TA indicators don't agree with each other

#1
Hi

I am a newbie to the world of Technical analysis and these days I keep checking the various indicators of the companies which are recomended/not recommended by senior members and analysts on various websites. My limited knowledge of TA comes from various tutorials on the internet, which indicate that when RSI is low towards 30-35, MACD crosses/is more than the signal and short term EMA is higher than long term EMA's, its a good
oppurtunity to buy that stock. But I have yet to see all the three singnals together. The EMA and MACD indicators are positive but RSI
is negative and viceversa. For eg. take Ranbaxy, the RSI is below 30 but MACD is below signal and short term EMA is below both other
EMA's while in Cipla, RSI is nearing 70 but MACD is above signal line and short term EMA is about to cross
long term EMA.

I am sure my limited knowledge is at play here. I would appreciate if others can help me understand these indicators and recommend
good sources (internet or books) for improving my knowledge of TA. I use Fcharts and Wallstreet analyzer for viewing charts.

Thanks
Nihar Desai
 

Traderji

Super Moderator
#2
The moing averages/MACD identify the trend (rising MA identify uptrends and vice-versa) and the RSI identifies oversold(buying opportunity)/oversold(selling opportunity).

You are probably not getting any BUY signals because the market is in a downtrend.
 
#3
Nihar,

Here is what I can advise you:

1. As Traderji rightly pointed out above - make sure you are trading with the market's current trend. Since the market is currently in a downtrend you may not get quality buying opportunities.

2. For trends at first begin looking at two EMAs (this is the way I started studying) . Or you could use the method extremely well explained by Traderji - Guppy moving averages. Select any one method of identifying trends and stick to it.

3. Once a trend is well established in a stock then you can look at various oscillators (again select any one and stick to it) and enter a trade based on their levels (don't get bogged down with absolute levels of the oscillators, just see if they are approximately overbought or oversold). Eg. Buy when the oscillator is oversold in an established uptrend or Short when the oscillator is overbought in a downtrend. And in both cases make sure you get confirmation from the price itself before you enter the trade. It means, when the prices are oversold in an uptrend, wait for the price to start moving up before you buy & vice versa.

Let me give you an example so it is clearer. Let us take your example - Ranbaxy. In the attached Ranbaxy chart we'll use 20 & 50 EMAs to identify the trend. This would mean Ranbaxy was in an uptrend approx from Sep 13 2004 to Jan 17 2005. For the oscillator we'll use Stochastics (5,3). You will see that in the uptrend you had three oversold conditions where you could have bought - approx around Oct 11th, Oct 26th & Nov 26th. Further, Ranbaxy went into a downtrend around Jan 17th and is still in a downtrend (so no wonder you are not getting buying opportunities). In the downtrend you had two overbought conditions to short Ranbaxy - approx around Feb 1st 2005 & Mar 13th 2005.

Also the most important thing to plan before you enter trades is where your stop loss point will be and how you will exit the trades to take profits. There are many strategies you can use. I will try and post something on it later.

I hope this will give your thinking a boost. Finally you will have to come up with trading strategies that you are comfortable with using whatever indicators you like. Make sure you use minimum number of indicators (at the most two should be more than enough).

--SwingTrader
 

Attachments

Traderji

Super Moderator
#4
Excellent & detailed write up swingtrader!

Would appreciate if you could come up with some more examples in the future.

PS: Anybody looking for a robust and reliable trading system should take a cue from swingtrader's post.
 
#5
swingtrader,
Thanks, it's a excellent write up.
Until now I was not using Stochastics but hope your this post will definitely help me further.

swingtrader said:
Also the most important thing to plan before you enter trades is where your stop loss point will be and how you will exit the trades to take profits. There are many strategies you can use. I will try and post something on it later.
We will wait for it.

swingtrader said:
I hope this will give your thinking a boost. Finally you will have to come up with trading strategies that you are comfortable with using whatever indicators you like. Make sure you use minimum number of indicators (at the most two should be more than enough).
Can you tell us which two best indicators to watch?
So that I can study that more.
 
