Section 11:
Trading Price Patterns with Technical Indicators
There are innumerable technical indicators available to today’s trader. Indicators range from the simple, intuitive, and effective to the incredibly complex and sometimes completely worthless. It seems more are being produced daily with the improvement in today’s trading software and technology.
Technical indicators can be traded with price patterns to form a powerful combination. The application of indicators enables traders to anticipate the confirmation of a price pattern. Anticipating the break of a price pattern secures a better entry point in terms of higher profit potential and lower risk. But anticipating a breakout from price pattern comes at the cost of lower probabilities. Price patterns are strongest when they break and actually confirm. Forecasting that patterns will break is a difficult process, but one that can be made easier with the use of technical indicators.
We will give examples with just two indicators: Full Stochastics and the Moving Average Convergence Divergence (MACD). The concepts that you’ll learn about using Full Stochastics and the MACD are applicable to most other technical indicators. Focus on the concepts rather than the indicators themselves. The concepts applied with the Full Stochastics and the MACD can be used in other indicators such as the Commodity Channel Index (CCI), Relative Strength Index (RSI), Aroon, Moving Average crossovers, among others.
Don’t worry too much about the parameters of the Full Stochastics and the MACD, along with other indicators. In general, stick with the default parameters used by most charting platforms. For example, the Full Stochastics is usually applied with a setting of 5,3,3 or 14,3,3. The MACD, for example, is generally applied with a 12,26,9 or 8,17,9 setting. Stick with these parameters and don’t tinker too much with other settings.