Leading and Lagging Indicators, Achieving a Balance (Part 4)
01/24/2008 12:00 am EST
Typically, I look for my lagging indicator or coincident indicators on a higher time frame. Then I combine that indicator with my leading indicators on a lower time frame. For example, let's say a daily pattern that I use as a setup to go long has just occurred. I'll look at an hourly (or less) chart to calculate the precise entry and stop placement points. Depending upon the nature of the lagging indicator that provided the context for the trade, I determine the strength of the market. I will then use pre calculated profit objectives on either the hourly or the daily chart as my exit point. The approach works equally well using a half-hour chart as a setup and dropping to a five minute chart for your leading indicator analysis. If you're a monthly-based mutual fund trader you can consult daily analysis to determine your entry, exit, and profit objectives.
The lagging and coincident indicators I use to establish market trend or direction are displaced moving averages, a combination of the MACD and Stochastic, as well as a series of nine price patterns. The only leading indicators I use are, as I said, a price-predicting oscillator as well as a specialized, advanced form of Fibonacci analysis. The more accurate your lagging indicators are the better your results. The more accurate your leading indicators are the better your results.
Now let's examine different types of traders to see who would be best suited to this approach and who might not be well served by this type of trading methodology.
Let's take a fund manager with over five million under management. Such an individual can afford to diversify over a wide variety of markets and hedge his trading over a variety of different systems. He has the equity to take the market draw downs that a much smaller trader couldn't afford and he can hire help to be there when he wants a day off. Maybe he doesn't need this approach.
On the other hand, let's take a trader with a $25,000 to $50,000 dollar account. This trader is often an individual who is attempting to make a living out of the market. He is often a one-man shop and needs income from which he can pay his bills. He may also need the support of his friends and family to continue this enterprise. It is very difficult for your wife to understand your explanation of a 30% win ratio and substantial losses for two months, even if the gain on the third month outweighs the losses. A high accuracy trading plan that shows consistent winnings avoids this issue and entices this type of an individual back to the computer. It fosters his ability to interact with the market in a very positive way.
Stay tuned for part 5 tomorrow.
By Joe DiNapoli of FibNodes.com