Altogether, I'll be looking at five technical signals to assess stocks. They are:
psar - Parabolic Stop and Reverse, a buy/sell signal designed by J. Wells Wilder Jr. It is calculated from price trends and their extremities using a complex formula. See Stockcharts, Wikipedia and Investopedia. The psar not only gives entry signals but provides trailing stop/loss points.
adx - Average Directional Index, a measure of the degree to which a stock is trending directionally rather than moving sideways. See Stockcharts, Wikipedia and Investopedia. It was also designed by Wilder.
pps - Person's Proprietary Signal, a buy/sell signal designed by John Person. It's inner workings have not made public.
macd - Moving Average Convergence Divergence, subtracts a longer moving average from a shorter moving average to calculate momentum. See Stockcharts, Wikipedia and Investopedia.
sto, stochatic - Stochastic Oscillator, calculates the relationship between the current close to the high-low range over a period of time. See Stockcharts, Wikipedia and Investopedia.
My plan is to use the psar as a basic bull/bear signal, with the pps and macd as subsidiary signals.
I'll use the adx as an indicator of the degree to which the stock is trending up or down. An adx reading below 20 is trendless (sideways), above 30 is trending and above 40 is really trending.
The psar signal will be accepted only in the case of trending stocks to lessen the chances of whipsaw.
Finally, the sto will provide an indication of the strength of the psar/pps/macd bull/bear signal. A bull signal with the sto somewhere in the middle of its neutral zone lacks credibility.
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