Charts for the Day
- Thread starter anil_s_trivedi
- Start date
- Tags 50 dma investing chart reading moving average setups ta charts
11 Rules for Anyone Who Uses Charts
By Michael Kahn
As I often say about my wine savvy, I know just enough to be dangerous. For many traders, the same holds true with regard to charting and technical analysis.
They know enough to use an RSI (relative strength index) to gauge momentum but really don’t know why they use a parameter of 14. And they use the same process day in and day out because they heard it once in a webinar or read it once in a book.
Trading teachers will tell us to find something that works and stick with it. I contend that unless you understand the “why” and not just the “what” you are setting yourself up for trouble down the road. After all, markets evolve and what worked yesterday may not work today.
This missive is not about deconstructing technical indicators. Rather, it is to get the reader to think about the spirit of the analysis and letting the charts speak to them. Any other method implies that traders are making the market conform to their own biases.
The market hates that and it will make you pay dearly for trying.
Let’s start with RSI and the 14-parameter. Why do so many traders use it? The answer is that is the default setting on the first applications of charting software that came out a few decades ago. There was reason behind it as Welles Wilder, the creator of RSI, was using half cycles in his favored markets as the basis. But once software coders and inexperienced product marketing managers got something in their heads it seemed to be set for life. Even today, many software programs do not let the user change the default parameter to something different.
Of course, indicator parameters should be in sync with the market and time frame in which they are being used. But it goes beyond that. Because markets evolve, indicators can behave differently than they did when they were newly created. Today, “everyone” sees what they think are overbought and oversold levels at the same time and act accordingly. How many times in recent memory have signals simply failed just because everyone – the herd – is taking the same action?
Rather than over-think an indicator or even a chart pattern, here are some rules that will make your life easier and more profitable. They are all rooted in keeping it simple and more importantly letting the market do all the thinking. All you have to do is turn off the news and absorb the message.
Rule 1 - If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.
When I look at a chart and cannot form an opinion after applying three or four different types of indicators – volume, momentum, trend, even Fibonacci – I must conclude that the market has not decided what it wants to do at that time. Who am I to tell it what it thinks?
Rule 3 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever.
Rule 4 – Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader).
It is very easy to get caught up in your own world and miss the bigger picture getting ready to smack you. It can mean the difference between buying the dip in a rising trend and selling a breakdown in a falling trend.
Rule 5 – Look at both bars (or candles) and close-only line charts to see if they agree. And look at both linear and semi-logarithmic scaled charts when price movements are large.
Short-term traders can ignore the latter since prices are not usually moving 30% in a day. But position traders must compare movements at different price levels.
As for bars and lines, sometimes important highs and lows are set by intraday or intra-week movements. And sometimes intrday or intra-week highs and lows are anomalies that can safely be ignored. Why not look at both?
Rule 6 – Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern.
A three-day correction is not sufficient to get a six-month trend back on track. And a three month pullback after a six month rally is probably a new trend, not a correction.
Rule 7 – Patterns should have symmetry. A triangle should look like a triangle and not a mile high and an inch wide (or vice versa). A head-and-shoulders should look like a central peak with two smaller but equal peaks around it.
Rule 8 – Price rules but it is better when volume, momentum and structure (patterns) agree. Sentiment is a luxury because it is often difficult to quantify.
No matter how strong the case built on indicators and the environment surrounding the market may be, there is no change in condition until price action reflects it. How many times has an overbought market become even more overbought?
Rule 9 – Always confirm one type of analysis with another type. For example, confirm RSI not with MACD but with on-balance volume or relative performance.
There are hundreds of indicators but only a handful of truly unique types. Be sure you do not try to prove your case with a variation on the same set of input data. Most momentum indicators are quite similar so be sure to look at at least the three types listed in Rule 8.
Rule 10 – Don’t get hung up if all your indicators do not agree. They never will all agree and you will end up missing every opportunity. Therefore, pretend you are a trial lawyer gathering a preponderance of evidence, not guilt beyond a shadow of a doubt.
