Introduction
Part 1
The best trend indicators are not the popular MACD, RSI or Stochastic. These are all effectively momentum type indicators that require too much in the way of reinterpretation and certainly don’t accurately define a primary or profitable trend individually.
Since Market Pendulum’s trend indicators are proprietary and whose formulas cannot be disclosed, what other good choices are available to determine profitable trends in all common stocks and indexes?
Three Premiere Trend Indicators
- The first one has been in plain
sight all along
- The second one is seldom seen or
seriously used
- The third one has been virtually
unknown for 60 years and is largely ignored
Individually, they can be effective but collectively offer great guidance. This is
based on thousands of scans and personal trading experience.
In Part 2 of this series, we will examine in detail:
- Three premiere technical trend
indicators, including a chart example
- The best recommended trading
technique for using them
These indicators and trading technique can be applied to the total stock universe as well as to all indexes, such as the XAU and S&P500.
All three indicators are available in most of the larger chart programs.
Question Before the House
The question before the house is simply how to dramatically improve ones trading results by:
- Using three premiere indicators most are ignoring
- An outstanding and proven trading technique.
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Firepower
The Three Best Trend
Indicators
Part 2
Today we are going to examine three of the best technical trend indicators outside of Market Pendulum's and a premiere trading method for using them. But first, a brief introduction.
In Part 1, we noted that the best trend indicators are not the popular MACD, RSI or Stochastic. These are all effectively momentum type indicators that require too much in the way of reinterpretation, certainly don’t easily define a profitable trend and are overused by too many.
If one is using the
same indicators as everyone else, one gets the same results.
Success can never be guaranteed so the purpose of this exercise is simply to improve performance probabilities. While the indicators are excellent and based on the supporting evidence of thousands of scans and personal trading experience, results are not guaranteed.
Fundamental considerations are important but are not covered in this technical piece.
Finally, keep in mind that this configuration and setup is in the context of an overall general bull market. Bear markets are handled with opposite indicator alignments.
Trend Indicator Descriptions
These indicators are primarily for traders in the daily time frame, but investors can use them in the longer time frame periods as well.
1) This may come as a surprise to some but the absolute best trend indicator is a weighted moving average (WMA). The WMA results improve on the simple MA’s calculation by assigning more weight to the most recent price action. Any particular WMA reflects the trend power for that period.
I recommend the 18/9 WMA (for aggressive traders) or a 25/12 WMA configuration (for conservative investors) with (or without) the signal lines.
Note: The 18 WMA is based on price action. The 9 WMA signal line is a 9 WMA of the 18 WMA, not price. Same for the 25/12 configuration.2) The TRIX, developed in the
1980’s, is a very accurate trend indicator that uses a triple exponentially
smoothed moving averages to eliminate cycles shorter than their indicator
value. Although slow at times (depending on the parameters used), this powerful
trend tool is a useful and reliable metric of direction.
I recommend the 12/9 configuration.
3) Most investors have never heard of the “Coppock Curve” since its development more than 60 years ago. Here is its interesting background story.
It was developed by Edwin Coppock in 1962 and was headlined by Barron’s in 1965. Coppock used 11 and 14 period values in his WMA rate-of-change indicator, which essentially results in a measurement of price sentiment and momentum. According to his Episcopal priest, “this was the average (monthly) mourning period when grieving the loss of a loved one. Coppock theorized that the recovery period for stock market losses would be similar to this time frame.”
The original goal of this indicator, which oscillates above and below a zero line, was to identify long-term buying opportunities in the S&P500. It is equally effective in the daily time frame for individual stocks and is quite accurate, particularly in combination with other indicators.
I do not recommend changing the 11/14/10 indicator values at all since this indicator is rarely used. A 5 period WMA of the indicator is suggested as a signal line.
All Recommended Chart Indicators
Trading Technique Summary
Part 3
The Profitable Plan
Let me emphasize the object here is to discover profitable up trends from base patterns, not sideways price action, so the lesson here is simple. Whatever indicators you choose to employ:
- They must be of different type,
construction and measure different aspects (preferably with a WMA)
- A minimum of 3 is recommended
- All indicators must be pointing in the same direction
- Last one to turn = entry point
On the negative side, this trade plan will not avoid the
effects of adverse press releases, hedge fund dumps or negative market
conditions.
Keeping an eye in the next higher time frame's position will tell you about the potential duration of a trade.
Note: A new positive daily trend reemerging back into a continuing positive weekly trend has outstanding probabilities of success.
Avoiding False Signals
Many types of indicators, including TRIX and Coppock, may give false buy signals in severe down trends, if used in isolation. Using a WMA is strongly suggested as part of a minimum three part indicator selection process and the reason is simply this.
A WMA, with the suggested period values of 18/9 or 25/12, demonstrates the overall trend force and is less subject to whipsaws experienced by various other indicators, particularly in downtrends.
As recommended, the WMA and at least 2 other indicators should all be in agreement before any stock selection.
A Premiere Trading Technique – 5 Step Summary
These three different indicators, when employed in combination with generally increasing price volume and a positive slope will go a long way toward determining an emerging positive trend and improve one’s confidence in a trade.
1) The first order of business is to locate an extended base pattern or new uptrend with an upward slope. A positive 18 (or 25) WMA trend scan will help screen for this initial requirement. Make sure the selection has not already rocketed ahead. All else is discarded without exception.
2) Probabilities dramatically
increase by requiring the other two indicators (TRIX & Coppock) to
be in a positive posture and also be moving in the same direction, at the same
time and before entering this trade. This confirmation is vital.
3) Equally important is to always
check the status of the sector and the next higher time frame trend to
determine the duration and durability of the trade. If reviewing a daily time
frame, check the weekly status.
4) If you now have developed a
reasonable profit (in your opinion), exit the trade unless a weekly positive
trend can be identified by all three indicators. Risk management tools apply.
5) Finally, after exiting a trade,
don’t look back but await the next opportunity to present itself.
Please Note
All indicators are available in most of the larger chart programs so you can create your own personal chart and stock scan program.
Alternatively, to duplicate or replicate website charts and results, we strongly recommend using your creative imagination skills and Simple Trading Logic.
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