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Approach of Investor while using Technical Indicators

Tuesday 15 May 2012

Investor & trader to focus on basic do’s and don’t while using technical indicators:
Moving Average Convergence Divergence (MACD)
Do’s
  • The basic rule for trading the MACD is to enter trend positions by referring only to the signal line calculation. Buy when the signal line moves above zero, and sell when the signal line falls below zero. 
  • Watch for Kiss of life and Kiss of death patterns to catch a big move.
  • Price is supreme, confirmation of prices is important to initiate position.
Don’t:
  • One should not try to preempt the patterns or crossover will happen.
Relative Strength Index:
Do’s:
  • A popular method of analyzing the RSI is to look for a divergences (both positive and negative) to get alert not react.
  • Look for stocks coming out of Overbought and Oversold regions.
  • Act on divergences only on price confirmation (preferably averages) to initiate trade.
Don’t:
  • Basic mistake many make when stock enters overbought zone, is to refrain from long side and look for shorting.
  • Another common mistake is that when stock enters oversold zone, people refrain from short side and look for buying.
  • Don’t create bias when looking at overbought and sold regions 
Stochastic
Do’s:
  • One should look at crossover for trading purposes. For example stochastic value bounces from lower levels of 20 and starts trading above 30 then one should look for going long with price confirmation.
  • Similarly on the short side, value falls from the higher levels of 80 with the crossover and starts trading below 80 then one can sell/short.
  • Look for price confirmation (preferably averages) for initiating trade.
Don’t:
  • Mistake of selling when stock has just entered the overbought zone.
  • Mistake of buying when stock has just entered the oversold zone.
  • Don’t create bias when looking at overbought and sold regions
Summarizing, indicators are only there to indicate, on their own they cannot initiate trade. One should always refer to price confirming tool to verify the significance of the indicator reading. Only after the confirmation, trade should be initiated with stop loss. Markets can remain irrational longer. One should always remember this while using indicator and oscillators and not tend to get bias.



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