Last edited:
#6
nihar15 said:
Hi

I am a newbie to the world of Technical analysis and these days I keep checking the various indicators of the companies which are recomended/not recommended by senior members and analysts on various websites. My limited knowledge of TA comes from various tutorials on the internet, which indicate that when RSI is low towards 30-35, MACD crosses/is more than the signal and short term EMA is higher than long term EMA's, its a good
oppurtunity to buy that stock. But I have yet to see all the three singnals together. The EMA and MACD indicators are positive but RSI
is negative and viceversa. For eg. take Ranbaxy, the RSI is below 30 but MACD is below signal and short term EMA is below both other
EMA's while in Cipla, RSI is nearing 70 but MACD is above signal line and short term EMA is about to cross
long term EMA.

I am sure my limited knowledge is at play here. I would appreciate if others can help me understand these indicators and recommend
good sources (internet or books) for improving my knowledge of TA. I use Fcharts and Wallstreet analyzer for viewing charts.

Thanks
Nihar Desai
If all the tech indicators gave buy/ sell signals concurrently, the stock would spurt/ plunge coz there would be someone following some strategy or the other. The key is in analysing the indicators that give clear cut signals and perform with some level of accuracy across differing market conditions. While most technical indicators lag the market, there are a few like the ADX that give signals just ahead of the market. Using these indicators with oscillators, you can develop a good trading strategy. Instead of just using the indicators, it is better to read about them in detail to know under what conditions which indicators perform better than others. The best book is "Trading Systems and Methods" by Kaufman. If you want to develop your own indicators in Excel, use "Computer Analysis of the Futures Market" by Lebeau and Lucas. A little knowledge is a dangerous thing.
 
#8
swingtrader said:
Nihar,

Here is what I can advise you:

1. As Traderji rightly pointed out above - make sure you are trading with the market's current trend. Since the market is currently in a downtrend you may not get quality buying opportunities.

2. For trends at first begin looking at two EMAs (this is the way I started studying) . Or you could use the method extremely well explained by Traderji - Guppy moving averages. Select any one method of identifying trends and stick to it.

3. Once a trend is well established in a stock then you can look at various oscillators (again select any one and stick to it) and enter a trade based on their levels (don't get bogged down with absolute levels of the oscillators, just see if they are approximately overbought or oversold). Eg. Buy when the oscillator is oversold in an established uptrend or Short when the oscillator is overbought in a downtrend. And in both cases make sure you get confirmation from the price itself before you enter the trade. It means, when the prices are oversold in an uptrend, wait for the price to start moving up before you buy & vice versa.

Let me give you an example so it is clearer. Let us take your example - Ranbaxy. In the attached Ranbaxy chart we'll use 20 & 50 EMAs to identify the trend. This would mean Ranbaxy was in an uptrend approx from Sep 13 2004 to Jan 17 2005. For the oscillator we'll use Stochastics (5,3). You will see that in the uptrend you had three oversold conditions where you could have bought - approx around Oct 11th, Oct 26th & Nov 26th. Further, Ranbaxy went into a downtrend around Jan 17th and is still in a downtrend (so no wonder you are not getting buying opportunities). In the downtrend you had two overbought conditions to short Ranbaxy - approx around Feb 1st 2005 & Mar 13th 2005.

Also the most important thing to plan before you enter trades is where your stop loss point will be and how you will exit the trades to take profits. There are many strategies you can use. I will try and post something on it later.

I hope this will give your thinking a boost. Finally you will have to come up with trading strategies that you are comfortable with using whatever indicators you like. Make sure you use minimum number of indicators (at the most two should be more than enough).

--SwingTrader
Excellent Write Up with Example SwingTrader Keep it Up. We would like to have more and more Write Ups with Examples !! :D
 

sh50

Active Member
#9
I would also like to congratulate swingtrader in coming up with a post in a really lucid language easy to understand.ivanboesky has also made handsome value addition. Over the last one year,the most important lesson I have learnt is to concentrate on the chart action instead of being obsessed with indicators, to identify one's own indicators and focus on money management more than anything else which mainly implies position sizing.

I do hope swingtrader comes up with many more similar writeups.It always a pleasure to revise basics following the " back to basics " philosophy. Swingtrader's post really lives up to the "keep it simple" philosophy.
 

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