I learned long ago that price action is king. As a technician, I have a world of indicators that can help give me the edge I am looking for, and guiding me toward a buy/sell decision. But it is the price action that matters the most. We can look at all different sort of indicators and latch on, but if the price is not confirming then the indicator is not all that useful.
Now, timeframe matters immensely. We can look at price action of the S&P 500 across different planes of time and come up with an entirely different view. That all depends on your trading timeframe. For instance, using a 15 minute chart might show a very bullish short term momentum move is underway, yet the daily chart is just not confirming the trend yet.
If you're trading for a 1-3 day period then taking the 15 min chart signal is worthwhile. Yet, if you're swing trading for days or even a couple weeks, the daily chart is the one that probably is the most valuable tool. That is my preferred time.
Our job is to recognize there are differences and to understand where we need to reference. As it relates to other indicators, I have found when they line up with the price action that gives me a greater confidence level in making a trade. Here is a tear down of my process, see if it aligns with your own:
- Identify strong daily trend on the price chart. Is there breakout?
- Check out the volume - is it strong or weak as the price makes a move.
- Is there some follow-through in price? Are there distinctive chart patterns evident?
- What does the MACD look like? Crossover?
- How about relative strength? How is the stock performing vs. the rest of the market.
- Money flow - important to see positive flow when a stock is moving higher.
- Option activity - is there big money flowing towards option strikes?
- Is the stock overbought or oversold?
It is through this flow process that I am able to understand more about the price action of the stock and make a sound trading/investing decision that I am comfortable with. There are certainly more filters to use, but these work for my trading timeframes.