Algorithmic Trading Tips 08.
CREATE NEW TECHNICAL INDICATORS BY DRAG & DROP.
SIMPLE STEPS TO ADVANCED TECHNICAL ANALYSIS.
Tradesignal provides almost 200 built-in technical indicators. But sometimes it is not always easy to find the right one – tailored specifically for your needs. However, it is quite easy to build your own custom indicator. This Trading Tips issue shows you how.
You can define “correction within uptrend” combining all two indicators. The Directional Movement Index could give you the trend direction, the Stochastic Indicator might show you the correction. However, you might not always like the complex calculation of the Directional Movement Index. The number of alerts generated by simple Slow Stochastic can be very annoying – always either overbought or oversold, providing no stable signal. Instead, you would like to see a smooth, simple indicator which catches the perfect retracement in any uptrend.
I will alter my strategy to get the desired result and use the oldest indicator around – the 200-day Simple Moving Average. I simply drag and drop a “Moving Average Simple” indicator onto my chart and set it to a period of 200 days. This indicator, as old-fashioned as it might be, is great for trading stocks. Everyone knows that it is advisable to buy stocks if they trade above the 200-day line. Hence, market trading above the 200-day line combined with rising 200-day line is a good indicator of the bullish trend. First task is completed.
Our next challenge is to find useful indicator to show market dips. I would like to use the Momentum indicator. It compares today’s price with the one 10 days ago – simple and easy. Market builds up momentum if the Momentum indicator is rising.
Now put the Momentum indicator onto your chart and see for yourself. It is easy to determine momentum status above and below zero, but it is hard to determine if the momentum is rising or falling with all that daily fuzz. This is visualized by the confusion of my arrows in Fig 1.
FIG. 1: PLAIN MOMENTUM INDICATOR IN THE LOWER PANE DOESN’T OFFER SUFFICIENT INFORMATION.
And now it is time for magic. Instead of keeping the Momentum applied to the symbol in the chart, drag and drop it onto the 200-day line! This gives you a very smooth Momentum indicator and you can easily see if the indicator is rising or falling.
FIG. 2: MOMENTUM APPLIED TO MOVING AVERAGE. NOW TURNING POINTS CAN EASILY BEEN IDENTIFIED.
Let’s have a closer look. Search for all the days when the market is trading above the 200-day line and your custom Momentum indictor starts to rise. You should have been able to make positive profits on the long side from such analysis.
On the other hand, the right time to close your position or to use a tight stop would be when the market trades above its 200-day line and your custom Momentum indicator starts to fall.
At least a small correction should be expected. You can save this indicator combination in the template section of Tradesignal’s toolbox – simply Save Template.