Monday, January 9, 2012

By incorporating high quality indicators that expose analysis not commonly used by most retail traders, you avoid the trap of the popular indicators.

MetaStock SPRS Series - Week 50 - TechniTrader® Weekly Discussion for MetaStock Users: SFY - January 9, 2012
By: Martha Stokes C.M.T.

One of the things I try to do with my students is to introduce them to indicators that are superior to the popular indicators many traders use. Just because an indicator is promoted heavily and is available on every charting system, doesn’t mean it is the best indicator. All that means is the indicator is at risk of over use.

By incorporating high quality indicators that expose analysis not commonly used by most retail traders, you avoid the trap of the popular indicators.

The trap is that extremely popular indicators are over used, and in many instances used by an automated trading system such as a red light/green light system and that becomes a big risk for the High frequency Trading formulas and Quant formulas.

HFT formulas plow through millions of data from the market looking for anomalies they can exploit on a very short term basis. Since these trading firms are trading on the millisecond scale, any surge of orders that bundle together are likely to be flag by these formulas.

If you use a popular indicator that hundreds of thousands of other traders are using for an entry, as an example, then you run the risk of getting caught up by these lightning fast trades.

The result is often a whipsaw intraday trade or a whipsaw swing trade.

In addition, when too many traders all trade exactly the same way, anomalies cause abnormal activity for brief periods of time. If you have ever been in a trade and get whipsawed, it isn’t market makers, its formula traders taking advantage of the order flow.

One indicator that is extremely good but seldom used by retail traders is Wilder’s RSI. It is known as a momentum price oscillator but it really has far more uses than mere overbought or oversold patterns.

Chart 1

In the above chart you will see the RSI/RSI that TechniTrader developed specifically for MetaStock users. This is a hybrid RSI that gives you the ability to study price action in a totally new way.

Instead of a high and low range oscillator, this indicator has the floating center line that gives you earlier signals that regular oscillators while also exposing strengthening price action in a consolidation or platform pattern.

Since the market moves sideways often, identifying the strengthening of price within the sideways pattern is crucial.

TechniTrader® RSI/RSI tells you:

1. When price is compressing prior to a breakout
2. That price is gaining momentum even while it is still in a tight sideways pattern
3. That a bottom low has occurred
4. That the overall pattern is poised to move suddenly
5. When price is weakening in a platform

Using this indicator instead of stochastic, or price rate of change, or other price oscillators can significantly improve your stock pick selection.

This indicator also works well in an exploration to help you screen down a smaller list of stocks.

RSI/RSI is currently showing higher lows and has moved above the floating center line even while this stock remains in a sideways pattern. The ability to see price gaining momentum early on is important for swing, day, intraday, and momentum traders. It can also be a big help to position traders as well.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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