Why You Should Use 1 or 2 Indicators

The market showed some strength today with Semiconductors helping to lead the Nasdaq higher. The Dow and S&P also participated. One positive I’m seeing right now is that the Nasdaq is trying to wrestle leadership back from the S&P 500. Should this continue it would indicate that investors are again becoming more willing to take risks. I’m certainly not getting excited just yet, and my theory of an oscillating, trendless market has been playing out perfectly as of late. I still think the next significant move (5% or more) will be down, but the action in the Nasdaq bears watching.

One question I get from time to time is what oscillators or technical indicators I like to see on my charts, so I thought I would address that today. For the most part, I like to keep my charts fairly clean looking. I find that too many indicators just tend to confuse me so I use them sparingly. Many charts I look at will only include price, volume, and a couple of moving averages (50 and 200 most commonly). If I want to view the intensity of a trend or consolidation then many times I will add some Bollinger Bands (or ADX) as well. As far as oscillators go, I tend to prefer RSI over some others like MACD or Stochastics. It is not because I believe it is any more predictive than those others, it’s more due to the fact that I only have to look at one line rather than two or three. Again, I want to make it as simple as possible for my own viewing.

When looking at charts I feel it is important to make them aesthetically pleasing. There’s no sense including indicators that you find difficult to interpret. Whatever you like looking at will work best for you. All oscillators are based on price (or volume) and none of them are perfect. (Actually, that isn’t quite true. It would be more accurate to say that all of them are perfect. It’s just math, and math is perfect. Unfortunately, the market is not perfectly mathematical. But more about that in another column…) My advice therefore, would be to pick one or two indicators that are the most pleasing to your eyes and use them primarily. When you want to look at things in different ways and you have plenty of time for evaluation and thought, then throw some others on there.

Best of luck with your trading,
Rob
Rob@HannaCapital.com

For those who may be looking to expand their knowledge beyond just market timing, my Hanna ETF Money Flow System utilizes the VIX in generating trading signals for spread trades.

Rob Hanna is the principal of a money management firm located in Massachusetts. He has spent the last several years developing and refining methods for trading in stocks across multiple time frames. He selects stocks using both fundamental and technical criteria, and then trades them using technical analysis techniques.