Technical Analysis For Dummies, 3rd Edition

Chapter 19

Ten Rules for Working with Indicators

In This Chapter

Identifying market sentiment

Using indicators as a guide — not as a crystal ball

Indicators measure market sentiment — bullish, bearish, and blah. Indicators are only patterns on a chart or arithmetic calculations whose value depends entirely on how you use them. You use indicators for many trading-related decisions, including identifying a trend, knowing when to stay out of a security that isn't trending, and knowing where to place a stop-loss, to name just a few. This chapter offers a few tips and tools you need to maximize your use of technical analysis indicators.

Don't Jump the Gun

To use fancy indicators before you understand bars is to rush the learning process. Following price bars and figuring out what they mean is the first step — don't shirk it. Besides, indicators are only the result of manipulating the price bar data into a different format. Think of the bar as a miniature indicator. Many setup traders never look at indicators; they just look at bars.

Every bar tells a story about crowd behavior. Exceptional bars tell you more than ordinary bars, but try to listen to all bars. Floor traders complain that electronic trading lacks something valuable that being on the exchange floor offers — the noise of ...