Hi Larry,

I just finished reading Bollinger on Bollinger Bands.

In it (pg 140 Table 17.1) he writes about indicator categores.

He list 6 Catagores, each catagory has 2 examples. They follow:

Momentum
-Rate of Change
-Stochastics
Trend
-Linear regression
-MACD
Sentiment
-Survey
-put-call ratio
Volume ( open )
-Interday Intensity
-Accummulation Distributio
Volume ( close )
-Money Flow Index
-Volume-Weighed MACD
Overbought / oversold
-Commodity Channel Indes
-RSI

Bolinger suggest to choose one indicator for each catagory when making a system. He suggest that chosing more than one indicator from each catagory can cause a false sense of security.

I recently went to http://www.paritech.com/paritech-site/education/technical/indicators/default.asp . They say:

Whilst there are many ways to categorise indicators, for our purposes we will use the following groupings:

Trend Indicators
Volatility Indicators
Momentum Indicators
Cycle Indicators
Market Strength Indicators
Support and Resistance Indicators

The paritech catagories and examples did not completely agree with Bollinger's. They put RSI under Momentum and Commodity Channel Index under Volatility. They don't list some of Bolinger's indicators.

In general, how would you categorise indicators?
What indicator class would you put candlestick signal interpretation?
What are your favorite indicators for six months, two weeks and one day? And, why do you like those indicators? What indicators don't work for you?

What websites and books do you recommend to explore this topic?


Thanks.

JeffO

Jeff,

If I can get you to listen (and I can get very few people to listen ) I’m about to save you lots of money and grief. You are making this way, way too complicated. All an indicator does is give you a little clearer picture of price and volume. They do nothing that you couldn’t see for yourself on a price and volume chart without indicators.

You can place most indicators in three simple categories: oscillators, trend following, and volume.

Pick one of each and learn them really well. For an oscillator, I like RSI. For trends I like moving averages. And for volume I like Chaikin Money Flow. I like RSI because it’s simple. I like moving averages because they give me a general idea as to trend and the price in relation to the trend. I like CMF because it sometimes gives me some insight on accumulation and distribution.

Whatever you do don’t use indicators that basically do the same thing. For example, RSI, Stochastics, CCI, Williams %R are all oscillators. Chaikin Money Flow, Accumulation/Distribution and On Balance Volume are all volume indicators.

Candlesticks simply give you a little clearer picture of price in relation to the open, high, low, and close of the day. So I wouldn’t put them in any particular category.

I would recommend that you spend some time in Stock Chart’s Chart School…

http://stockcharts.com/education/

It’s free.

And I would recommend that you get one of John Murphy’s books like “The Visual Investor.” He does a very good job of explaining all the various indicators and how they may be used. But I’ll tell you an interesting thing about John. He is a very experienced and accomplished technical analyst. And yet a few weeks ago I saw him on Bloomberg and he said that the more experienced he gets the more he just looks at a chart and if it looks like it’s going up he buys. If it looks like it’s going down he sells. I know exactly what he means.

Here’s another one that I’ve told before. One of the greatest traders ever is Ed Seykota. He has said that he pins a chart to a wall, walks to the other side of the room, and if the trend is obvious from that distance he has no problem with trading in the direction of the trend. He probably wouldn’t know an indicator from a basketball.

I’m going to keep saying this until I’m in my grave, but this is all about money management and psychology. Everything else is just icing on the cake.

Larry