The Top Three Overlooked Indicators
A quick rundown of some of the most valuable indicators on the market.
I get a lot of heat due to the look of my charts. I admit, at times it does look like a mashup of “Care Bears” meets “Tron”. Despite all of the flair and pizazz, the information conveyed is extremely informative and has rarely led me astray.
When I am scanning for opportunities (or planning longer term swings) I rely heavily on three key tools:
- Money Flow Index (MFI)
- A Gann Fans
- and anything by Ehlers (today we will be looking at the Super PassBand)
The Gann Fan
I stumbled upon Gann’s work while attempting to apply Nikola Tesla’s 3/6/9 theory to the stock market. I quickly learned that Gann was also applying the rules of 3/6/9 in his mathematical charts and diagrams. If we take a closer look, we also see the rules of 3/6/9 at the core of the fibonacci sequence.
Why We Like It
The Gann Fan is similar to fibonacci levels, but also incorporates a time/decay component. The further price moves away from the “impulse” move, the less energy and momentum it contains. The energy will slowly decay until another “impulse” move provides a fresh cycle of energy.
How We Put it to Use
Identification of Long-Term Trajectory
- To identify targets over a longer period of time, we combine this with fib retracement levels to identify swing targets during aggressive pullbacks.
- Are we near a potential change in trend?
- How much momentum do we have?
Ehlers’s Super PassBand
Why We Like It
I stumbled onto Ehlers’s while researching indicators to identify cycles for quant development. Ehlers created equations that convert price action into signal waves. This enables him to apply age old equations based on physics to gain a clear picture of the market.
All of Ehlers’s tools and theories are great when being leveraged in quants and algorithms, but they are a bit of a distraction when trying to apply them manually to a trading system.
A well rounded and simple to understand tool in the Ehlers’ arsenal is the Ehlers’ Super PassBand Filter. It is a filtered accumulation of Ehlers’ Cycles and Instantaneous Trend.
How We Put it to Use
When manually trading we use Ehlers’ Super PassBand filter to identify entry and exit points. The BandPass filter cuts through the “noise” and provides clear cut binary signals — this leaves virtually nothing to interpretation.
MFI - Money Flow Index
Why We Like It
MFI is a combination of RSI and accumulative volume. This allows us to track whether price is being accumulated or distributed.
Provides a Clear Picture of Market Internals
MFI on a 4H chart is extremely useful when swing trading specific stocks. When we see divergence on MFI on a 4H chart we can start to spot a bottoming pattern without getting our head chopped off.
How We Put it to Use
I use MFI to answer three questions:
- Do we have more room for continuation?
- Is this a reversal to the downtrend?
- Are they accumulating or distributing at the current moment?
I. Identify Where We Are in a Move
MFI acts as GPS coordinates when looking at a longer term cycle.
II. Divergence on MFI Signals a Reversal
III. Signs of Accumulation/Distribution
Accumulation and distribution isn’t always visible in general price action. The accumulation and distribution tends to begin during the previous high from the top.
