A clip for an old army rifle held only five bullets. Going into action with such a weapon forced one to take good aim instead of shooting wildly. This is a good attitude for trading the markets.

By now, we have selected four bullets-exponential moving averages, channels, MACD-Histogram, and Force Index. A moving average and MACD are trend-following indicators. Channels, Force Index, and MACD Histogram are oscillators. What fifth bullet shall we pick?

To help you choose your fifth bullet, we'll review several more tools. Feel free to range beyond this menu, but make sure to understand how each indicator is constructed and what it measures. Test your indicators to develop confidence in their signals.

In Trading for a Living I described more than a dozen technical indicators. There are dozens more in other books on technical analysis. Quality and the depth of understanding are more important than quantity. A drowning amateur, grasping at straws, keeps adding indicators. A mature trader selects a few effective tools, learns to use them well, and focuses on system development and money management.

There are no magic bullets in the markets. There is no perfect or ultimate indicator. A trader who becomes preoccupied with indicators quickly reaches the point of diminishing returns. Your choice of analytic tools depends on your trading style. The idea is to select your tools and quickly move on to where the real money is-system development and risk management.

Elder-ray Elder-ray is an indicator developed by this author and named for its similarity to x-rays. It shows the structure of bullish and bearish power below the surface of the markets. Elder-ray combines a trend-following moving average with two oscillators to show when to enter and exit long or short positions. Most software developers fail to include Elder-ray in their packages, but you can do it yourself with minimal programming.

To plot Elder-ray, divide your computer screen into three horizontal panels. Plot a chart of the stock you plan to analyze in the top panel and add an exponential moving average. The second and third panels will contain Bull Power and Bear Power, plotted as histograms. Here are the Elder-ray formulae:

Bull Power = High - EMA Bear Power = Low - EMA

A moving average reflects the average consensus of value. The high of each bar reflects the maximum power of bulls during that bar. The low of each bar marks the maximum power of bears during that bar.

Elder-ray works by comparing the power of bulls and bears during each bar with the average consensus of value. Bull Power reflects the maximum power of bulls relative to the average consensus, and Bear Power the maximum power of bears relative to that consensus.

We plot Bull Power in the second windowpane as a histogram. Its height reflects the distance between the top of the price bar and the EMA-the maximum power of bulls. We plot Bear Power in the third win dowpane. Its depth reflects the distance between the low of the price bar and the EMA-the maximum power of bears.

When the high of a bar is above the EMA, Bull Power is positive. When the entire bar sinks below the EMA, which happens during severe declines, Bull Power becomes negative. When the low of a bar is below the EMA, Bear Power is negative. When the entire bar rises above the EMA, which happens during wild rallies, Bear Power becomes positive.

The slope of a moving average identifies the current trend of the market. When it rises, it shows that the crowd is becoming more bullish; it is a good time to be long. When it falls, it shows that the crowd is becoming more bearish; it is a good time to be short. Prices keep getting away from a moving average but snap back to it, as if pulled by a rubber band. Bull Power and Bear Power show the length of that rubber band. Knowing the normal height of Bull or Bear Power reveals how far prices are likely to get away from their moving average before returning. Elder-ray offers one of the best insights into where to take profits-at a distance away from the moving average that equals the average Bull Power or Bear Power.

Elder-ray gives buy signals in uptrends when Bear Power turns negative and then ticks up. A negative Bear Power means that the bar is straddling the EMA, with its low below the average consensus of value. Waiting for Bear Power to turn negative forces you to buy value rather than chase runaway moves. The actual buy signal is given by an uptick of Bear Power, which shows that bears are starting to lose their grip and the uptrend is about to resume. Take profits at the upper channel line or when a trendfollowing indicator stops rising. Profits may be greater if you ride the uptrend to its conclusion, but taking profits at the upper channel line is more reliable.

Elder-ray gives shorting signals in downtrends when Bull Power turns positive and then ticks down. We can identify the downtrend by a declining daily or weekly EMA. A positive Bull Power shows that the bar is straddling the EMA, with its high above the average consensus of value. Waiting for Bull Power to turn positive before shorting forces you to sell at or above value instead of chasing waterfall declines. The actual shorting signal is given by a downtick of Bull Power, which shows that bulls are starting to slip and the downtrend is about to resume. Once short, take profits at the lower channel line or when the trend-following indicator stops falling, depending on your style. You can make more money by holding on for the duration of the downtrend, but it is easier to achieve steady results by taking profits at the lower channel line. A beginning trader is better off learning to catch short swings, while leaving long-term trend trading for a later stage of development.

Stochastic This oscillator identifies overbought and oversold condi tions, helping us buy low or sell high. Just as important, it helps avoid buying at high prices or shorting at low prices. This indicator was popu larized by George Lane decades ago and is now included in most soft ware packages.

