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.