Instead of the most effective indicator, the better question is:
- Why are you using the indicator?
- What are you looking for?
I struggled with these two questions immensely until I truly understood price structure.
There are only two components of price:
- Trend: Price’s long term tendency. For example,
- Volatility: How price fluctuate up and down in the short run
So what does this mean?
This means you only need two indicators on your chart.
Any more indicators I would consider to be redundant.
It doesn’t really matter which indicator you use as long as it tells you what the trend is and the volatility.
In the uptrend, you want to trade only the dip.
In a downtrend, you want to trade only the tops. (Personally, I don’t trade downtrends anymore because stock market has a natural tendency to go up).
Once you have determined an uptrend + a dip, you want to gather information for alternative sources to confirm that signal is right.
You found a stock with a good up trend (Facebook) plus a temporary dip.
Then, you read the news and noted that Facebook is about to launch a new product.
This allows you to “guess” that the new product will drive more sales for Facebook which will lead to higher earnings.
In every dip, there are only two situations:
- It is a dip and the price goes back up
- It is not a dip and price continues to go down. If you previously identified an uptrend, this means the trend has now changed.
So you can invest comfortably knowing that you have a high chance of being right.
I’ve just summarized how I invest from a high level.
If you are interested in knowing more, I’ve prepared a free 45 min webinar which you can watch here: Free training: How to maximize wealth on the stock market (45 min)