Stochastic measures the capacity of bulls to close prices near the top of the recent trading range and the capacity of bears to close them near the bottom. It ties the high of the range, representing the maximum power of bulls, with the low, representing the maximum power of bears, and with closing prices, the final balance in the markets, representing the actions of smart money.

Bulls may push prices higher during the day, or bears may push them lower, but Stochastic measures their performance at closing time-the cru cial money-counting time in the markets. If bulls lift prices during the day but cannot close them near the high of the recent range, Stochastic turns down, identifying weakness and giving a sell signal. If bears push prices down during the day but cannot close them near the lows, Stochastic turns up, identifying strength and giving a buy signal.

We have to choose the number of days, or bars, over which to calculate Stochastic-the value of n. If we use a low number, below 10, Stochastic will focus on the recent bars and flag minor turning points. If we choose a wider window, Stochastic will look at more data and flag major turns, missing minor ones.

How wide should we make the Stochastic window? Since we use oscillators to catch reversals, short-term windows are better; we should reserve longer time windows for trend-following indicators. Five or seven days are a good starting point, but consider testing longer parameters to find the ones that work best in your market.

Fast Stochastic is very sensitive to price changes, making its lines appear jagged. It pays to add one more step and convert it into a smoother Slow Stochastic. Of course, a computer does this all automatically.

3. Convert Fast Stochastic into Slow Stochastic. The slow line of Fast Stochastic becomes the fast line of Slow Stochastic. Repeat step 2, above, to obtain the slow line %D of Slow Stochastic.

Stochastic is designed to oscillate between 0 and 100. Low levels mark oversold markets, and high levels mark overbought markets. Overbought means too high, ready to turn down. Oversold means too low, ready to turn up. Draw horizontal reference lines at levels that have marked previous tops and bottoms, starting with 15 near the lows and 85 near the highs.

Look for buying opportunities when Stochastic nears its lower reference line. Look for selling opportunities when Stochastic nears its upper refer ence line. Buying when Stochastic is low is emotionally hard because markets usually look terrible near bottoms, which is precisely the right time to buy. When Stochastic rallies to its upper reference line, it tells you to start looking for selling opportunities. This also goes against the grain emo tionally. When Stochastic rallies to a top, the market often looks fantastic, which is a good time to sell.

We should not use Stochastic alone, in a mechanical manner. When a strong uptrend takes off, Stochastic quickly becomes overbought and starts flashing sell signals. In a powerful bear market, Stochastic becomes oversold and flashes premature buy signals. This indicator works well only if you use it with a trend-following indicator and take only those Stochastic signals that point in the direction of the main trend.

Should a trader wait for Stochastic to turn up to recognize a buy signal? Should he wait for it to turn down to recognize a sell signal? Not really, because by the time Stochastic turns, a new move is usually under way. If you are looking for an opportunity to enter, the mere fact of Stochastic reaching an extreme gives you a signal.

Go long when Stochastic traces a bullish divergence, that is, when prices fall to a new low but the indicator makes a more shallow low. Go short when Stochastic traces a bearish divergence, that is, when prices rise to a new high but the indicator ticks down from a lower peak than during the previous rally. In an ideal buying situation, the first Stochastic low is below and the second above the lower reference line. The best sell signals occur when the first top of Stochastic is above and the second below the upper reference line.

Do not buy when Stochastic is above its upper reference line and do not sell short when it is below its lower reference line. These "no go" rules are probably the most useful messages of Stochastic. Moving averages are better than Stochastic at identifying trends, MACD-Histogram is better at identifying reversals, channels are better at identifying profit targets, and Force Index is sharper at catching entry and exit points. The trouble with them is that they give action signals most of the time. Stochastic identifies danger zones, just like a line of red flags on a ski slope marks unsafe areas for skiers. It says "no go" just when you feel tempted to chase a trend.

Ready to Hunt? Your choice of indicators depends on personal prefer ences, just like selecting a car. Be sure to combine trend-following indicators, which identify trends, with oscillators, which identify reversals.

In addition to the indicators described above, you may want to take a look at the Directional indicator, which does a good job of signaling trends. It consists of several components, one of which, ADX, helps identify new bull markets. Williams %R is an oscillator similar to Stochastic, especially useful for showing when to pyramid winning positions. Relative Strength Index (RSI) is an oscillator based entirely on closing prices. It helps track the behavior of market professionals who tend to dominate markets at closing time. All of them are described in Trading for a Living.

Keep in mind that no single indicator can guarantee you victory in the trading game. Trend-following indicators, such as moving averages, catch trends but produce whipsaws in trading ranges. Oscillators identify tops and bottoms during trading ranges but flash premature countertrend signals when the markets begin to run. Trading signals are easy to recognize in the middle of the chart, but hard to see at the right edge.

There is no magic indicator. All indicators are building blocks of trad ing systems. A good system uses several tools, combining them so that their negative features filter each other out, while their positive features remain undisturbed.