The key to making good trading decisions is to pick good primary signals and good confirming signals.
Charles Dow was an early trader that founded the Dow Jones Industrial Average. He used the rail stocks (Transports) to confirm moves in the industrial stocks.
Confirmation improves your overall performance by increasing the percentage of winners. I reduces the number of winning trades and losing trades, but the
reduction in losing trades is much greater in its effect than the reduction in winning trades. If you had 120 winning trades and 90 losing trades, then you
have 57% winners. By using confirmation you will probably remove 19 winners and 31 losers. The new numbers are 101 winners and 59 losers: 63.3% winners.
The improvement that confirmation provides is a key step in achieving the highest levels of trading performance.
A classic way to confirm a trade is volume. If a breakout occurs on above average volume then the move can be considered confirmed. Confirmation needs to be
skillfully applied, there are no "Laws of Confirmation" that always work. On a gradual advance higher, there probably won't be volume confirmation.
From the above chart you can see that volume does work sometimes, but not always. Sometimes volume indicates a blow-off top. It will take some practice to make volume work for you.
Using candlestick chart interpretation theory you can find confirmation. Patterns like the Hammer, Hanging Man, and Shooting Star can provide effective trade confirmation.
Using a Tell is a good way to achieve confirmation. See our video on Market Tells for more information on this method.
To move beyond a simple delay, you need to bring in another source of information. TICK and ARMS indicators attempt to do this but we have had little luck
with those indicators. We do perform a comparison to the S&P 500 and measure the stock's performance against the S&P's performance (see the chart below).
