One of the safest ways of making money from stock market investing is by always ensuring that you are trading in the same direction as the overall trend. This is very important and is something you should always bear in mind, so in this article I want to discuss two technical indicators that will help you identify the overall trend.
The first of these is the Supertrend indicator. This is not one of the mainstream indicators and is one you may need to download from elsewhere, but it is nevertheless one that is well worth using. I refer to this indicator all the time whether I'm investing in or trading shares, or whether I'm trading the currency markets.
What the Supertrend indicator does is basically tell you whether a stock is trending upwards (denoted by a green line) or trending downwards (denoted by a red line) at any given time. You can use this on your present time frame or you can do what I do and that's to apply it to slightly longer time frames to get an idea of the long-term trend.
For instance, if I'm looking to buy shares in a particular company then ideally I will want to see the Supertrend being green, ie bullish, on the weekly and monthly charts as this confirms that a well-established long-term trend is in place. Then I will drop down to the daily chart and wait for the stock to enter an oversold position in order to obtain a good entry point. This is a tactic I've been employing for a good few years now and it is generally very effective.
The other indicator that I will often consult is the 200 period Exponential Moving Average or the EMA (200) for short. This indicator is used by many investors and traders and is a valuable source of information because this provides another snaphot of the long-term trend.
It's most useful on the daily chart and tells you whether you should be looking to buy shares or hold on to your existing shares, or whether you should consider selling your shares. The general rule is that if the price is above the EMA (200) then you should look for buying opportunities until it falls below this indicator, at which point you should seriously consider selling your shares.
You can of course look for oversold positions when the price is substantially below the EMA (200) but this is a risky game to play because you never know when the price is at or near the bottom. It could easily drop substantially further to leave you seriously out of pocket.
It's much safer to invest in shares only when the price is trading above the EMA (200) and ideally when this indicator as rising as well. This will ensure you are trading with the trend and will increase the odds of your investments being profitable particularly if you look for any oversold positions along the way.
So basically if you want to buy shares that are in strong uptrends in order to minimize your risk, then you should definitely consider using the EMA (200) and Supertrend indicators because both of these will be of enormous benefit.
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Date Published : Feb 17 2009