Brandon Wendell, CMT
Brandon Wendell
Technical indicators that we place on our charts simply offer a different perspective of past and current price action. These indicators are helpful, but are also lagging as they depend on past price or even need a current close before sending a signal. Online Trading Academy Graduates know that for the best trading opportunities, you need to rely on Supply and Demand to identify entries and exits.
When trading, there is nothing wrong with wanting additional confidence in our trades. That is where the indicators come into play. Indicators are technical assistance we use to help make decisions. Looking at the indicators the right way can give you the boost of confidence you need to enter your planned trade. It can also give you the necessary warning for you to honor your stop when things go awry.
Using the indicators for entry and exit signals alone can be disastrous. Remember that they are all lagging current price and will often offer their entry signals after the move has started. Extended Learning Track (XLT) program students know we want to be in the trade well before that.
So what good are the indicators if they are late in signaling entry? Plenty, that is if you use them in the right manner. There are several ways to best use any technical indicator. The first is to look for a divergence from price at a supply or demand zone. A positive divergence is when price is making lower lows while the indicator does not. The indicator will make higher lows or the same lows. This shows a lack of selling pressure/momentum. The best signal comes at an area of demand.
When price is reaching to new highs, but the indicator is making lower highs, or keeping the same high, you are seeing negative divergence. Combine that with price reaching a supply zone and you have an excellent signal for a reversal in trend. Notice how my divergence gave a timely signal to exit longs in the broad market well before the decline in the markets in November 2010.
Some people will undoubtedly question my entries for these trades as they want more confirmation to enter. I agree that proper entry may seem dangerous at times; you are buying when everyone seems to be selling and the markets seem weak, and you are selling when everyone wants to buy and the talk is bullish. I am not catching a falling knife in mid-air. I am grabbing it as it hits the floor and loses all momentum. At my entry, I may have more losing trades than someone who waits for the reversal of momentum. However, my losses will be much smaller as I can have tighter stops and can overcome my losses easily as I will also have larger winners.
This is the best way to use the indicators when trading. There are others though. I will discuss some additional uses for the indicators in future articles. If you are not sure how to properly use these tools, visit Online Trading Academy and sign up for a class.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD recovers to top end of consolidation ahead of Friday’s US NFP
EUR/USD drove back to the top end of recent consolidation on Thursday, recovering chart territory north of the 1.0700 handle as market risk appetite regains balance heading into another US Nonfarm Payrolls Friday.
GBP/USD tumbles below crucial 1.2500 as bears move in
GBP/USD turned south and dropped below 1.2500 in the American session on Thursday. The US Dollar continues to push higher following the Fed-inspired decline on Wednesday and doesn't allow the pair to regain its traction.
Japanese Yen trims some intraday losses as BoJ data supports Japan's intervention
The Japanese Yen rallied on Wednesday amid speculations of another intervention by authorities. The momentum, however, runs out of steam on the back of the divergent BoJ-Fed policy outlooks. Traders now look to the second-tier US data for some impetus ahead of the NFP report on Friday.
Editors’ Picks
AUD/USD post moderate gains on solid US data, weak Aussie PMI
The Australian Dollar registered solid gains of 0.65% against the US Dollar on Thursday, courtesy of an upbeat market mood amid solid economic data from the United States. However, the Federal Reserve’s latest monetary policy decision is still weighing on the Greenback. The AUD/USD trades at 0.6567.
EUR/USD recovers to top end of consolidation ahead of Friday’s US NFP
EUR/USD drove back to the top end of recent consolidation on Thursday, recovering chart territory north of the 1.0700 handle as market risk appetite regains balance heading into another US Nonfarm Payrolls Friday.
Gold recoils on hawkish Fed moves, unfazed by dropping yields and softer US Dollar
Gold price clings to the $2,300 figure in the mid-North American session on Thursday amid an upbeat market sentiment, falling US Treasury yields, and a softer US Dollar. Traders are still digesting Wednesday’s Federal Reserve decision to hold rates unchanged.
High hopes rouse for TON coin with Pantera as its latest investor
Ton blockchain could see more growth in the coming months after investment firm Pantera Capital announced a recent investment in the Layer-one blockchain, as disclosed in a blog post on Thursday.
NFP: The ultimate litmus test for doves vs. hawks
US Nonfarm Payrolls will undoubtedly be the focal point of upcoming data releases. The estimated figure stands at 241k, notably lower than the robust 303k reported in the previous release and below all other readings recorded this year.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.