Build Traders Toolbox with Right Technical Tools

As an educator I make it a point to help students develop a solid fundamental and technical foundation. Years ago, I started my own “traders toolbox” that is now filled with facts, axioms, statistics and technical indicators. I refer to my toolbox when trading and creating strategies.

My first experience in the markets was on the Chicago Board of Trade trading floor. Trading pits are frequently loud, hectic and intimidating. Commodity and stock exchanges are unlike anything I had ever experienced. Somehow, there was order in this crazy, chaotic environment. I wanted to learn their secrets. There was opportunity and I was a sponge. I asked questions and kept notes. Here are some of the lessons I learned from professional traders.

Fundamentals First

My first question to my new employer was, why is the market moving up/down? His answer: You better learn the fundamentals, or the information that moves prices lower and higher.

For financial markets such as treasury (interest rates), equity index, precious metal and foreign exchange, I researched which reports had the biggest impact on prices. Monthly reports such as employment, inflation, sales, sentiment and housing data are typical catalysts for big price swings. If trading these sectors, it is imperative to monitor when these reports are due and what the consensus estimates are. Economic data are priced in before the numbers are released. It is the discrepancy between expectation and actual that moves markets.

As a rule, weak economic data make interest rate futures and ETFs rise and equities fall. Gold tends to follow treasuries and energies tend to move with stock indexes. Understanding the relationships between major sectors is essential to building your foundation. Commodities such as oil, wheat and cotton are driven by supply and demand reports, as well as weather. Earnings and guidance are the main influences on stocks prices.

Candlestick Is a Top Tool

When fundamental data are lacking, many traders turn to technics or charting tools and indicators. To populate your toolbox, begin with the basics. The first tools in my kit needed to be a directional indicator (trend beginning) and another that shows when a market has shifted to neutral (trend end). Candlesticks accomplish both scenarios.

Trend and Change Indicators

A gauge for judging the speed of a trend is vital for a trader’s toolbox. Relative Strength Index (RSI) is a reliable trend gauge used to ride profitable trades longer. Markets often reverse when reaching exhaustion, otherwise known as an overbought/oversold status.

Stochastics and MACD (Moving Average Convergence Divergence) found a spot in my toolbox. The logic behind them reveals when a trend is losing steam or about to reverse.

ATR or Average True Range can be useful when projecting profit targets and risk. I use ATRs in nearly every trade I do or recommend. Day, week and month ATRs are your guide for setting profit targets. A percent of ATR can be used to define risk.

Logic is the building block. Ask why and use market generated information to get answers. Your toolbox will grow with your curiosity.

John Seguin
Senior Technical Analyst
Market Taker Mentoring, Inc.