Rule 11 – If a stop is hit you must honor it. All big losses start out as small ones. No exceptions. Feel free to re-analyze a trade that got stopped out to see if you would enter anew but never justify holding on to a loser.
Again, nothing here is rocket science but these rules force you to let the market talk. After all, that is our job as traders, reading the signs and acting accordingly.
By Michael Kahn
As I often say about my wine savvy, I know just enough to be dangerous. For many traders, the same holds true with regard to charting and technical analysis.
They know enough to use an RSI (relative strength index) to gauge momentum but really don’t know why they use a parameter of 14. And they use the same process day in and day out because they heard it once in a webinar or read it once in a book.
Trading teachers will tell us to find something that works and stick with it. I contend that unless you understand the “why” and not just the “what” you are setting yourself up for trouble down the road. After all, markets evolve and what worked yesterday may not work today.
This missive is not about deconstructing technical indicators. Rather, it is to get the reader to think about the spirit of the analysis and letting the charts speak to them. Any other method implies that traders are making the market conform to their own biases.
The market hates that and it will make you pay dearly for trying.
Let’s start with RSI and the 14-parameter. Why do so many traders use it? The answer is that is the default setting on the first applications of charting software that came out a few decades ago. There was reason behind it as Welles Wilder, the creator of RSI, was using half cycles in his favored markets as the basis. But once software coders and inexperienced product marketing managers got something in their heads it seemed to be set for life. Even today, many software programs do not let the user change the default parameter to something different.
Of course, indicator parameters should be in sync with the market and time frame in which they are being used. But it goes beyond that. Because markets evolve, indicators can behave differently than they did when they were newly created. Today, “everyone” sees what they think are overbought and oversold levels at the same time and act accordingly. How many times in recent memory have signals simply failed just because everyone – the herd – is taking the same action?
Rather than over-think an indicator or even a chart pattern, here are some rules that will make your life easier and more profitable. They are all rooted in keeping it simple and more importantly letting the market do all the thinking. All you have to do is turn off the news and absorb the message.
Rule 1 - If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.
When I look at a chart and cannot form an opinion after applying three or four different types of indicators – volume, momentum, trend, even Fibonacci – I must conclude that the market has not decided what it wants to do at that time. Who am I to tell it what it thinks?
Rule 3 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever.
Rule 4 – Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader).
It is very easy to get caught up in your own world and miss the bigger picture getting ready to smack you. It can mean the difference between buying the dip in a rising trend and selling a breakdown in a falling trend.
Rule 5 – Look at both bars (or candles) and close-only line charts to see if they agree. And look at both linear and semi-logarithmic scaled charts when price movements are large.
Short-term traders can ignore the latter since prices are not usually moving 30% in a day. But position traders must compare movements at different price levels.
As for bars and lines, sometimes important highs and lows are set by intraday or intra-week movements. And sometimes intrday or intra-week highs and lows are anomalies that can safely be ignored. Why not look at both?
Rule 6 – Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern.
A three-day correction is not sufficient to get a six-month trend back on track. And a three month pullback after a six month rally is probably a new trend, not a correction.
Rule 7 – Patterns should have symmetry. A triangle should look like a triangle and not a mile high and an inch wide (or vice versa). A head-and-shoulders should look like a central peak with two smaller but equal peaks around it.
Rule 8 – Price rules but it is better when volume, momentum and structure (patterns) agree. Sentiment is a luxury because it is often difficult to quantify.
No matter how strong the case built on indicators and the environment surrounding the market may be, there is no change in condition until price action reflects it. How many times has an overbought market become even more overbought?
Rule 9 – Always confirm one type of analysis with another type. For example, confirm RSI not with MACD but with on-balance volume or relative performance.
There are hundreds of indicators but only a handful of truly unique types. Be sure you do not try to prove your case with a variation on the same set of input data. Most momentum indicators are quite similar so be sure to look at at least the three types listed in Rule 8.
