Best indicators for the modern trader

August 7, 2014 11:34 AM

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Traders depending on technical indicators to predict market movements used to be laughed at and dismissed as kooks, but modern traders are paying heed to these funny lines on top of price charts. Examples of common technical indicators include Relative Strength Index, Money Flow Index, Stochastics, MACD and Bollinger Bands.

We asked a few experts what indicators they look to in today's markets to stay suuccessful. Here's what they said.

 

Alan Rohrbach @MacroMeister

The entire psychology of ‘trend’ analysis (vs. short-term trading or long-term valuations) rests on timeless precepts. That leaves classical patterns and moving averages still useful after so many ‘new’ or ‘ground-breaking’ analysis developments.

That is because price trends are characterized by a natural progression that is indeed timeless. Market price activity tends to proceed through phases of directional swings followed by taking a rest. The degree of that directional volatility and length of the rest (‘consolidation’) periods can vary widely. However, within the overall trend psychology, the attempted reversal patterns which inevitably form during rest phases are a key to the health of any trend.

Does a ‘top’ after a bull run succeed in reversing the trend, or is it quickly overrun? The failure of a top to perform is a sign the bulls still dominate the market. The inverse is true in a bear trend. And that pattern ‘negation’ may prove to be a good timing indication as well.  

Source: michael kooiman  

Similarly any drop after a rally is also subject to consideration of whether it violates enough up trend support to trigger yet more selling. In those cases the trend or channel line support (a hybrid form of patterns) is key.

And those reactions can also be assessed with well-researched moving average projections. Many criticize moving averages as lagging indications. Of course they are, reflecting a ‘smoothed’ picture of the price activity. They are nonetheless useful for spotting tests of trailing momentum.

New forms of analysis are often worth a look. Yet for those who have mastered the ‘craft’ of properly interpreting the classics, they will always be important indications. They are, after all, based on intrinsic aspects of price trend evolution.  

Lead Analyst and President of Rohr International, Inc. He is an international equity index, interest rate and foreign exchange trend advisor. His forte is ‘macro-technical’ analysis of how fundamental influences blend with technical aspects to drive trend psychology. Clients include international banks, hedge funds, other portfolio managers and individual traders.

Kara Boniecka @lakeshoreATS

We use the Balance of Power (BOP) indicator a lot these days. It measures the strength of bulls versus bears by looking at their respective abilities to push price to an extreme level.  It is great not only for timing market entries but also for identifying when trends are looking exhausted. It’s also useful in trying to tell when markets are entering range-bound territory. 

Since most of what we do is mechanical trading, and different algos perform well under different market conditions, we have found we can really increase our performance by actively heeding what the market is trying to show. BOP helps tease those messages out.

We also make use of basic principles of calculus with a proprietary derivative-based indicator to further hone our entries and exits.  We have found the combination to be extremely powerful, especially in the current market environment.

 

Kara Boniecka is the founder of LakeshoreATS, a Chicago-based algorithmic trading firm. She started her trading career in the grain pits at the CBOT, before moving on to work at a bulge bracket bank and finally at a propietary trading shop in Chicago. Her background has afforded her a keen focus on risk management and capital appreciation.  Since 2010, she has been developing and trading her own automated systems. 

Dan Gramza  

In the search for the best indicator to use today, I think it’s important to ask yourself before you begin this search what function do you want this indicator to perform. We typically think of an indicator as a buy and sell generator but an indicator can be much more than that.

It can be used to confirm a trade, build a position by adding to an established trade, entrance or exit only of a trade and it could be used as a guide to determine the risk management level to exit a trade with the loss. This evaluation and analysis of the purpose of the indicator may lead to the discovery of a weak buy and sell indicator that may be a powerful risk management tool.  

Source: Chris Potter

Before an indicator is used it is essential to understand the limitations of the indicator. In other words, when does it perform well and when does it not perform well. Often times an indicator is used across all markets with the expectation that it will perform equally well in all market environments around the clock.

What I have found helpful in my trading and work with institutional and private traders around the world is an understanding when to use the indicator and when not to use the indicator. For example, a daytrader may find in their market that the stochastic indicator provides the best performance between 8:00 AM and 11:00 AM and it is not used as a reference during the rest of the trading session.

 

Dan Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains.

Carl Larry @oiloutlooks

Oil is a fickle beast. Our indicators used to be all about America’s thirst for oil and geopolitics disrupting supply, we’re channeling the band Kansas and have gone past the point of no return. Now when we’re trading WTI it’s all about U.S. production and the pace of economic growth. We used to talk about how a $10 increase in the price of crude oil would decrease GDP by 0.5%.  

Source: Terence Wright

Now we’re nearing a point where the more oil we export, the more we’ll be thinking about how a $10 increase in the price of oil will “increase” the GDP by 0.5%. For oil trading, our indicators are more about what we are going to produce and sell and not what we’re going to import and buy.

Carl Larry is the president of Oil Outlooks and Opinions LLC. He provides daily oil market guesstimates with a dose of pop culture.

John Caiazzo @jlc7111

Source: David Ohmer

 

I follow primarily the financials including the Treasury Bonds, and Stock Indices.
 
Having been director of a number of International Divisions covering securities and commodities, my methodology includes momentum, chart technicals, and volume. The basis for my market activities relies heavily on global interest rates, currencies, and of course basic fundamentals and data. I put everything in a "pot" and make decisions based on resulting scenarios.  
 
John Caiazzo has over 40 years of experience at brokerage firms across the United States. He provides the end of week market wrap-up.

Matt Weller (@MWellerFX)

For me, picking a single indicator as the “best” is about as impossible as asking a mother to pick her favorite child. That said, one indicator that I’ve found particularly effective in this year’s strongly trending markets is deceptively simple: an instrument’s distance from its 100-day moving average.

Traders can easily modify the widely used Moving Average Convergence-Divergence (MACD) indicator to display this information by changing the settings for the first period to 1 and the second period to 100 (ignore the signal line). These parameters tell your trading software to calculate the difference between the “1-period moving average” (or the current price) and the 100-period moving average. When this difference reaches an extreme level, it is often a signal that the market is overbought and may be due for a pullback.  

Source: epsos .de

 

Take the GBP/USD as an example: the pair’s uptrend has stretched to 400 pips from its 100-day MA on four separate occasions this year, and each time (including just two weeks ago) rates have pulled back by 300-400 pips before finding support, presenting a better buying opportunity for trend-following traders.

Of course, there’s no guarantee that this indicator will continue to be so reliable, but it’s undoubtedly a tool that should be in every technical trader’s toolbox.

Matt Weller is the Senior Technical Analyst for FOREX.com. He contributes regular updates on various currencies throughout the day.

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About the Author

Lauren is the editorial assistant for Futures Magazine. She graduated from DePaul University in 2013 with a degree in English.