I field a lot of questions about technical indicators. As a Chartered Market Technician (CMT) I have learned how to use many indicators and oscillators for trading. I have come to the conclusion that they are not necessary and only serve to confuse most novice traders.
When making trading decisions, we need to view raw price action. That is where you will find the information you need to make an educated decision on the markets. I am reminded of an old trade that I took in the Extended Learning Track (XLT) – Stock India class; I took a trade based on the tools we learned in both the class and in the Professional Trader course. Although this was an intraday trade, the tools and techniques can be applied to any time frame.
The first thing you may notice is that there aren’t any technical indicators on my chart. I didn’t need any for the trade. Price itself is the best indicator and when we reach areas of supply and demand, price movement can be predicted with a high degree of accuracy. Technical indicators are a derivative of price and while they are useful as an odds enhancer, their signals are always slightly delayed and may prevent you from obtaining the best entry.
In the trade I took, I also used the relationship of the stock to the broad market. Looking at the chart of the Nifty, I saw that the index was opening slightly positive, but was headed into a supply zone in the first five minutes of the day. Supply equals a potential selling opportunity. In previous articles, I discussed the exhaustion of retail orders in the morning that can also cause a trend reversal. It was no surprise to see the Nifty start to drop away from supply taking most stocks with it.
So, all I had to do was find a stock that was looking to rise into supply and offer me a shorting opportunity when the markets fell. It wasn’t that hard actually. Using a technique we teach in the class, I identified seven such candidates. I chose L&T for the trade. L&T was showing a gap up open. However, it was gapping just short of a strong supply level as indicated on the chart. This meant that when the markets found supply and started to turn, there was a high probability that L&T would do the same. High probability opportunities are what we as traders live for.
The gap was caused by a pre-market imbalance of supply and demand. The demand overwhelmed the sellers and price gaps up to where there is sufficient supply to satisfy the growing demand. Satisfy is the key word here. Once demand is satisfied, the price cannot move any higher. If it is at a supply zone, the increased selling pressure will cause price to fall. That is where I entered the short.
I exited at the gap fill as not to be greedy in my trade. Buyers found the stock to be cheap at yesterday’s close and bought at the open to cause a gap up. They may find it cheap again inciting a buying frenzy that would hurt my short position. As you can see, that is exactly what happened as prices ran higher once again from that level.
So, you don’t need really sophisticated tools or software to trade successfully. You simply need to understand the movement of price action and how greed and fear motivate people. If you don’t, I suggest you join us in one of our classes. Your trading account will thank you!