Many traders rely so much on technical indicators that they avoid or forget that all indicators are derived from price, so when you are using indicators you are adding an extra layer of analysis between yourself and price.
Technical indicators are like different colored lenses, each one offers a different view, but the clearest view is always using a clear lens.
The Best Technical Indicator Is Your Eye
What this means in a nutshell is simple. The best indicator of price change is done visually, there is no delay and no distortion between price and indicators, so before you start using advanced indicators and strategies, consider the fact that every indicator you add to your chart creates a distortion layer between your eye and price.
That can really hurt you, especially when you are just starting out and learning how to use different indicators, so keep it simple and start with basic visual analysis.
Once I incorporated the KISS (keep it simple-stupid) method into my charting and technical analysis I became a more consistent and less confused trader.
Perform Extensive Time Frame Analysis
The second biggest mistake new traders tend to make when it comes to chart patterns and chart analysis is not considering the weekly time frame analysis along with the daily.
You would be surprised at the amount of clues you can get by looking at the weekly and daily charts.
You see, the more time frame you use in your analysis, the more meaningful the analysis becomes, the less time frame you use, the more noise you will have in your chart analysis.
When you look at weekly charts, you really start seeing the fundamentals very clearly, and you get to see the real long term support and resistance lines, which have some real meaning behind them, because they withstood a longer period of time within being taken out.
What I typically do is begin my analysis with weekly charts, and notice the strength and the main trend. Then I work my way to the daily charts and make sure that the trend is pointing in the same direction.
Now, I begin looking at the intraday charts and start mapping out my potential entry and exits. Start with the weekly’s and I promise you that if you start that way, your analysis will begin changing rapidly as you approach the daily time frame.
This is the same reason I use 2, 5, and 60 minute charts intraday. Some swear by the 15 versus the 5 but I like the 5 for day trades.
I look at the trend on the 60 minute chart first and see if the other time frames line up. If it doesn’t, I won’t take the trade. I know this is ultra conservative but it works for me.
Volume Analysis By Itself Is Useless 90% of Time
I know I’m going to get a lot of comments telling me that I’m wrong on this one, but I’m going to tell you that following volume alone for the most part is not going to help you make money.
I’ve been studying volume and the effects of volume on technical analysis and price action and I have all but proven a lot of my prior beliefs false.
Sure a stock needs to have people trading it for it to move, and I’m not advocating that we trade tickers with only a few shares of volume in a day, but with the position sizes that most retail traders use getting in and out a low volume stock would not be a problem.
If you watch the price action and time and sales tape you will quickly be able to tell whether a stock is tradeable or not.
Before using complex technical indicators, use your eyes and learn visual technical analysis and once you can identify charts easily, then transition into technical indicators.
That’s exactly what I did. I started trading with clean charts. Keep in mind that some of the best traders in the world rely on their eyes only and ditch most technical indicators.
Always use different time frames for your analysis and don’t think that just because you day trade, weekly and daily charts are not relevant or important to your trading.
This especially applies to the broad market and indexes, because stocks do tend to follow indexes about 70% of the time on average
Day traders are technical traders. We rely on charts and price action to tell us the story. I have been guilty of putting too much emphasis on volume alone. In this current market that has all but handcuffed me and kept me out of some solid trades.
I have spent the last month studying this and I feel confident that I have a better understanding of how volume should be factored in to my trading. So I would say expect some changes in my volume requirements in the next coming weeks.