CORRELATION:The true relationship between technical indicators and price movement | Pacific Trading Academy
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CORRELATION:The true relationship between technical indicators and price movement

20 May Posted by in Day Trading | Comments
CORRELATION:The true relationship between technical indicators and price movement
 

 

My good friend and fellow mentor, Ken Chow, developed a trading technique he calls SuperStructure. It uses only price.  No indicators at all. He and his students do quite well.

But, success at SuperStructure requires a certain mathematical aptitude that not everyone has.  I know I don’t have it.

I need more visual cues than I can get from price alone.  Hence, the indicators on my charts.

Why do we use indicators?  What do they really do?  Two important things:

1.  They give us a point of reference to which price movement can be compared, and

2.  They create a filter that eliminates the “static and noise” that are irrelevant to showing the true direction of price.

I believe that in order to be effective, indicators must be correlated with the movement of the price so that they reiterate that movement but in a different visual style.  So, wherever one’s eyes fall on the chart, one sees a depiction of price movement.

I create this correlation through the use of a color-coding scheme based upon Red, White & Blue.  I use these colors because they provide a nice visual contrast, and because, thanks to John Phillip Sousa, everyone in this country always tends to think of those three colors in that specific order: Red, White & Blue.

Chart #1 is a sample of a five minute chart that I use to day trade the S&P Emini (ES) and my favorite forex pair, EUR/USD.  Chart #2 shows just the White and Blue moving averages and the White and Blue MACD to illustrate the relationship between these elements.  Chart #3 adds the White and Blue Stochastic lines.  Chart #4 combines the Red and White elements including the Parabolic SAR I use to create “Momentum Modules.”.  And finally, Chart #5 adds back the White and Blue to complete the correlation.

Please click on the charts below to make them full screen.
Chart #1

Chart #2

Chart #3

Chart #4

Chart #5

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