This week, we got a reader question about the best trading indicators.
Now, this is one of the most common questions I get. And it’s no surprise when you think about how many indicators are out there.
At last count, there are over 1,000 commonly used technical indicators.
Not to put too fine a point on it, but I just did a quick Google search for “best trading indicators” and found articles on everything from the Schaff Trend Cycle Indicator, a relatively complex oscillator that incorporates multiple moving averages…
…to SIX different volume indicators every trader MUST know…
…to a news article about a 24-year-old who made $8 million in two years using VWAP and linear regression lines.
Hundreds of results. Unfortunately, very few of them will actually help you master market trends.
The truth is, you don’t need thousands of complex indicators to be a successful trader. In fact, the best traders usually stick to just a few simple indicators that they follow consistently.
Those simple indicators — including my No. 1 indicator that I’ll tell you about below — are the best way to identify market trends, which is how you know when to “buy low” or “sell high.”
What Is Trend Analysis?
Trend analysis is a technique used in technical analysis that attempts to predict future stock price movements based on recently observed trend data. It uses historical data, such as price movements and trade volume, to forecast the long-term direction of market sentiment.
Let’s take it a bit further. A trend can be bullish (price increasing over time), bearish (price decreasing over time), or even sideways (price moving flat over time).
Each of these trends has their own optimal strategies we can apply, but generally speaking, when you trade using trends, the idea is to capture profits by buying the underlying instrument in an uptrend (bullish market), selling in a downtrend (bearish market) or collecting option premium in a sideways (neutral market).
Additionally, you can also profit by taking trend reversal opportunities as the existing trend reaches an exhaustion point.
As we saw from my search results earlier, there are numerous technical indicators that traders like to apply to their trend analysis efforts. At last count, there are over 1,000 commonly used technical indicators.
But you don’t need thousands of indicators to be a successful trader. In fact, the best traders usually stick to just a few simple indicators that they follow consistently. And one of the most important — and most basic — indicators is something called pivot point support and resistance.
The Most Important Technical Indicator
What is a pivot point? Well, it’s like a price magnet — attracting traders to certain price levels.
For the pivot point low, it’s the point on a chart that has a higher low on the previous bar (to the left) as well as the following bar (to the right). This price level is where the sellers gave up and the buyers took over forcing the price higher.
The pivot point high is just the opposite. It’s when the bar to the left and the bar to the right have lower highs. This is where the buyers gave up and the sellers took over forcing the price lower.
These areas are called support and resistance price levels and are often tested in the future. Note the three times this stock tested the $85 price level as support:
Now have a look at the double top resistance level pivot point highs that occurred — rejecting higher prices so the stock moved lower:
Pivot points are like price magnets — attracting traders to certain price levels that represent support and resistance. Traders frequently “test” these price levels, and their efforts are either successful or rejected.
To learn more about my trading strategy, give Gabe and his VIP team a call at 855-509-6600. They’ll be happy to answer any questions you may have.
To your continued success,
Tom Gentile
America’s #1 Pattern Trader
