Which Indicators Work Best?

08/03/2012 10:42 am EST

Focus: STRATEGIES

Anne-Marie Baiynd

President and CEO, TheTradingBook.com

Professional trader Anne-Marie Baiynd unveils the one most important indicator to use, plus discusses the few others that every trader should be watching.

Traders have plenty of technical indicators to choose from, but which are the ones that we should be using?  We’re talking about that today with Anne-Marie Baiynd.  Anne-Marie, you have a few ideas on that topic.

I do, I do.  I think the most important technical indicator of all is the one people sort of ignore—price.  Price is the most important thing, because every other technical indicator we look at is a derivative of price. So the more esoteric your indicators become—the farther away they’re developed from price—the less reliable they’re going to be. 

So if you always look at technical indicators in terms of is this thing confirming the price event, and look at what’s happening from that perspective.  A lot of folks go alright, well I’m going to trade the 820 cross.  Well, does the price actually tell you that you should trade the 820 cross? Because it’s the price that’s going to tell you first, because the price makes the technical indicator.

Why do you think people overlook price then?

I think there’s a tendency for folks to look for the next big thing. I just want something that says buy right here. And I think people overlook price because sometimes they think it’s too difficult, because they’re looking at it in too much of a granular fashion. They’re looking in every single penny rather than hey, it’s moved up.  If it pulls back, is it pulling back into support? Is it pressing up into resistance? What’s it actually doing right there? That sort of makes people have to think a little bit more, as opposed to the green arrow says it crossed the 820 so I need to buy.

So Anne-Marie, I understand what you’re saying about the importance of price, but I know that you also have some other indicators that you do use regularly.

Yes.  I use the moving average.  Again, not a fancy indicator.  It’s been around for a long time, but it is very, very powerful.  Listen, if your candlesticks are printing above your moving average, you probably shouldn’t be short. If it’s sitting below the moving average, you probably shouldn’t be long, right? 

The next one I like is the Stochastic Momentum Index, because it measures divergence. Because after a while price doesn’t really like to move far away from the moving average.  They have a tendency to want to converge together.  So the candlesticks, after they stretch too far away, they’ll start coming back and a Stochastic Momentum Index really does help us do that. 

The other one I really like is the Commodity Channel Index, interestingly enough.  I think it was built just to work in the commodities market, but it is very, very good at telling you when price is getting ready to move in an opposite direction. Really good, I like that one a lot.

Thank you so much for sharing your insights with us today.

Thank you very much for having me.

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