Students of Online Trading Academy know that the core strategy we use for trading centers around trends and supply and demand. In fact, we do not use many technical indicators if any at all in our trading. Technical indicators are based on past price movement and volume and use a mathematical calculation to summarize the trend and momentum of price.
Traders who use technical indicators for buying and selling signals will quickly find that they are prone to false and late signals. Mike Siewruk from our Tampa, Florida office and I were discussing the potential use of these indicators for trading. While we agreed that these indicators are not good for signaling purposes, Mike stated that they can still be useful to screen out stocks that are more likely to offer trading opportunities.
Many traders struggle with finding the right stocks to trade. They may have some favorites that they regularly follow, but if those securities are not displaying the right setups, there is no point in trading them. So a trader could be wise to use a scanning tool to find stocks that are most likely to demonstrate great trading opportunities.
When we trade, it is wise to find stocks that are moving in a similar fashion to the broad market indexes. These stocks are more likely to move further and faster with the markets to provide greater profits.
While I would not use a stochastic indicator to signal an entry for a long, a stock that is showing an extreme oversold reading on the stochastics while in an up trend on a larger timeframe could be pulling back into an excellent demand zone.
You could use a combination of momentum indicators to identify the strength of the trend with oscillators to time the potential reversals. For those of you who are not familiar, the momentum indicators measure the strength and direction of the prevailing trend with a slight lag.
Oscillators on the other hand show when price is oversold or overbought compared to previous prices. There are usually lines on the oscillators like the 80 or 20 line on the stochastics to show this. The problem with the oscillators is that the price can stay overbought or oversold for a while in a strong trend. That is why you need to rely on supply and demand zones to tell you the reversal points. Oscillators will only offer signals once prices have bounced from those zones.
You can learn how to read these indicators and oscillators from many trading books. To learn how to trade the proper way with Online Trading Academy’s core strategy, visit your local training center and enroll in one of our courses.