What is the Most Important Indicator of All?

Most stock market traders have a favorite technical indicator.

The one that they have the most confidence in. The one that, from experience, they trust the most. Or the one that they always look at first.

For some it is the RSI. Others like the Stochastic or the MACD . Or one of the literally hundreds of other indicators that are available.

Well, I love the MACD. And the Stochastic is also a favorite.

But there is one indicator that I refer to more often than any other. However, before I tell you what it is, it is important that this discussion is placed in context.

I always stress with the traders that I mentor that the most important part of your analysis is price action.

By this I mean that the very first thing you should look at is the shape of the stock's chart. And any patterns that you may be able to identify.

In particular, look for trends and consolidation. Candlestick reversal patterns and support and resistance levels. And be particularly aware of all time or 52-week highs or lows.

Also, be on the lookout for double tops and bottoms and triangles and head and shoulder patterns.

Because it is only in the context of the basic price action that you can make your trading decisions. And it is only from this understanding that you should begin to apply your technical indicators.

So, establish the context for your further analysis. Indeed, use this first process as a screening device.

Because, unless the chart immediately "speaks" to you, you should eliminate the stock from any further review.

What I mean by this is that unless there is a clear reversal pattern or potential for a breakout, move on. Don't waste time analyzing charts that have no likelihood of immediate movement.

And one of the best patterns for short-term trading is the channel. Always keep an eye out for these and when you find one, give serious consideration to trading them. Now, let's get back to our earlier discussion. What is the most important indicator?

Well, whilst this might surprise some of you, I believe it is volume.

You see volume is an indication of the strength of price action. A market needs high volume or increasing volume to sustain a movement in price.

So we want to see volume moving in the direction of the price. Increasing both in an uptrend and also a downtrend.

But realize that it takes more effort to push prices higher than it does to cause them to drop. So increasing volume is more significant in an uptrend than a downtrend.

If volume is diverging from the trend [going down instead of up] then we would normally not carry out any further analysis. Because the lack of volume means that there is a lower probability of price movement in the direction of the current trend.

Note however, that divergence can be an indication that a trend is about to end. So this can be an early sign of a reversal.

Another important aspect to volume that is often overlooked is in regard to retracements. Because the volume during retracements gives us a significant indication of the strength of the overall trend.

A strong uptrend should have higher volume on the upward legs of the trend and lower volume on the downward or corrective legs. Similarly in a downtrend.

Volume is best plotted below your chart as a histogram, or series of vertical lines.

And it helps to add a moving average line over the histogram to smooth the volume readings. I use a 3 day MA but you can experiment to see what works best for you.

But most importantly, always consider volume before entering a trade.

David Chandler For free mini-course on stock and options trading click the following link: http://www.StockMarketGenie.com http://stockmarketgenie.blogspot.com/ Ordinary People Making Extraordinary Profits! The above comments are offered for educational purposes only. We are not providing you with financial advice. We are simply sharing with you what has and hasn't worked for us personally. If you wish to trade or invest in the stock market you should obtain advice from a registered licensed advisor.

---

The Top 10 Reasons to Invest in Mutual Funds

Everyone who follows the financial news has heard of mutual... Read More

Invest, Be Wrong, and Make Money in the Stock Market

I have been trading for several decades and was an... Read More

Finding A Good Stock

One of the things people are always asking me is... Read More

Stops Make Money

During the day I watch CNBC-TV, the stock market channel.... Read More

Quality Investment Information: Standing Firm In the Face of Opposition

THERE'S SOMETHING TO BE SAID FOR standing firm in the... Read More

You Wont Like This

Why? Because I am going to shatter your conventional wisdom... Read More

Market Psychology

Today we are inundated with tons of information about the... Read More

Humpty Dumpty the Stock Market Falls Down

Humpty Dumpty had a great fall and all the King's... Read More

The I Word is Coming to a Town Near You

Hello Inflation, it has been awhile, I see you on... Read More

E-mini Day Trading - Day Trading for Beginners - Stock Market Timing Software

I mean it when I say that. While plastic silverware... Read More

Market Globalization

Just 30 years ago the stock market was a shadow... Read More

Stock Insurance

You have a lock on your house. You have a... Read More

Play another Day

Money management starts with protecting your capital, realizing profits and... Read More

This Market Is Different

All of the talking heads have been telling us that... Read More

Leverage - Margin Debt

What is leverage?Here is a definition of leverage from an... Read More

Which Way The Market

I am hearing predictions by brokers, financial planners, talk show... Read More

Why Buy and Hold?

Since I can remember, and that's a long time ago,... Read More

Understanding a Stocks PEG Ratio

A PEG ratio cannot be used alone but is a... Read More

Buying Stocks and the Importance of Correct Timing

An investor can find and research the best stock on... Read More

Moving Averages

Every day on CNBC-TV they show a 200-day moving average... Read More

Protectionism

First let's see what protectionism is. According to Mr. Webster... Read More

Hold Em and Fold Em

When most analysts, financial planners, fund specialists and investors try... Read More

Trading Tips No 5: Stock Trading Curve Drawdown and Commitment

All stock trading and investing methods must deal with the... Read More

When?

When will the stock market stop going down and start... Read More

Hedge Funds: the Good, the Bad, and the Ugly

Alfred Winslow Jones started hedge funds in 1949. He was... Read More

The 10 Commandments

Wall Street has been preaching for years and years to... Read More

Mid-Cap Stocks: Asset Class with an Identity Crisis

Much like the middle child, mid-cap stocks have long struggled... Read More

What Are You Waiting For?

Do you own any mutual funds? In an IRA or... Read More

Managing Investing and Stock Market Risks

Reduce your investing and stock market risks by:Setting your sights... Read More

Stock Valuation using the SMP Model

Disclaimer: Please note that I do not necessarily purchase, own,... Read More

Overvalued & Underbought

With all the bad news that has been dumped upon... Read More

Long Term Financial Vehicles

Investing in long-term financial vehicles give you the most gains... Read More

Race Horses and Mutual Funds

For years investors have been taught to look into the... Read More