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- The Right Indicator for Your Stocks
The Right Indicator for Your Stocks
One size does not fit all in the world of trading signals
Hey there! My name is Nate and I write for WOLF Financial. If you enjoy learning about trading, I guarantee you’ll also enjoy my newsletter A Trader’s Education, and more of my content on 𝕏 @tradernatehere. Thanks for reading!
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
A common mistake to avoid as a trader is thinking that every stock should be traded the same way.
It is easy to think there are golden rules to follow or that one indicator rules them all.
While there are certainly great guidelines to trade with, it is important to pay attention to what works and what does not for each individual stock.
I cannot stress this enough.
Every stock should be assessed individually to understand which indicators work and which do not.
You might have heard advice about keeping the list of stocks you trade to a small number, perhaps only a handful.
I completely agree with this advice and part of the reason is because you really need to understand which indicators work best for each stock.
If you are trying to trade thirty different stocks, that is a lot of preparation which means a lot of your time.
Of course, it seems possible and even reasonable if you’re applying rules generally across every ticker.
“Buy when stocks are above the 50-day simple moving average, sell when they cross below it” is an oversimplified example but a good one.
Some stocks respect the 50-day SMA while others merely oscillate around it. Fail to recognize this and you could sell too soon or buy too early.
It is up to you to recognize which signals work, and which do not. And to trade accordingly.
Another example along these lines could be that you decide to create rules around only buying “when RSI is oversold, and volume is declining”.
Odds are good that you’ve settled in on rules like this because they worked well with one particular stock at one point in time.
But if you are not paying attention, a general rule like this can be costly.
Every trader experiences the disbelief of entering a trade with what seems like a perfect set up only to watch it fail right in front of you.
It is a miserable and confusing experience.
Sometimes the trade just doesn’t work out and there is nothing you could have done. You cut your losses and move to the next opportunity.
However, there are also times when you might have been looking at the wrong indicator or making the wrong decision because of bad assumptions.
There is a simple way to prevent these mistakes. The answer is twofold.
First, simplify your watchlist. Narrow down the stocks you want to trade on a regular basis to no more than five to start.
Second, study the charts of these five tickers relentlessly. Your studying should reveal which indicators have been respected recently and which have not.
As usual, the answer is simple but putting it into practice requires some work.
Your notes should include details about all of your observations.
“Does not respect the 20-day SMA.”
“Remains in oversold conditions for extended periods of time.”
“Responsive to Fibonacci Retracement levels.”
And you should be reviewing your charts at least weekly to understand what rules can still be followed and which indicators might be less accurate.
Whichever indicators you decide to utilize, be sure that you are not just blindly assuming they will work with any stock you select.
Taking time to study what works and what does not will have positive impacts to your trading results.
It sounds obvious, but so few take the time to prepare and study to find out what is truly working versus what we believe will work.
What to Look For
Examples always help so let’s take a look at a couple.
TSLA was a great chart in last week’s newsletter about finding support.
If you missed it, spoiler alert. TSLA did indeed find support and bounced!
And this week the chart serves again as a great example. So here it is.
Daily candles for TSLA.
Starting at the top of the chart, I recognize pretty quickly the trendline that was respected in October.
On back-to-back days TSLA tested the trendline that started in July and fully formed in September.
This trendline has been shown respect. If shares break through, I would expect a quick shove higher. That said, another rejection is more likely.
Next, notice the higher high that was put in this past week. That is a pattern that has seen some follow through in the past on this chart.
A potential reversal is forming when shares have been dropping, find support, and then continue to a higher level than the previous failed attempt at a reversal.
You can see that with the higher high on the chart above. This is a bullish indicator even if TSLA pulls back to start next week.
Take a look back at the chart and you will see this pattern play out over and over again.
The third piece of information that is working for TSLA is the respect it showed for the volume shelf.
This “shelf” is the price level where a relatively large number of shares have traded. In other words, there is a lot of interest at this level.
If one volume shelf is respected, I have found that others typically also see similar respect.
For that reason, while I expect TSLA to continue higher I do think there is reason to take profits around the $244 price level. Another volume shelf.
Wrapping up, it is important to note what is not working on the TSLA chart.
Notice there seems to be very little that can be taken from the moving averages. The 20-day, 50-day, and 150-day just slice through the candles.
Why would you use the 50-day moving average for TSLA as a support or resistance level?
A quick study of the chart reveals that it does not make sense to use this indicator in this way for TSLA.
Take some time to study the charts of your favorite stocks to trade and see what you find. It might change the way you trade.
If you found this information helpful, consider sharing it with others so we can all trade wisely together.
Have a great week ahead!