Hey traders! Roger Scott here.
Now listen.. there are several different types of indicators that ETF traders use for market entry and exit, and most of them are based on technical analysis and technical chart patterns. For example, Rob Booker and I use these specific indicators when spotting currency ETFs. As I told you earlier in the week, we spotted a trade in our Jump Trades program that we currently own.
The trade we spotted and alerted our members of was FXE.
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Now let's get back to it! This report will outline the basic type of indicators that work best for ETF Swing Trading.
Before I get into specifics, you need to understand that there are three basic types of indicators: 1. Identifying Trends and/or Confirming Trend 2. Identifying Overbought and Oversold Conditions 3. Identifying Chart Patterns and Trading SetUps.
Many Professional ETF Traders Rely On The 50 Day Moving Average
The first type of indicator most ETF traders begin experimenting with is the moving average. This is an indicator that will help you identify and confirm a trend. There are several different types of moving average indicators, the most basic kind is called the simple moving average.
This indicator has been used successfully by traders for several decades. The simple moving average is calculated by adding the closing prices for a set number of days and then dividing the total by that same number.
The average is plotted each day to give a running average of the market’s price. The typical length of a moving average is 20 days for short term trading, 50 days for intermediate term trend and 200 days for long term market analysis. Many traders use indicators that are based on the moving average such as Bollinger bands.
The Moving Average Is A Great Trending Indicator For ETF Traders
The Relative Strength Index Measures Overbought And Oversold Levels
The next category of indicators are momentum indicators. These indicators are leading indicators, this means they anticipate what will happen next.
Unlike the moving average, which is a lagging indicator, momentum indicators react to what has already happened in the markets. One of the most popular momentum indicators is the RSI (Relative Strength Index) indicator.
This indicator is available on every charting program online and offline.
The RSI indicator measures strengthening and weakening of momentum and is most commonly used to indicate temporary overbought and oversold levels in stocks, futures and commodity markets.
The RSI indicator works very well when markets are flat and range bound, and only recommended during these type of market conditions. Another very popular use of momentum indicators is to determine divergence between the ETF and the indicator.
If the ETF makes a lower low while the indicator makes a higher low, it indicates that the market is overbought and trend reversal may be near. Similarly, if the ETF makes a higher high while the RSI indicator makes a lower high, it indicates that momentum to the upside may be slowing down and the market may be overbought.
Relative Strength Index Is One Of The Most Popular Indicators For ETF Trading
Visual Chart Patterns Make Excellent Market Analysis Tools
Visual Analysis has been around since before the 20th century and has been used successfully by professional traders around the world for technical analysis.
Although, technical indicators have become simple to use and are based on advanced mathematical and statistical formulas, visual analysis remains one of the most popular methods to analyze ETFs, stocks, futures, currencies and commodity markets.
Basic patterns such as flags, head and shoulder patterns and other visual patterns based purely on price remains one of the best indicators for short term and swing trading strategies.
Many trading patterns that I use for my daily market analysis are based on simple visual analysis.
How Can These Indicators Help You
The best way to use technical indicators is to determine the underlying conditions of the ETF you are trading. If the ETF is trending strongly, using a lagging indicator such as a moving average will produce the best results.
Conversely, if the ETF is flat and range bound, an oscillator such as the RSI or Stochastic would probably work best. Many times a simple visual analysis of the slope of the trend line will provide all the feedback that is necessary to determine the most accurate trading conditions for ETFs.
This article is supplied courtesy of WealthPress.