Our Strategy is to Follow Leading Indicators. Why? Leading technical indicators follow the Smart Money...
We previously stated in our Smart Money tab that the goal of our fundamental analysis is to narrow down our stock selection to only those that are heavily disruptive and undervalued before any of their trend starts. Our fundamental analysis is the preliminary step of our overall analysis to qualify potential disruptive undervalued stocks.
As part of our second phase of our analysis, we drill further into those disruptive undervalued stocks with our technical analysis which is mainly based on very specific leading indicators because leading indicators follow the Smart Money. Technical analysis looks at how a stock has performed historically. Specifically, this means how pricing and trading volumes have changed over time. With technical analysis, the purpose is to look at what has happened previously with a stock and use that information to gauge or forecast what may happen with its price going forward. This strategy relies on charts, ratios and other historical indicators to determine whether a stock’s current price is sustainable or if the price may drop in the future. With technical analysis we are assuming that all of the relevant factors that could affect a stock’s movements (profits, earnings, etc.) are already factored into its pricing history. We combine multiple technical indicators into a single trading strategy to limit the risk while still earning strong returns. What is the difference between the two broad categories: Leading vs lagging technical indicators. The most obvious difference is that leading indicators predict market movements and react to prices quickly, while lagging indicators confirm trends that are already taking place and are far slower to react.
Characteristics of Lagging Indicators
Characteristics of Leading Indicators - the Smart Indicators
The Volume factor: The Driving Force behind Leading Indicators.
Some of the greatest traders all used volume as the cornerstone of their own trading philosophy. They understood the power of using volume and price action, and it allowed them to succeed, where so many traders had failed. What drives leading indicators? Volume after all is the fuel that drives the market, both higher and lower. Volume is truly the only leading indicator, however the analysis and interpretation of volume is more complex. Professional traders use volume to determine their interest in the market – it is their way of understanding accumulation prior to up momentum and distribution prior to down momentum. Based on the volume driving force that is incorporated in diverse leading indicators, we zoom into these leading indicators which provide the following valuable information about stock evaluation:
Prices will either continue to decrease, but at a slower pace or stop falling and start to rise.
By now you understand why we focus on leading indicators for our technical analysis. With leading indicators we narrow down our selection to disruptive undervalued stocks that have not showed a trend yet, but rather potential for larger gains and a margin of safety; our goal is to anticipate market moves before trends start in order to reap the most profit possible for each trade.