By Jody Samuels
The last ten articles have been entitled Analysis Toolbox and we discussed the various market cycles including trends and continuations. This next part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)
In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. In this Indicator Series, we talk about the mechanics of trading.
|Developed by Marc Chaikin. This study is a momentum oscillator tracking price trends, to determine whether the buyers (accumulation phase) or the sellers (distribution phase) are in control of the price movement of a stock.|
The Accumulation/ Distribution line is designed as a momentum oscillator, and is best used on daily, weekly and monthly stock charts, in conjunction with volume. When there is strong buying pressure with high volume, this pushes the indicator higher and strong selling pressure with reduced volume pushes the indicator lower. The Accumulation/ Distribution line either reaffirms the trend or gives a warning that the trend is about to change direction. As prices continue higher with the Accumulation/ Distribution line pointing lower, this suggests selling pressure (distribution) which could forecast a trend change in the underlying market. When prices trend down, and the A/D line points up, this suggests buying pressure (accumulation) and is a bullish reversal signal for the underlying market.
The A/D line may project a subtle change in momentum that may not be visible solely by looking at the price chart. For example, a stock may be trading in a clearly defined range, above an important support level and below obvious resistance. The A/D line may demonstrate a shift in control between the buyers and the sellers which could forewarn of a breakout above or below the established trading range. Watch for divergence between price and the A/D line because that would also point to a trend change as in the AMZN example below.
As with any indicator/ system, it is important to observe the behavior of the A/D line across many markets and time frames to get comfortable with the indicator personality. Once that is established, different trade management strategies can be implemented and a combination of indicators can be used for confirmation.
In the Amazon chart above, price makes a new low and the A/D line makes a higher low, as illustrated in the red box. At the same time, volume spikes and when volume spikes, it could forewarn of a trend change, as in this case. In the example, the A/D line reversed before price did, in conjunction with increased volume, suggesting strong buying interest which pushed the indicator higher before the underlying price reversed.
As with any indicator, observe the A/D line on several charts to get comfortable with what it is telling you. See you next week for another “A” indicator!
If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.
I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.
The Trader’s Pendulum: The 10 Habits of Highly Successful Traders. Copyright (c) 2015 by Jody Samuels. This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.