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Six Key Indicators to Time a Stock Purchase

All six of these indicators can be used on any period chart, be it a daily, hourly, or one-minute bar chart. The period is not as relevant as the proper use of the indicators.

1) 20 Day Exponential Moving Average (E/M/A): I use the 20 day E/M/A/ to begin my screen for equities to determine the overall direction. To qualify for a potential Long position the equity must have made a higher low crossover and closed above this moving average. The inverse would work for a Short position, and would have to close below a lower high crossover. This is the first cut, in finding a potential stock to trade either to the Long side or Short side.

Moving averages are trend following, or lagging, indicators that will always be a step behind. This is not always a bad thing, considering the trend is your friend and it is best to trade in the direction of the trend. Moving averages will help ensure that you are in line with the current trend, and set the table for other confirming indicators.

The two basic moving averages are exponential and simple moving average. There is a very subtle difference between the two and I have used both at different times. Basically, an exponential moving average is considered best for short-term situations that require a responsive moving average. Simple moving averages work well for longer-term situations that do not require the same sensitivity.

2) 100 Day E/M/A: This is used to find support and resistance areas. If the 20 day E/M/A is below the 100 day you can surmise that, that area will serve as some resistance and could be a good place to take profits. On the other hand, if the 20 day is above the 100 day then it could serve as some support.

3) 200 Day E/M/A: Many people, including myself look at this moving average to indicate the overall market direction. It also serves as support and resistance, but mainly to indicate market strength. The depth of the strengh can be looked at by the percentage of stocks trading above the 200 day M/A. If the amount of stocks trading above the 200 day moving average is increasing on a daily or weekly basis, the overall trend could be consider up. Of course, if the amount of stocks trading below this important moving average is increasing the market is either entering a down phase or in a down phase.

4) Stochastic Oscillator: This is a technical momentum indicator that compares a security's closing price to its price range over a given time period. The oscillator's sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result.

http://www.Investopedia.com explains Stochastic Oscillator

"The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called the "%D" ".

"This indicator is calculated with the following formula:
%K = 100[(C - L14)/(H14 - L14)]
C = the most recent closing price
L14 = the low of the 14 previous trading sessions
H14 = the highest price traded during the same 14-day period.
%D = 3-period moving average of %K"

One of the ways to explain the use of this tool is to in-vision a coiled spring pushed all the way down and that is where you want the indicator for purchasing to the long side. On the other hand, if you were shorting equity you would want this indicator pulled out or as high as possible. It is the extreme extension, or compression, that you want to use in conjunction with your moving averages.

5) On-Balance Volume, OBV: This indicator was developed by Joe Granville, and is typically considered a momentum indicator. The calculation provides a running total of volume to show whether the volume is flowing into or out of a given security. It is an attempt to determine buying or selling pressure in an equity. An up-trending OBV indicates more buying pressure then selling, and consequently a downward OBV indicates money coming out of the stock.

To find a downward sloping OBV while the price of the equity is trending upward is considered convergence and can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming soon.

6) Trendlines: Simply put, a line that is drawn over pivot highs or under pivot lows to show the prevailing direction of price. Trendline's are also a visual representation of support and resistance in any period. They are used to show direction and speed of price. Trendlines can and many times define or describe tradable patterns in the markets. The breach of a Trendline can be either the opportunity to get into a security as it begins a move out of a pattern, or a signal to exit a trade that has gone the wrong way

It can take years of looking at charts and plotting different indicators to give you the perfect entry or exit out of a security. The bottom line is to find something comfortable that you develop enough confidence in to actually pull the trigger and buy or sell a security.


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