By Brandon Wendell, Online Trading Academy Senior Instructor and Trader Mentor
As an instructor at Online Trading Academy and a trader, I am very familiar with many technical analysis tools. I further demonstrated my technical analysis knowledge by attaining the Chartered Market Technician designation. However, when it comes down to trading and profiting from market moves in any market, I always rely on the basic tools of supply and demand.
Many students claim that I trade differently than Sam Seiden or Michelle Volmering, and that I use technical tools like the CCI or the MACD to base my decisions. This couldn't be further from the truth. I use the indicators as odds enhancers, additional signals to improve my odds of a correct trade, not for the decision to enter itself.
Let's take, for instance, a trade that occurred on the SPY on Wednesday, Feb. 10th. Looking at my trading time frame, the 5-minute chart, I was able to identify a demand level that was violated and being tested as supply. This is a stronger resistance level. Additional indication for the trade is provided by the breakdown of moving averages indicating probable continuation of the downtrend.
Figure 1 I confirmed the breakdown on the larger time frame for perspective, my 15-minute chart. Note the MACD indicating strength in the downtrend. This is my use of the indicator to confirm supply and demand.
Figure 2 The target for the trade is naturally the next level of demand. Referring back to the first chart, we can see this level highlighted with the green lines at approximately 106.50. As price moved on, the trend grew stronger until it reached my target.
I was able to confirm whether to exit at my target, or allow the profits to continue by analyzing my price and indicators at the target zone. Looking at the following chart, I saw overwhelming evidence to take the profits and exit the trade as price showed: Buying pressure from bottom tails on the candles, an oversold condition in the Bollinger bands and CCI, and a loss of momentum in the MACD Histogram. Such overwhelming evidence prevents me from holding on too long in the trade as I now have many reasons to exit.
Figure 3 In all, the best use of technical indicators is as a decision support tool. Not for the decision to enter or exit itself. This applies for all types of trading, intraday, swing or position. To learn more about how to properly use these tools and which tools are best to use in which market environment, I invite you to join me and the other instructors in the Extended Learning Track (XLT) program offered by Online Trading Academy.
Have a great day.
- Brandon Wendell bwendell@tradingacademy.com
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