Monday, July 16, 2012

Indicator Studies "Price Rate of Change"

MetaStock SPRS Series - Week 77 - TechniTrader® Stock Discussion for MetaStock Users - Indicator Studies "Price Rate of Change" - July 16, 2012
By: Martha Stokes C.M.T.

MetaStock Charting software boasts the largest library of indicators available. This allows you to customize your trading platform and trading style to suit you precisely.

When I visit the NYSE floor, one of the first things I do is go around and study the numerous monitors of the floor traders, specialists, and market makers. What I find is each is totally unique. No two are exactly the same, and therein is the secret of the professionals’ success.

Retail Traders all want to trade the same way, they rush to seminars and webinars and then all try to use the new tool that is taught at that training. The reason retail traders are not a fraction as successful as the pros is more about the tools they use, the strategies they use, and the attitude toward trading than anything else.

Pros get emotional, speculative, and greedy too. Pros make bad choices from time to time but what pros have that you do not have, is a complete process, trading plan that encompasses ALL aspects of the trade, and a unique personally customized trading platform.

How do I know this? I have talked to tens of thousands of retail traders over the years and the repetition of these same mistakes over and over is what I find.

The question is: are you doing this for fun, as a recreational pursuit, a hobby, OR are you really serious about making money trading stocks? My method of teaching is not for everyone, and I am not for the hobbyist or recreational trader. I work with only those who are truly serious about trading stocks successfully.

One thing you MUST do as a serious trader is to dump the junk and get down to the basics. Yes, the basics. One basic is setting up your tools to suit you, NOT what is popular.

Today I am starting a series on Price Oscillators to show you just how diverse this category of indicators is, and how useful this indicator category can be for you.

I want each and every one of you to try these, and then decide if it is right for how you trade.

Most of you use MACD and stochastic, and sometimes you are using these together which makes no sense at all. When these are used together, it tells me that you don’t really understand how to use these indicators properly.

We will cover those indicators later, because today is about “PRICE RATE OF CHANGE.”

This is a wonderful indicator that I really think has a place in some trader’s tools.

Here is how it works:

Price Rate of Change is a CENTER LINE oscillator. It is NOT tracking overbought / oversold conditions but is tracking how price is changing over time. This is NOT the same as Average True Range, which is NOT a trend indicator but a price variance indicator.

What is the difference between a price variance aka volatility indicator, and a rate of change indicator? There is a huge difference.

The chart below shows you just how different the two indicators are. Price Rate of Change is the one with red arrows in the middle chart window, and ATR is below that in the bottom chart window. You can quickly see that for intraday, day trading, and swing trading Price Rate of Change is providing far more information, patterns, and exposing much more critical data than ATR. ATR has a place and is a great indicator for specific analysis tasks. PRC is great for comparing price fluctuations over time. ATR exposes price variance day to day. These are two totally different aspects of price analysis.

Chart 1

Price rate of change is able to expose a sideways action developing, even before the eye can see it on the candlesticks. ATR is not designed to expose sideways developing patterns, only the day to day variance when using daily candles.

Price Rate of Change also exposes sudden rates of change in price, as the stock starts to create a risk of a top. ATR exposes some price variance and volatility, but is not warning that the rate that price is changing over time has become more inconsistent.

The chart is of TJX. We can follow the progress of this stock over time. What PRCE is exposing at this time is the fact that this stock is getting more speculative trading activity, including more High Frequency Trader activity. HFT activity often precedes the earliest stages of a top. Earliest stages means weeks not tomorrow folks. Some of you assume I am talking about immediate action.

The goal of using tools is to not only find great stock picks, but also to help you avoid bad picks AND to help you see what is going to occur down the road. If a stock is posturing for topping action then it is something to consider for a sell short watchlist. If a stock is bottoming, then it is worth putting on a swing style watchlist for sudden velocity moves out of that bottom.

Watchlists are an entirely different topic that I will also cover at a later date.

Put PRC on a chart and test it, study it to see how it can expose divergences in price not easily seen in the candlesticks.

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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