A number of readers have asked me to define what chart settings and indicators I use and I thought I should post regarding this information.
I trade with TradeStation and do all trading through them, but for the blog, I enjoy posting charts from StockCharts.com because of the professional look and feel of their charts, and because they’re much more commonly seen than TradeStation charts, which can be endlessly customized to your needs. I started out years ago with StockCharts and have become accustomed with their format and style, and so I find it much easier to teach or show examples using their charts so that is why I post public charts using their format instead of TradeStation.
Here is an example of the settings I use on the charts I post:
I start off selecting CandleStick charts as my preferred way to view the data, and then overlay the following moving averages:
20 period Exponential
50 period Exponential
200 period Simple
Exponential averages track the more recent data quicker (by their calculation) and I’ve found most ‘tests’ or pullbacks are better captured using exponential than simple moving averages, though this point is certainly up for debate, as others swear by simple moving averages, or even triangulated or linear averages.
I also overlay volume and set ‘colored bars’ which gives the red and white tint to the candles for ease of viewing.
The background is the “Mohave” setting, though you can change this setting to fit your needs easier. If you look at hundreds or thousands of charts, you generally want the image to be as appealing to you as possible. I avoid black and white charts as much as possible because honestly I don’t find it as fun as viewing charts that have more aesthetic visual appeal – you’ll sustain motivation if you find the charts appealing and interesting.
I also overlay the Bollinger Bands (default, 20 period setting), though you may have difficulty seeing them and that’s also the point. I don’t want the Bollinger Bands to confuse me for a moving average, or to saturate the data with too many lines – data clarity is paramount. I use Bollinger Bands to assess the volatility environment as outlaid in the “Range Expansion/Contraction” price principle. Also, it’s helpful to know if price is at or above a Band extreme (particularly if you see a momentum divergence or other form of resistance/support). I use the “Area” setting and dim the opacity of the Bands so I can see where price is in the Band area – Bands represent 2 standard deviations away from a 20 period moving average.
What is that strange oscillator in the bottom panel? It’s a common and appropriate question, and the oscillator is commonly known as the “3/10 Oscillator” but it’s really a simple, customized MACD indicator.
To convert the MACD into the “3/10,” simply change the three numbers in the parameters (default 12, 26, 9) to 3, 10, 16 respectively. Discussing how to use this oscillator is far beyond this post, and there are lengthy articles out there that describe how to use this indicator effectively.
Essentially, the Black line represents the difference in a 3 period and 10 period Exponential Moving average (for TradeStation, I use Simple Moving averages for the 3 and 10 period, but that’s not possible in StockCharts). The oscillator is unbounded, and pivots about the zero line. The Red (’signal’) line is a 16 period average of the Black “MACD” Line, which serves as a trend indicator (and roughly parallels the Black line on a higher time frame).
Although I do more with this oscillator, I tend to frame my discussions in terms of “Momentum” and describe this simply as a “Momentum Oscillator,” which it is. In truth, the 3/10 is a trend indicator, momentum oscillator, and a swing oscillator.
What I’m looking to do mainly is to compare price highs with oscillator highs and look for divergences, particularly if price makes a new swing high and the oscillator fails to make a new high. I’m also concerned with New Momentum Highs (or Lows) which clues me in that an actual price high is likely yet to come.
When comparing price swings of certain magnitudes, I look to draw Fibonacci Retracements of key price pivots, and look to use Fibonacci levels as both targets and entries (as well as support and resistance). I don’t always show Fibonacci retracement levels on my charts, but they are very important to me and I have a white board in the office where I write down key Fibonacci levels based off significant price pivots.
I’m also applying of Gann price/time projection principles as well as Elliott Wave theory, into my trading and analysis as well, neither of which can be expressed by default in StockCharts.
I always show the top portion (chart) on the site, so let’s pan the camera down and look at the settings/engine that drive the charts I post publicly on the site:
Feel free to let me know if there are additional questions or suggestions.
(I am not compensated in any way by StockCharts.com or TradeStation Securities in posting their charts or mentioning their companies. All rights reserved).