OPENING POSITION May 2002
Trends, reversals, consolidations, accumulations: Which stage is the market in? After all, spotting these phases helps you forecast the direction of the markets' essence - that's right, prices. And as we all know, prices fluctuate rapidly. When you analyze price movements, you're essentially measuring market participants' views about future prices. Since few investors come up with precisely the same predictions, this results in the buying and selling that defines the market. In such an environment, there may never be a way to accurately forecast price movements. But in order to trade successfully, you need to have some way to identify what the majority of traders are thinking. You can do that with the help of technical indicators.
But there are hundreds of indicators, and trying to pick a few that work well can be an overwhelmingly frustrating experience. Some indicators may work well in trending markets, while others may work well during consolidations, and yet others may work well at identifying reversal points. Some may lead price movements, whereas others may lag. Each indicator has its merits and each has its drawbacks. To add to the complexity, new indicators are always being added to the list. While it may not be necessary to study every indicator you come across, it would be to your benefit to select a few to help confirm signals, alert you to possible movements, and indicate price action.
In this latest issue of Technical Analysis of STOCKS & COMMODITIES, we focus on a new indicator created by regular contributor John Ehlers, which he refers to as the center of gravity oscillator (CG oscillator for short). He developed this indicator while researching adaptive filters, and it's certainly worth trying out; the results may surprise you. We're also bringing to your attention an indicator that has been around since the 1980s, namely the Bollinger Bands technique. Read what its creator, John Bollinger, has to say about this popular method in this month's interview.
Finally, whichever indicator you use, whether old or new, don't forget
that price movements are dictated by human perception, and measuring them
quantitatively doesn't provide the entire solution. Indicators merely filter
price action and provide an objective measurement. The subjective side
can always distort what an indicator is suggesting, which is why you have
to practice sound money management. We hope the article "Planning
To Win" by Richard Ahrens will help you do just that.
Jayanthi Gopalakrishnan,
Editor
Originally published in the May 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.