A beginner needs to learn a battery of standard technical indicators and start tweaking their parameters. Some traders create their own indica-tors to gauge different aspects of crowd behavior and identify market moves. Let us walk through the process of creating a new technical indi-cator and see how to go about building your own private indicators.

All good indicators reflect some aspect of market reality. Market Thermometer helps differentiate between sleepy, quiet periods and hot episodes when market crowds become excited. It can help you adapt your trading to the current environment.

Quiet markets typically have narrow bars that tend to overlap one another. Hot, boiling markets tend to have wide bars whose highs and lows extend far outside the previous day's range. Beginners jump into trades during those wide bars, afraid to miss a runaway move. If you enter when the markets are quiet, your slippage is likely to be lower. Hot markets are good for taking profits because then slippage may work in your favor.

When gold recently ran up $40 in one week, a journalist asked a famous investor whether it was a good buy. Gold was good, he said, but the time to get on this bus was when it stood in front of the station, and not rolling down the highway at 40 miles an hour. Market Thermometer helps you recognize when the bus slows down in front of the station, picks up speed, or roars down the highway.

Market Thermometer measures how far the most extreme point of today, either high or low, protrudes outside of yesterday's range. The greater the extension of today's bar outside of yesterday's, the higher the market temperature. Here's the formula of Market Thermometer:

Temperature = the greater of either (High today - High yesterday ) or (Low yesterday - Low today )

To program Market Thermometer into Windows on WallStreet soft ware, use the following formula:

if (hi < ref(hi, - 1) and lo > ref(lo, - 1), 0, if ((hi - ref(hi, - 1)) > (ref(lo, - 1) - lo), hi - ref(hi, - 1), ref(lo, - 1) - lo)).

It is easy to adapt this formula to other software packages.

Market temperature is always a positive number, reflecting the ab-solute value of either the upward or the downward extension of yes-terday's range, whichever is greater. Plot temperature as a histogram above zero. Calculate a moving average of market temperature, and plot it as a line on the same chart. I use a 22-day EMA because there are 22 trading days in a month, but feel free to experiment with shorter EMA values if you want to make this indicator more sensitive to shortterm swings.

When markets are quiet, the adjacent bars tend to overlap. The consensus of value is well established, and the crowd does little buying or selling outside of yesterday's range. When highs and lows exceed their previous day's values, they do so only by small margins. Market Thermometer falls and its EMA slants down, indicating a sleepy market.

When a market begins to run, either up or down, its daily bars start pushing outside of the previous ranges. The histogram of Market Ther mometer grows taller and crosses above its EMA, which soon turns up, confirming the new trend.

Market Thermometer gives four trading signals, based on the rela tionship between its histogram and its moving average: The best time to enter new positions is when Market Thermometer falls below its moving average. When Market Thermometer falls below its EMA, it indicates that the market is quiet. If your system flashes an entry signal, try to enter when the market is cooler than usual. When Market Thermometer rises above its moving average, it warns that the market is hot and slippage more likely.

Exit positions when Market Thermometer rises to triple the height of its moving average. A spike of Market Thermometer indicates a runaway move. When the crowd feels jarred by a sudden piece of news and surges, it is a good time to take profits. Panics tend to be short-lived, offering a brief opportunity to cash in. If the EMA of Market Thermometer stands at 5 cents, but the Thermometer itself shoots up to 15 cents, take profits. Test these values for the market you are trading.

Get ready for an explosive move if the Thermometer stays below its moving average for five to seven trading days. Quiet markets put amateurs to sleep. They become careless and stop watching prices. Volatility and volume fall, and professionals get a chance to run away with the market. Explosive moves often erupt from periods of inactivity.

Market Thermometer can help you set a profit target for the next trading day. If you are a short-term trader and are long, add the value of today's Thermometer EMA to yesterday's high and place a sell order there. If you are short, subtract the value of the Thermometer's EMA from yesterday's low and place an order to cover at that level.

I had two purposes in presenting the Market Thermometer. I wanted to give you a new indicator, but even more I wanted to show you how to use your understanding of the markets to design your own analytic tools. Once you understand the principles of market analysis, you can create your own indicators. Use your knowledge, understanding, and discipline to get on the right side of the markets.