This directory on market breadth introduces traders to how they can gain an advantage in the market, but it will take time to master the movements of each individual indicator. Try following two or three internal indicators every day instead of trying to master them all. Many of the indicators overlap, so find the ones that work for your personal trading style and focus on those. Always rely first on the price data of the vehicle you're trading, and then check that the internal indicators reinforce your position.
Here is an overview of the main points we dealt with in this tutorial on market breadth:
- Internal indicators measure market breadth, which refers to the amount of force and the level of participation behind market moves.
- The most common data used to build internal indicators are volume, advance/decline and new highs/lows.
- Strong volume in the day's winners indicates buyers are winning the day, and vice versa.
- Advance/decline data gives traders a look into how many different companies are taking part in a rally or decline. The more companies taking part, the broader the move.
- New highs or lows for a company indicate exceptionally positive or negative feelings toward its performance. If many stocks are making new highs or lows, movements in the broad market should mirror that sentiment.
- Point-and-figure charting, by removing the time element from the chart and recording only larger price moves, helps filter out market noise.
- Internal indicators are most useful when used in conjunction with a price chart.
- Market breadth should never be used to rationalize an otherwise bad trade. The price action trumps everything else when it hits a stop-loss.
- Internal indicators are used to confirm price moves in a given market, and they should generally print the same shape as the underlying price chart, making highs and lows near the same date.
- An important warning signal is given when an internal indicator diverges from the direction of the market in question, indicating that a price move is not widely supported by market participants.
- A reversal occurring when an internal indicator is in an overbought or oversold condition may mean fast moving price changes are ahead.
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