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.

In The News:


Investor's Business Daily

IBD's Best Mutual Funds 2017 Awards | Stock News & Stock Market ...
Investor's Business Daily
Except for the Harlem Globetrotters, repeat winning is hard. Even our Best Mutual Funds 2017 Awards winners have few repeats from last year.
Should you invest directly in equity or via mutual funds?Economic Times
Are you risk averse? Give hybrid mutual funds a chanceFinancial Express

all 10 news articles »

Motley Fool

The Worst Funds for Your 401(k)
Motley Fool
And all three of these options are far cheaper than the average U.S. stock mutual fund's expense ratio of about 1.25%. However, notice that there is a 65-basis-point difference in gross expense ratio between the highest- and lowest-cost funds on the ...
Mutual fund group aims for fee transparency with 'clean shares'San Francisco Chronicle

all 4 news articles »

Bloomberg

ETFs Are Giving Mutual Funds a Run for Their Money
Bloomberg
Mutual fund ownership of equities is at its lowest level in nearly 13 years, according to a research note from Goldman Sachs Group Inc. Meanwhile, exchange-traded funds are becoming an even bigger force in the stock market, the team led by Chief U.S. ...

and more »

US-based stock mutual funds take in most cash in a year -ICI
Reuters
By Trevor Hunnicutt NEW YORK, March 1 Fund investors' aversion to riding the market's highs showed signs of waning as stock mutual funds attracted the most cash in a year in the latest week, Investment Company Institute data showed on Wednesday.

and more »

Moneycontrol.com

Time to be careful: Fund managers are shying away from stocks
Moneycontrol.com
A look at the portfolio of ICICI Prudential Balanced Advantage Fund, the largest mutual fund scheme In India investing in stocks reveals that the exposure to stocks have been cut over last one year. The net equity investments of this scheme are down to ...

and more »

Barron's

ETFs Chasing Mutual Funds as Stock Buyer
Barron's
Mutual funds' outflows since last year have driven their equity ownership to a nearly 13-year low, according to Goldman Sachs. ETFs, meanwhile, are growing by leaps and bounds as a stock market force. “Corporations and ETFs will continue to drive ...


Mutual funds invest over Rs 2000 crore in stocks in February
Economic Times
Mutual fund managers purchased stocks worth a little over Rs 2,000 crore in February --- making it the seventh straight month of positive inflow in equities --- on sustained participation by retail investors. Fund managers have been investing ...

and more »

The Indian Express

Mutual Funds' exposure to bank stocks hits record Rs 1.2 lakh crore in February 2017 end
The Indian Express
Mutual Fund managers seem to be bullish on bank shares as they raised their allocation in the sector to an all time-high of over Rs 1.2 lakh crore at the end of February, primarily on account of cheaper valuations. In comparison, fund managers had ...

and more »

Utility Stocks for Retirement Investors: 1 Stock, 1 ETF and 1 Mutual Fund
Investorplace.com
While utility stocks have taken it on the chin lately with the Federal Reserve starting to raise rates, the reality is, they still make sense for retirement investors. Utilities For Retirement Investors: 1 Stock, 1 ETF and 1 Mutual Fund. Source: 401(k ...


CNBC

Why mutual funds could be on their way to another lousy year
CNBC
The improvement comes amid multiyear lows in the tendency of stocks to correlate up and down together, as well as an elevated level of dispersion, or the difference between returns for various sectors. Stock pickers in actively managed mutual funds ...
Stock pickers lift performance in battle of the benchmarksFinancial Times

all 4 news articles »
Google News

Buy and Hold Investment Philosophy

Wall Street has been preaching the doctrine of Buy and... Read More

Maximizing a Stock Market Investment

Maximizing a stock market investmentThere are several factors an investor... Read More

Traders, Defend Against the Dreaded Death Spiral.

It has often been said that there is only two... Read More

Look Out The Window

Quick, look out the window. It's raining. No, the sun's... Read More

Choosing An Investment Stock Broker

If you want one.And I don't recommend any broker with... Read More

Why Buy and Hold?

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

Time Out

Are you paying any attention to your retirement savings? Do... Read More

This Market Is Different

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

Discover the Retirement Breakthrough the Federal Government Created for You - The Roth IRA!

If you don't know what a Roth IRA is then... Read More

10 Tips For Creating Wealth From the Stock Market

1. Do not spread your money too thin.My friend has... Read More

Protectionism

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

Boiler Room 7/17/00

On Friday or Saturday evening my wife gets a movie... Read More

A Penny for Your Stocks

According to Investopedia Inc. the penny stock market has seen... Read More

Cash

How many people went to a cash position this week?... Read More

Zero Sum Game

Most people think the stock market is a zero sum... Read More

Moving Averages

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

On Line Stock Trading: Small Cap & Micro Stocks Go Up and Down - How Can You Profit?

Success in small cap & micro cap stock trading like... Read More

Bottoms Ups

If you have talked to a stock broker or financial... Read More

Successful Trading ? Establish Your Risk Level

Before you embark upon a journey of trading stocks or... Read More

Evaluation I

An insane person cannot evaluate an insane evaluation system.As you... Read More

Big Buildings Can Mean Big Economic Disaster

AS BUILDERS BEGIN WORK ON THE FREEDOM TOWER in New... Read More

Why Technical Indicators

The fight continues to rage among traders who use technical... Read More

I Love To Lose Money

Well, not really. What I mean is I don't mind... Read More

Choosing a Stock Broker

If you were to find that you had some severe... Read More

Small-Cap Stocks: The Beginning of the Journey

When an individual investor wants to roll up his sleeves... Read More