Every week, the coaches at Prosper Trading Academy offer their insight on some of the most challenging questions covering recent stock market developments, trading tips, and relevant news stories. This week, Scott Bauer, Charlie Moon, and Mike Shorr discuss the three most important indicators in stock trading, and when it makes sense for traders to stand pat.
What do you think are the three most important indicators traders should use?
Charlie: So, there are indicators that are extremely popular and some that are newer and complex. I find it odd that people tend to like the complex and new versus the old and popular. If the markets do not recognize the “newer” indicators, then how relevant will it be? How consistent will it be? The truth is, a lot of back testing and research should happen, and I encourage you to study and study some more. As for me, the most important indicators will be Moving averages (SMA or EMA), The VWAP ( Volume Weighted Avg Price), and Volume Average.
Mike: What is important to any trader is to find something they are comfortable with and use that. There are thousands of ways to use technical analysis for your trading. Also, find the simplest approach with as few indicators as possible. For day trading, I would use a short-term chart (1m, 3m, 5m) with the VWAP and a standard deviation envelope around it, along with a short-term moving average (5, 7, or 10) against a longer-term moving average (10, 15, or 20).
Scott: There is such a thing as analysis by paralysis, meaning too much information can be head scratching and actually a detriment. To keep things simple, I use these easy-to-follow and widely-followed indicators: The 50 and 200-day moving averages and volume. Since my positions are not day trades and typically last for a few days or even weeks, I prefer using the Simple Moving Average rather than the Exponential Moving Average.
Sometimes your best move you can make is to not even trade in the first place. When do you think it’s best for a trader to simply stand pat?
Charlie: The days where not much is happening, where volume and volatility is light and days where news is coming out at a time everyone will be expecting it. With light action and chop – that is a perfect recipe to lose money. Even if you make money, it won’t be much, and the risk will far outweigh the reward potential. The days where news or data is coming out, are basically a coin flip. Up or down, and it will be extreme. If you are not prepared for it and it gets out of hand, it’s a good way for a new trader to lose a ton of money, or end up holding some heavy bags.
Mike: The approach I use is “let the market tell you.” If the market is not moving, why are you providing leans for others to get out? You should have to be convinced that a trade is a good trade and not just “well, I am here, I might as well trade.” There are no merit badges for volume.
Scott: Yes – often the best trade is no trade at all. Trading just to trade or feel part of the action is a recipe for disaster. Unless you are 100% confident in a position based on your technical/fundamental analysis – DO NOT MAKE THE TRADE. DO NOT GET CAUGHT UP IN FOMO. There will always be another trade to make.
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