Rule 10 – Don’t get hung up if all your indicators do not agree. They never will all agree and you will end up missing every opportunity. Therefore, pretend you are a trial lawyer gathering a preponderance of evidence, not guilt beyond a shadow of a doubt.
Rule 11 – If a stop is hit you must honor it. All big losses start out as small ones. No exceptions. Feel free to re-analyze a trade that got stopped out to see if you would enter anew but never justify holding on to a loser.
Again, nothing here is rocket science but these rules force you to let the market talk. After all, that is our job as traders, reading the signs and acting accordingly.
Nifty update:
Intraday strength above 6175 levels only. Above 6190 more to it.
A daily buy signal if crosses, 6225-30 levels.
Momentum on daily is down, and price sustaining below 50 DMA as of now, putting pressure on downside,so ideally its sell on rallies, as we are pointing since it breached 6295 zone.
All intraday strength cases should result in daily strength, else its a weakness only.
On dowside, levels posted earlier are still valid.
Intraday strength above 6175 levels only. Above 6190 more to it.
A daily buy signal if crosses, 6225-30 levels.
Momentum on daily is down, and price sustaining below 50 DMA as of now, putting pressure on downside,so ideally its sell on rallies, as we are pointing since it breached 6295 zone.
All intraday strength cases should result in daily strength, else its a weakness only.
On dowside, levels posted earlier are still valid.
Nifty consolidating bigger range created 6150 to 6400 levels. The closing on friday, weekly not good one, and prompting more weakness. But demand keep coming at 6150 sub levels, so its a dicey here, whether weekly weakness will carry on this week too.
On Weekly, a sustained effort will be seen above 6295 only, below that attempt failed near to 6295 will be termed as weakness only. On downside, a support at 6150, below that weakness will affirm itself towards sub 6100 levels.
On daily, we got a buy in the morning when it crossed 6195 zone. So its a up on daily as of now, this is for trading nifty positions, below 6190 we will shift to sell again.
On intraday first sign of weakness will be if sustained below 6220-25 zone. Addon move below 6190 will reaffirm it.
Weekly levels marked on chart are valid for throughout the week. Daily observations keep changing based on hourly chart formation and S/R levels from hourly.
Have a Good Day...
Hi sunnyman,
DLf as seen consolidating in a ascending triangle, and repeatedly taking support at 50 DMA, where intermediate players always comes to rescue. A supporting evidence is seen by OBV rising and holding previous peak.
Weekly chart telling us a consolidation of prior downtrend, and can resume is trendline breached downside, thats why any longs here will need a tight SL what you are comfortable with.
Momentum wise on daily, Short term - Down, intermediate - Down, long term - Rising. So its a bit of caution side. As you have seen we already exited stock at 165 levels, prompting us a weaker follow up above 170 levels. This is how price action works. So until stock gives a buy in intermediate side, i will restrain form buying it on delivery basis. As my basic approach is trend following, and i wait for a momentum to show supporting evidence.
Levels wise, 50 DMA@ 155 is a crucial support, aggressive longs here should have tight SL, may be closer to lower rising trendline, so that any downside breakout will save you from loosing big.
A close today above 165 is a buy, considering hourly chart S/R levels.There are many who get in yesterday near to 50 DMA, as you see chart, stoploss there was a affordable one, and lower trendline support too coming in at those levels. so a SL of 3% or so, will be fine there to initiate position. This type of risk-reward analysis is what matters to mkt players.
Similar threads
-
Future trading at discount than the spot price after a breakout in daily charts
- Started by Jalesh_Soni
- Replies: 1
-
Can you provide Indian Mutual fund charts in trading view ?
- Started by Prakashbhai
- Replies: 1
-
Suggest me a Discount broker with Trading view charts (Buy/SL from charts)
- Started by id4trade
- Replies: 14
-
GANN CYCLES-HOW TO SEE THEM ON AMIBROKER CHARTS? PLEASE PROVIDE A CODE
- Started by rvlv
- Replies: 0
-