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Classic Technical Indicators: Introduction to a New Series, Part 2
May 21, 2016
This is Part 2 of an interview with Raymond Rondeau, new CI contributing editor, who will be writing a series on Classic Technical Indicators. In of the interview, which ran in the April edition of CI, Ray discussed the many potential negatives and pitfalls of working with indicators and technical analysis in general. This second part of the interview covers the benefits of working with technical indicators. These interviews serve as a good introduction to Ray’s new Technically Speaking series, which will debut in the June issue of CI.
Jackie: Up to this point (in Part I of this interview), we have covered a number of the potential pitfalls and cautions with indicators. Let’s turn to the benefits.
Raymond: Earlier, we talked about some of the long-term influences of price movements. The good news is that technical indicators can influence price movements, at least to some degree, in the short term. This phenomena is more pronounced during quieter or less volatile times, when there is nothing else influencing pricing. The truth is that specific price patterns and indicator signals often have a self-fulfilling nature to them. The more people and programmed computers that follow the signals, the more relevant the technical patterns and signals become—“What people believe often prevails over truth.”
As experienced technicians will attest, we often see prices react at key indicator points, such as a 200-period moving average (MA), simply because of the widespread belief that the 200-period moving average is relevant. [A moving average is a lagging indicator calculated by averaging the closing prices of a stock for a given period.] Because of this, it can give an observer a small element of predictability into the likely future price movement’s direction and magnitude. Additionally, because technicals show specific strategic price areas on a chart, we can often make further future price action evaluations at these points by comparing what should or shouldn’t happen according to the rules of technical analysis.
Integrating volume with price plots makes it easier to verify the trading volume for price tops and bottoms, for support and resistance breakouts and more.