Technical Analysis For Dummies, 4th Edition

Chapter 20

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

Figuring out technical analysis starts with bars, both standard bars and candlesticks. To use fancy indicators before you understand bars is to rush the learning process. Think of the bar as a miniature indicator. Besides, indicators are constructed by manipulating bar components arithmetically, and indicators will be easier to understand after you have mastered the bar and its components. And you can trade on bars alone without ever needing to dive into the intricacies of indicators. One example is trading on candlesticks alone. Many setup traders never look at indicators; they just look at bars.

Every bar tells a story about ...