Use the Right Technical Tools When You Trade

By Price Headley | Published 02/9/2006

STOCHASTICS AND MACD MOMENTUM INDICATORS

By now you're wondering how you're supposed to know which indicator to use at any given time.

As I said earlier, there is no holy grail, but this tip comes pretty close to being one - you have to watch price charts as well as indicators. The movement of price bars will tell you what indicator to use.

If you see an index moving back and forth in a narrow range, use an oscillator.
If you see a stock moving an a straight line and breaking above or below previous highs or lows, that's a trend that should be spotted by a momentum indicator.

Now, I'm not advocating a constant waffling between two indicators - there has to be some discipline. As a rule of thumb, when one indicator fails, switch back to the other one. When that one fails, go back to the previous one. Won't that indicator failure lead to a losing trade? Absolutely, but it's better to lose on one trade than it is to continue applying the wrong tool and end up losing on several trades in a row.

Use the right tool at the right time, and you'll have an enormous amount of success. As always, the more you apply this concept, the better you'll become at using it.
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A 10-Day Trading System

The 10-day System is probably the simplest one you will ever learn, yet it can be very helpful, especially during choppy markets.

The 10-day lows are, by far, more useful then the 10-day highs. Since 1980, the 10-day lows have been an accurate predictor of short-term gains on the SPX index about 62% percent of the time. Simply buying the morning after a low signal and holding for exactly 5 days each time, as described above, would have yielded a gain of around 120% for the 26 year time period, and that is without reinvesting profits.

While that, in itself, is impressive, it is definitely not the only way that you can use the system. The 10-day System is probably best used to direct your other trades. For example, if you swing trade stocks or options and notice that the 10-day System hits a high signal, you might avoid or cut back on your bullish trades for a few days.