Leading and Lagging Indicators, Achieving a Balance (Part 2)

01/22/2008 12:00 am EST

Focus: STRATEGIES

Joe DiNapoli

President, Coast Investment Software Inc.

In my trading career I have found only two leading indicators that have the reliability necessary to justify employing them. The first is the oscillator predictor, a study I created in the early eighties. It is a derivative of a de-trended oscillator. It tells me a day ahead of time where the market will find support or resistance. It does not tell me that the market will get to those points, it only tells me that if the market gets to those points, there will be substantial support or resistance. The second leading indicator that I use, and have developed considerably, is derived from an advanced form of Fibonacci analysis that I refer to as DiNapoli Levels. By combining varieties of expansions and retracements in unique ways, a trader is able to determine ahead of time, very accurately, where the market is likely to find tradable support or tradable resistance in an ongoing move. It doesn't matter whether they're on a one minute chart or a monthly chart; these levels are consistent throughout. The problem, however, with this very accurate leading indicator, as with all leading indicators, is that it is of little value in buying support in a strong down move or in selling resistance in a strong up move unless you're just looking to scalp the market for a very brief trade. That's why you need a strong context for the trade. Here's how it works.

First, determine the context for the trade using lagging indicators. Then establish the entry level using a high quality-leading indicator. Continue to use the leading indicator to find a stop placement point. In the case of an uptrend, this would be below a substantial support level. In the case of a downtrend, the stop would be above a substantial resistance level. Notice I don't use money stops. If the stop is too large for money management criteria, simply don't take the trade. Since the stop placement point is known ahead of time, it's easy to make that calculation. Once the stop and entry are in place, it is now possible to calculate an expansion level (leading indicator) to take profits. The closing order is placed in the market immediately upon making this calculation. Do not wait for the market to get there and see what happens. 

Stay tuned for part 3 tomorrow.

By Joe DiNapoli of FibNodes.com

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