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Essential Technical Tools for Your Trading Toolbox

Essential Technical Tools for Your Trading Toolbox
June 12
17:18 2012

As part of their technical analysis, traders rely heavily on chart formations, as they should because they contain critical data on price movements and provide visual depictions of price trends. The key to sound technical analysis, however, is in the ability to draw inferences from the price movements that will lead to profitable trading opportunities, and that can only be done with the use of technical indicators that, when applied to the chart formations, can produce clear signals.

There is no shortage of technical indicators and many traders utilize more than one in order to confirm a signal.  Most successful traders cut their teeth on these three proven indicators, and most would agree that they should be included in every trader’s tool box:

Moving Average Lines

Perhaps the most widely used indicator, and with good reason. The MAL is one of the most reliable for confirming positive or negative trends. Consisting of a support line and a resistance line that stretches back to a period of time (i.e. 20-periods), the first indication of a changing trend is when the price breaches either level to indicate that it is moving higher or lower.

Bollinger Bands

More traders are beginning to use Bollinger Bands, because, in addition to identifying changing trends, it also provides correlating volatility data which is a stronger indicator of the strength of the change. Using support and resistance bands, and the same 20 period moving average line, traders can quickly identify price reversals and lock in a low and high trading range. When the bands move closer together, it is a strong indication that the price has entered a range bound trend.

Average Directional Index

When used in combination with the moving average line and Bollinger Bands, the ADX is the foremost tool for measuring the strength of a new trend. An ADX measure of 40 is an indication that the trend is strong and will have enough duration to trade. Conversely, a measure of 10 or less indicates that there would not be enough duration for a profitable trade.

Over time most traders will experiment with many different technical indicators, but few ever completely abandon these tried and true tools.  If you were going to add just one more technical indicator to the mix, candlestick analysis is another proven tool that adds critical market data, and, when used in conjunction with the others, provides a complete perspective on market trends.

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