Posted by forex at 5:32 AM
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1. Measure money flowing into or out of a stock. Use money flow or accumulation/distribution indicators to determine whether trading volume represents overall buying or selling pressure. These types of indicators rise as buying increases.
2. Determine whether a stock is overbought or oversold. Use an oscillating indicator, such as stochastics or the relative strength index, to determine whether the price is ready to reverse because of profit taking. When these indicators move to the upper pane of their plotted area, they indicate overbought price conditions.
3. Measure the strength of the trend. Use indicators such as momentum or Average Directional Index, or ADX, to measure the strength of a stock's trend. ADX readings above 35, and momentum readings above 3, indicate a strong trend.
4. Look for buy signals. All indicators can be used to find buy and sell signals. The Moving Average Convergence/Divergence, or MACD, histogram offers one of the easiest to read signals, making it one of the most popular indicators. A buy signal is produced when the MACD crosses above 0 on its histogram plot.
5. Find the best price point at which to buy. Moving averages arguably offer the best way to measure a safe and reasonable place at which to buy a stock. For example, institutional investors tend to defend the 50-day average when a stock is in a strong trend. Waiting for the price to return to the 50-day average is a good place to buy.