether a trend is likely to continue.

10. Know the Confirming Signs Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It is important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning sign that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.
Generally speaking, when you see a significant increase in volume coincide with other technical indicators, you should see new highs and lows followed by a trend reversal.

But perhaps most importantly, as Murphy said: “Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.”   

One final note of caution: Do not try to incorporate every technical tool out there in every single one of your trades. They all have value and some work well in concert with others, but when you try and deploy them all at once, you stand the risk of suffering “paralysis by analysis.”

Technical Analysis is a vital part of my trading and helps me make key decisions with almost every transaction. But I do not take lightly the fact that traders should not ignore fundamental factors. I’m simply a little more partial towards technicals.