What Indicators and Strategies Do You Use To Confirm an Early Uptrend or Downtrend?

SCAlchemist

Would you please discuss the Indicators and Strategies that you use before you Pull The Trigger on an Early Uptrend or Downtrend?

Thanks in advance for your much appreciated time and expertise.

markd

In general, indicators tend not to give a signal until AFTER the trend has already changed (although, even then they can be wrong). So, the signal IS the confirmation. If you use indicators, but don't take the signal, then you are in effect waiting for confirmation of the confirmation.

I think all indicators work to a greater or lesser degree in different markets, but none will give you a winning signal every time. You just have to do the research to understand how they work, and determine which one works best for you - in what kind of markets does it give the best signals, how many does it give you, can you withstand the drawdowns when it gives a series of bad signals.

Some traders will use one indicator to filter the signals of another indicator. But it seems to me these combinations tend to work for one market cycle but not another. Markets change character over time.

The alternative to indicators, or maybe a supplement to indicators, is to learn to read the candlesticks and volumes (in the different time frames) to determine where the buyers and sellers are, and when control of prices is changing hands. This is not foolproof either, but I think it keeps you closer to the changing character of the market.

A couple of helpful books on reading price and volume: Richard Arms - Stop and Make Money; Tim Ord - The Secret Science of Price and Volume; Hank Pruden - Three Skills of Top Traders (good discussion of Wyckoff principles).

markd

Pruden's book is kind of big picture and textbookish - a lot of background and theory - why things happen in the market they way they do. There are some good schematic charts, but the real life example charts are not so good.

Arms and Ord are more like user's manuals. Not so much theory, more how-to. Excellent charts in both. Ord's charts are mostly DecisionPoint and Stockcharts charts. Arms' charts are his own - Candlevolume style (which is a style available on SC).

Arm's method would be easier to master than Ord's.

So the easiest to read and use right away is Arms, if that's what you want. Ord requires some math keeping track of volume in up and down legs if you are going to use it. I suggested it mainly for getting a feel for how volume works in the market because it has a lot of concrete examples. Pruden takes the most effort to read and understand because it's more comprehensive but I think worth it in the long run.

Kevo

The question is too broad to answer properly. Moving Averages are indicators used to confirm an uptrend or downtrend. However, MAs are not early. They are lagging. A good trend would look something like this: Price > 50 Daily SMA > 200 Daily SMA.

You have determine the trend and also look at momentum and Overbought/Oversold. There are a lot more factors to consider as well.

SCAlchemist

Thank you for the references and the insight.

What I am trying to get at, is, if you buy a stock when the short term trend,[ e.g., SMA(10) crosses up over the SMA(20)], what confirming information would you look at to maximize your chances that the short term trend,[ SMA(10) above the SMA(20)], would turn into a medium term trend, [SMA(20) crossing up over the SMA(50)], and then into a long term trend, [SMA(50) crossing up over the SMA(200)]?

markd

Well, it sounds like you want to take a long term position using short term information. I think if you want to take a long term position, you need to wait for long term indicators - like the 200 MA - to decelerate or turn up, or at least the intermediate term MA like the 50, turn up below the decelerating 200. Divergences on the longer term charts - like OBV on the weekly or monthly are helpful, too. But neither of these GUARANTEES that the long term will work out.

To improve your odds that any long-side trade will work out in any time frame, you need to see that 1. selling is exhausted in that time frame and 2. buyers are active. Either one alone is not enough. Lack of selling alone does not make prices go up, buyers have to come in to take advantage; but buying will not keep prices going up if higher prices still bring out still more sellers.

On the way down, you can tell buyers are coming in if a down close on significantly higher volume does not make a new low close in proportion to the volume, or does not make a new low at all, or retraces a large part of the previous down candle, or shows much decreased range considering the volume, or closes in the upper half of the candle, leaving a long tail. If you see a big up candle without previous evidence of buying into the decline, its probably not the final low. Then you want to see the low of that up candle get broken on much lower volume with buyers coming in after that.

On the way up, you want to see good range on the up candles, preferably with higher volume, but sometimes if sellers are really weak, you will get low volume candles and the rally is still good. Then, on the reactions, you want to see light volume compared to the last time prices were at that level. If there were heavy volume up candles on the way up, you want to see the lows of those candles hold, or if broken, there should be an immediate strong buying response.

So basically, you want to see a series of higher volume down candles that don't advance the local down trend, and a series of higher volume up candles that do advance the local trend. You want to see that, on balance, buyer are more effective at moving the price in their direction on the close, than sellers are.

SCAlchemist

Thank You for sharing your insight and wisdom, markd. Given the discussion, which of your suggested book list would you recommend that I buy and read first?