KISS Your Technical Analysis
For anyone who wants to employ technical analysis in their trading, there is that constant question—which indicators to use? Just taking a glance at the range of indicators offered in any TA package can likely discourage any but the most diehard chartist. In the next 500 or so words, this article intends to rescue you from that morass and provide you with a method that can KISS—Keep It Short and Simple—your technical analysis to the next level. It will also provide a couple of examples.
One of the key mantras rolled out by technical market mavens over the decades is only ever to trade in the direction of the prevailing trend. But what is the easiest and quickest way to do this? Well, first up, you have to determine in which direction—up, down, or sideways—you market is trending. That’s it—there’s only three directions. Surely it can’t be that difficult? Truth is, it’s sometimes maddeningly difficult. So, let’s first of all determine a method to work out if a market is trending up or down. We’ll use another indicator to tell us if it’s trending sideways.
The technical indicator for the KISS method is a 13-period exponential moving average (EXMA), tagged to the period close. Why exponential? Because, of the three main choices—simple, weighted, and exponential, it is the exponential that makes the most sense. There’s not enough room here to explain the differences, but if you don’t know what they are, then do yourself a great benefit and perform a little research.
For day traders, a good phase to take as your trending guide is a weekly market, with each period on the bar chart representing five days of trading. If the current EXMA is higher than the previous period’s close, then take the market as trending up. If it’s lower, then take the market as trending down.
Next, look at the daily EXMA. If the weekly EXMA provides the trend, then the daily EXMA provides your timing. If your weekly EXMA is higher than the previous week, and your daily EXMA is higher than the previous day, then long is the position to take. If both are lower, then the only position to take is short. If there is a mismatch—weekly up, but daily down, or vice versa—then the market is trending sideways, and the best bet is to stay flat. And that’s it! Couldn’t be more KISS than that!
Note: for traders who take a longer-term view, you could use a monthly EXMA for your trend indicator, and a weekly for your timing. Shorter-term traders, such as day traders could use an hourly for the trend, and a 10-minute EXMA for the timing. Always aim for a 5:1 ratio for your EXMA pair.
Now, let’s take two examples. At the time of writing this article—May 11th, 2019, the EXMA indicators for these two markets are as follows:
|Market||EXMA Weekly from Previous Week||EXMA Daily from Previous Day||Position|
|Japanese Nikkei 225 Index||Lower||Lower||Short|
|US S&P 500 Index||Higher||Lower||Flat|
Our KISS system indicates that traders should be short in the Japanese stock market against flat in the S&P.
The KISS method is clear, unambiguous, and easy to deploy. It could also be automated to provide clear indications of a range of indicators, “at a glance”. Why not give it a try and see if KISSing your market works for you?