5 Favourite indicators
My 5 favourite indicators for long term investors.
I know we are not supposed to have a favourite pet or child, but I think if we are allowed to be honest with ourselves, we all do. Today I want to share my 5 most favourite indicators with you, that have treated me so well over the years.
- A golden cross formation. A golden cross formation appears when a shorter moving average breaks upwards through a longer moving average. This signals a buy opportunity for long term investors. Keep in mind the shorter moving average will move faster than the longer moving average since it is a lot closer to the latest price action of the instrument. A 20 and 40 week moving average works very well but sometimes they are too slow depending on the volatility of the share. I have found that a 10 and 20 week moving average moves fast enough and confirms not too late. Moving averages follow similar laws to most things in life, sometimes you have to play around with them and look at the history of the share to see if the breaks were real and confirmed a change in the trend.
- Death cross formation. For a buy opportunity we look for golden cross formations but when we want to consider taking profit, the death cross formation is confirmed when the shorter moving average breaks downwards through the longer-term average from the top. Again, look at a 10 and 20 or a 20 and 40 to see what has worked when tracking the historical price action. Keep in mind a 40-week moving average on a weekly graph represents the same as a 200-day moving average on a daily graph.
- Coppock curve. The Coppock Curve(CC) was introduced by economist Edwin Coppock in Barron's, October 1962. This indicator is often used by the long-term investors. There are three variables within the indicator: the short ROC (11-month rate of change), the long ROC (14-month rate of change) and a weighted moving average (10-month WMA). The zero line of the Coppock Curve acts as the trigger, above the zero line it is considered a buy opportunity and below it you can look to bank profit again. It is a slow indicator and waits for confirmation before it reacts and that is why it is one of my favourites.
- Stochastic indicator. There are many indicators that highlight overbought and oversold levels but the stochastic is one of our favourites. Why? Because it is also a relatively slow indicator. It gauges between a 0 and a 100. Above 80 the instrument is seen as overbought, which means the probability of the instrument to retrace to lower levels is more likely. Below 20 it is seen as oversold which means the probability of the instrument to reach for higher levels is more likely. The downside to the stochastic is that it can remain overbought and continue to rise to higher levels. The divergence in overbought territory usually hints more towards the downside and a divergence in over-sold territory usually hints more towards the upside.
- Fibonacci levels. As technical analysts we love lines on our graphs, we are always trying to find that perfect support or perfect resistance level. After we have identified our own diagonal and horizontal lines, I love to use the Fibonacci levels to see how close they are to mine. If my own levels are confirmed by the Fibonacci levels, then I know voila! this is a strong one. Fibonacci levels can be used as possible targets towards the top as well as support levels should the share price retrace. Fibonacci levels are derived from a number series that Italian mathematician Leonardo of Pisa - also known as Fibonacci - introduced to the west during the 13th century. The sequence starts like this: 0, 1, 1, 2, 3, 5, 8, 13...
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