Beware of the overbought-oversold trap. This convenient terminology suggests immediate action when oscillators push into extreme territory. But this questionable strategy will rob profits in trending markets. For example, common wisdom tells traders to sell when Stochastics punches above 80 or to buy when it drops below 20. Unfortunately, this advice fails during major breakouts and breakdowns. Look to the pattern first before trying to interpret any technical indicator, and remember Martin Zweig's classic adage that "the trend is your friend".

Use both pattern analysis and technical indicators to predict future price movement. But the indicator must support the pattern rather than the other way around. Patterns handle reward:risk measurements and identify the best Execution Targets. Indicators point to hidden strength or weakness and flag underlying conflict. For example, don't buy congestion in anticipation of a breakout when Stochastics rolls over sharply from an overbought state. Also, avoid daily short sales when a 14-day RSI turns up from an oversold condition.

Technical tools must address both numbers and emotions to locate promising setups. While state-of-the-art software builds complex trading systems, most indicators fail to capture the emotional tension that ultimately drives market trends. Turn to visual examination of recurring price and volume patterns for this essential task. Classic formations emit response fractals that predict how volatility and direction will evolve over time. Effective pattern analysis uncovers opportunity by finding these signals within the random noise of the charting landscape.

Recognize the unique appearance of each technical indicator. Many print characteristic patterns, while others oscillate between two extremes. For example, On Balance Volume (OBV) can display a Head and Shoulders formation with the same predictive power as its better-known cousin. But even the most effective indicators radiate both good and bad information. Learn when to listen to their important message, and when to ignore them completely.

Many technical indicators tune to preadjusted settings by the author, software or web site. Use this canned input to track crowd behavior, but set it aside when growing skills demand original strategies. Proper selection of both indicators and their settings requires considerable attention to tap the divergent trends that unwind through various time frames.

Technical indicators flash many false signals. Realize that the wrong set of parameters may misalign with your particular tactics and trigger actions that depend on bad data. Simple price input often yields dangerous output. Encouraging results may point to opportunities that don't work at all in your time frame. Bad exchange or vendor data can generate sharp peaks or valleys with no predictive power. Endless math quirks and limitations will frustrate your sincere efforts to uncover market clarity. Above all else, learn when indicators offer the keys to the kingdom and when even Bozo the clown should pass on the revelations.