How to Stock Your Trading Toolbox

When I bought my first house, I had no tools to repair or make anything. I was far from a handyman, and my father knew it. After we settled in, my dad showed up with gifts every homeowner should have. The essential tools he gave me were duct tape, WD-40, a couple of screwdrivers, pliers and a hammer. He said I could fix most problems with these essential tools. As time passed my toolbox grew, but after 30-plus years of home ownership I still use those original tools more than any others.

Every professional trader I ever worked with or for has a toolbox. Some toolboxes are overloaded with technical indicators and charting methods, while others have only the bare basics.

I have researched and tested many of the seemingly countless tools available to traders. But over the years, I’ve found I rely most on the tools I learned when I began market analysis in the mid-1980s. Bar charts and trendlines were the first technicals in my trader toolbox. Though I’ve added a few more tools to the chest, I still rely on those original tools today. I learned to 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 that I need just a few to keep analysis simple and logical.

I use tools that do the following:

  • Define value: When markets are in consolidation phases, value areas are defined by using flags and pennants. These are trendlines that form channels and triangles.
  • Determine momentum: Momentum is often defined as the move from fair value, so it is dependent on the first tool. Consecutive closes above/below a flag or pennant indicate that bulls/bears have taken control of momentum.
  • Determine trend potential: A timing mechanism is used to determine if trend potential is high or low. Average True Range can be used for this job. For example, if ranges over five days dip below the average, odds increase for a vertical move. For trade opportunities I scan for channels and triangles with below average ranges. ATRs can also be used to signify when a market is overbought/oversold.
  • Pinpoint entry/exit area or support/resistance levels: Tops and bottoms tend to form when markets retest old flags and pennants.

Every trader has tools and the best foundation is built using the essentials, logic and market generated information.

John Seguin, Market Taker Mentoring

Trader Education