Whether you’re trying to buy the dip or sell pops in this market, your timing must be excellent.
In a market this volatile, poor execution can be costly.
Yesterday I shared with you three technical indicators I plot on my charts to improve my entries and exits.
Today, I’ll save you some time by sharing with you the three technical indicators you’ll never see me tracking. Plus, I’ll tell you why I think they’re a waste of time.
3 Technical Indicators I Choose to Ignore
Before we get into the three indicators I think Evolvers should avoid, I think it’s important that I stress a point I’ve made in the past…
DISCLAIMER: Just because I don’t use a certain indicator doesn’t necessarily mean it won’t work for you.
If you see an indicator on this list that you have success trading with, don’t start ignoring it simply because I do.
REMEMBER: Every trader is unique. You have to figure out which indicators work for you.
But if you’re a newbie trader trying to approach the market using my strategy, I think it’s best to avoid these questionable technical signals.
Let’s break them down…
Bad Indicator #1: Relative Strength Index (RSI)
I think the most widely-tracked technical indicator that I have absolutely no interest in is the relative strength index (RSI)…
How It Works
RSI is a momentum indicator that attempts to determine how ‘overbought’ or ‘oversold’ a stock is based on the volatility in price action over a certain period.
Theoretically, a stock’s RSI can read anywhere from 0–100.
But in practice, RSI tends to land between 30–70 on the vast majority of widely-traded stocks.
I’ve found that the traders I speak with mostly use the 14-day RSI.
And there’s an overall consensus on where stocks begin to enter overbought or oversold territory…
In general, an RSI below 30 is thought to be oversold, while an RSI above 70 is thought to be overbought.
Why I Avoid It
My problem with using RSI as an indicator is that volatile stocks (like the ones I love to trade) tend to break every rule of the indicator.
If I had a penny for every time I’ve seen a momentum runner exceed 70 RSI, only to blast off further into a blue-sky breakout, I’d be even richer than I already am.
The same goes for stocks dipping below 30 RSI, only to continue to dump with capitulation. It happens all the time.
Example: Just look at Meta Platforms Inc.’s (NASDAQ: FB) recent price action. After its horrendous earnings call on February 3, FB dumped 25% in a day. The 14-day RSI was reading at 28 on the first red day, below the ‘oversold’ threshold of 30. But at the time of this writing, FB has dropped another 15% since! This is a perfect (and recent) example of how RSI indications can be incredibly misleading.
As you can see, attempting to trade volatile stocks using RSI is a guessing game.
This insignificant number doesn’t determine when a stock is overbought or oversold — only market sentiment does.
I think you’re better off focusing on volume and price. Keep it simple.
Bad Indicator #2: Moving Average Convergence Divergence (MACD)
Another momentum indicator that doesn’t work with my strategy is the moving average convergence divergence (MACD).
How It Works
MACD is calculated by taking the 26-day exponential moving average (EMA) and subtracting it from the 12-day EMA.
The average of these two indicators determines the MACD, creating a new 9-day EMA known as the ‘signal line.’
From there, some traders use this signal line as a beacon to buy or sell.
If the stock crosses above the line, it’s seen as a signal to buy.
If the stock dips below the line, it’s seen as a signal to sell (or short).
Why I Avoid It
Like RSI, MACD is a momentum indicator that tends to fail when used in the context of highly volatile stocks.
When market sentiment gets skewed in one direction or another, it tends to take out moving averages very quickly.
In a calm, slow trading environment … moving averages can be a consistent measure of general price direction.
But in a market that’s facing record-high inflation, looming interest rate hikes, and a potential world war … I’m certainly not trusting any moving averages as valuable indicators.
And neither should you.
Bad Indicator #3: Stochastic Oscillators
Last but not least, let’s go over why I avoid tracking stochastic oscillators.
How It Works
Stochastic oscillators are similar to the RSI in many ways, with a few key differences.
Where the RSI tracks the overall price action over a period of time, stochastic oscillators attempt to predict future price action based on the closing price of a security.
They do this by comparing the closing price on a certain day to a set of prices over a specific period.
Why I Avoid It
Bottom line: The basic idea behind stochastic oscillators is that a stock’s closing price is majorly important in determining where it’s headed next.
But I find this to be false as often as it’s true. And that makes the use of stochastic oscillators a total guessing game.
This is especially true with highly manipulated, widely shorted momentum stocks.
How many times have you seen a stock ramp into a beautiful closing rally, only to start tanking immediately in after-hours?
Example: Look at what happened to Peloton Interactive Inc. (NASDAQ: PTON) stock on February 9. The close of the trading day was positively euphoric and the stochastic oscillators were likely telling traders to buy. Then, the stock started dumping as soon as the market closed, opening over 5% lower on February 10.
I’ve seen this type of fake-out happen more times than I can count.
But there are ways to avoid these sorts of situations…
When it comes to volatile stocks that retail traders love, which are the tickers I love to trade … anything can happen.
This makes it even more important to follow the right technical indicators that make sense within the strategy you’re using.
Remember that manipulation is rampant on certain stocks. And market makers will do everything they can to play games with the price action (and take money from inexperienced newbies).
CAUTION: Don’t be one of these unfortunate traders!
Avoid the misleading signals I mentioned today and focus on the indicators that matter most — price and volume.