Choosing the Right Trading Tools

No matter which career you choose, they all require tools to be successful. Most tools are tangible, while others are psychological, mathematical and even spiritual. As a trader my tangible tool is a chart. There is math in my favorite market indicators, and the indicators illustrate psychological and sociological behavior. As for the spiritual part, it is the euphoric feeling a trader gets when all the hard work and analysis pay off as a lucrative trade that involves minimal risk.  

Basic Tools Serve a Purpose

The most important tool every trader must possess is fundamental analysis. Fundamentals drive markets. Essentially, they are the forces of supply and demand. Technical tools are charts that include indicators and studies. To build your own toolbox begin with the basics and purpose.

The Essentials 

After researching the seemingly countless indicators and studies, I concluded all tools have uses as well as weaknesses. You don’t use a hammer to cut wood, and you don’t use a saw to pound nails. Some technical tools work best during trends, while others are most effective signaling the end of one or the start of a consolidation phase.

Bar charts and trendlines were the first tools in my personal toolbox. Candlesticks eventually replaced bar charts because they illustrate momentum and often divulge a directional bias. My kit includes gauges that reveal when prices are apt to rise, fall and consolidate. Therefore, stock your box with tools that address that workload.

Though I have added a few more tools to the chest, I still rely on those original tools. Technicians build strategies by organizing data (open, high, low, close) into recognizable patterns. All the information we need to create trade signals is in the price action. In my attempts to find the perfect tools (indicators), I’ve discovered I need just a few to keep analysis simple and logical.

Define Value

When a market is in consolidation mode, it usually forms a pattern that defines fair value. The most common patterns take the shape of flags (rectangles) or pennants (triangles). When such trendlines are breached it frequently signals the onset of a trend or breakout.

Another pre-breakout identifier is when a short-term fast-moving average (5-day exponential) and longer-term moving average (20-day simple MA) converge for 6 to 10 days. A sharp vertical move frequently occurs when these MAs are convergent over a couple of weeks. On the other hand, when these moving average are historically divergent for a week or 2, a consolidation phase often follows. Check out the MACD (moving average convergence divergence) indicator to add to your toolbox.

Enhance the Timing of Entry 

I found the best time to enter trades is when a channel or triangle is violated after the first hour of the day or in the last 30 minutes of the session. The reason is liquidity is high during those time frames, and the move higher or lower occurs because the prime-time players are typically active when volume is peaking. Therefore, the tool I prefer to track intraday momentum and enhance entry time is a 30-minute candlestick chart.

During my career at the CBOT, I had many mentors who introduced me to various tools and disciplines. The tools mentioned above are the foundation for becoming a better market analyst and trader.

John Seguin, Market Taker Mentoring

Trader Education