“All about Market Indicators” is an excellent summary of major technical indicators and the thoughts behind these indicators of their creators.
We think the author Michael Sincere did a great job trying to guide the novice into the world of technical analysis. However, we would like to offer a few tips throughout our 20 year experience of servicing common investors.
Taking Dr. Elder’s indicators for example, let’s discuss some of the issues on technical indicators.
- Most technical indicators include all data, and thus create noises. For example, the Force index by Dr. Elder is
When there is an overshoot, or a long shadow in the candle stick, the force is large, and the index might be skewed.
- To smooth this type of noises many indicators use moving average MA or EMA. This results in two problems:
- The signals are delayed or less obvious.
- The signals still have major noises twice, once when an overshoot occurred, and the other when the range of MA ended. For instance, the book mentioned that Dr. Elder prefers using 13 days for the MA of his force index, the index will then have abrupt changes on day one and day 13 of an overshoot.
- Even though there is a clear trend going on for a stock and the trend is forming a channel that Dr. Elder likes, the waveform within the channel may not be regular or symmetrical. Sometimes the shape could be cup-and-handle, the favorable upward moving pattern of William J. O’Neil, described in “How to Make Money in Stocks”. Sometimes the pattern may form “coiled spring” as described by Dr. Carr.
When translating waveforms into technical indicators, the parameters need to be adjusted. This may be the reason why Dr. Elder said every indicator should be personalized to be truly useful. However, the price moving shape is irregular and not truly predictable, that’s why the book mentioned “he (Dr. Elder) says that setting up strict parameters, or levels, doesn’t make sense. . . That’s why I compare them to their own history using channels.”
- The forth and the most important issue that we learned from the years of our services is that for most people technical indicators are too complicated and not intuitive. Think, how much effort and devotion will it take for a person to be able to personalize an indicator to his/her benefit? In some of our tools, we allow users to compose their own formula and do back testing. We also offer simple tools that provide users to choose from pull down menu. Through these years, and with hundreds of thousand users, there may be only a few users who can master some technical indicators to their own benefits.
Channel is by far the most intuitive and accurate method to choose stocks profitable (to you), and to offer optimal timing (for you) to buy/sell or short/cover. With the first skill – picking the profitable stock, and the second skill – finding the good timing to trade, one will also develop the third essential skill needed for a winner – to carry out trading discipline. Earning Channel also assists users in money and risk management.
There have been unnecessary restrictions on the use of channel by others’ definitions. For instance, in “Trend Trading for a living” Dr. Carr mentioned that channel is either a flat channel or a symmetric triangle, and thus channel is only good for range bound trading. That is by no means the truth.
- A channel is a specific form of a trend, with at least two peaks and two dips, and the resistance and supporting lines are as close to parallel as possible.
- A channel indicates, in the period of time, people (small investors as well as institutions) think and act alike and are steady.
- A channel in the long-term reflects the underlining fundamental of the company, the industry, or the macro economy
Even for Dr. Elder who likes channel, said channel is good for traders not for long-term investors, which we disagree. In the long-term, the fundamentals are always reflected on the price movement. For good companies such as those called stalwarts by Peter Lynch, or those with durable competitive advantages preferred by Buffett, many if not most of these stocks’ monthly charts formed pretty good looking channels from 2009 to 2015. These stocks have given people plenty of time to earn, as Peter Lynch mentioned, a good stock often gives you a second chance to earn (to buy or sell).
So in normal cases here is how Earning channel can help ordinary investors (those who can spend at least 30 minutes a day, or half a day in the weekend) to learn and earn.
- Find the stocks or ETFs to earn (long or short), by finding up-channels or down-channels that match major fundamental concerns, or price and volume concerns.
- Use Earning Channel’s optimal timing and principles to trade
- Develop a position (long or short) only when a channel is formed (with at least two peaks and two dips)
- Increase the position along the movement (forming) of the channel, until reaching proper size, and then hold until the channel breaks.
- When a channel breaks, it is time to reduce or to clear original position. But, please remember, it is not the time to create a new opposite position immediately, as a new channel is not yet formed. If one tries to move to the opposite side immediately he may be tricked into guessing the tops or the bottoms. As been discussed by Dr. Carr, those who followed SAR and always stay in the game holding either a long or a short position, did not do well in the long run.
- It is strongly advised that ordinary investors follow channel strictly. Do not try to be a prophet. Because, even if you are right on fundamental analysis, technical analysis, or all analysis, others may not be as smart, or the big players may not be as smart, or sometimes they out smart you by twisting the market for a short while. Without dip pocket, it is not wise for an ordinary investor to try to lead the movement of a market turn. When the channel breaks, clean and watch. Be a close follower, follow the forming of a new channel if you want to stay with the same stock. When a new channel is formed, establish position as mentioned above. An easier way is to look for other stocks that have formed channels.
- Earning channel does include a lot of technical indicators for chart reading. It also provides important alerts for divergences and crosses, including MACD, KD, RSI, OBV, and volume. Those who are already familiar with technical indicators can take advantage of using divergences and crosses.
We will discuss abnormal cases in other articles, and how to use Earning Channel to reduce the risk and enlarge the profit in these conditions.
In summary, it is nice to be able to put some of the technical indicators into good use. But it is not a prerequisite of becoming a winner in stock investment. You don’t need to quit your job and spend 8~12 hours a day to become a fulltime trader to make profit in stocks. You don’t need to spend 10 years or more to become a guru in technical analysis to make money. Like O’Neil, we are “not big fans of most traditional indicators.” Or, like Thomas Demark, after inventing several indicators, “Demark no longer considers himself as a technician.”
Just as Michael Sincere said in the beginning of the book “There is one indicator that is more powerful than all the others. Without a doubt, this indicator has the final word. That indicator is the market itself,” The mother of all indicators is the market (chart) itself. Channels are special conditions when the market guides ordinary people to make money.
To be a winner, follow the advice of O’Neil. “You’re looking for a company that’s the current leader fundamentally as well as technically.” ”This can only be determined by daily, weekly, and monthly charts of the stock’s price and volume action.”
First master the trend. Take advantage of whatever the channel can offer. Earning Channel guides you to pick stocks that have channels and match the fundamentals. Then master channel trading techniques and timing using Earning Channel’s channel buy line, sell line, break up line, and break down line. In this way you can let profits run and cut losses short.
For most people, Earning Channel should help you become a long-term winner.
Try Earning Channel now! Risk free! Free trial!
Good luck on your investment!