Posted by forex at 3:46 AM
Read our previous post
1. Apply the Summation Index chart study to the stock or index of your choice. Most major stock charting programs will offer this particular tool. Many will likely allow its application to a short-term chart, but remember that the design of this indicator relies on a long-term time-frame, so it is best to use it in conjunction with a daily, weekly, or monthly price chart.
2. Study past patterns in the relationship of the Summation line to price movement before trading in real-time with this indicator. Such charts help identify the true strength in the marketplace, as measured by the quantity of stocks actually participating in rallies or declines. Note how new short-term highs in price were often accompanied by lower highs in the Summation Index just prior to a significant decline in price.
3. Compare the patterns from past periods to the process of unfolding patterns in the current market climate over a period of several days or weeks. Observing real-time chart studies is a separate skill based on pattern recognition of past events. It is crucial to develop confidence with this technique before relying on the Summation Index to inform trading decisions with real money.
4. Consider trading stocks based on this indicator once you have acquired some meaningful experience observing Summation Index patterns. Interpretation of technical studies is much like an art form and depends on subtle recognition of complex relationships. Consider buying into a long-term investment if it has just endured a decline but the Summation Index is demonstrating a climbing line or a higher low. As fewer stocks led to the decline, this suggests that the overall market climate is due for a turnaround.
5. Consider selling, or at least be cautious of buying, when prices make a new high on a weaker Summation Index. While the rally may appear strong, the Summation Index is indicating that fewer stocks are actually participating in the price movement, and thus a decline is likely imminent.