Looking at a price chart can be daunting especially if you don’t have any frame of reference of where price has been. One way to help you get a clearer picture is to use trading indicators. Just like basketball players and tennis players need to have “court awareness,” traders need to have price awareness. In this video, we will explore the top 5 indicators that are worth following.
The MACD MACD (Moving Average Convergence Divergence) is a trend-following, lagging technical indicator that uses a histogram and a 2 moving average lines to determine trends and provides dynamic support and resistance levels. When the MACD line crosses the signal line from below, a new up trend begins. When it crosses from above, a new down trend begins. The histogram shows the strength of the trend. The MACD is calculated by subtracting a 12 period moving average (MACD Line) from a 26 period moving average (Signal Line).
The best way to use this indicator is to use the histogram to catch divergences in price. When the tops of the candles create an up slope and the tops of the histogram curves create a down slope then there is a divergence. The same goes for the bottoms of the candles and the bottom of the histogram. When the bottom of the candles creates a down slope and the histogram creates an up slope there is a divergence. When there is a divergence, price usually reverses. It’s best to catch these divergences on larger timeframes and then to enter your trade on a smaller timeframe.
Swing High/Swing Low
Another way to use this indicator is to use the histogram as an indicator for swing highs and lows in price. When there is a swing high or low that appears on the chart confirm it with the MACD histogram. If the histogram is green (or above the zero line) for a swing high it is confirmed and if the histogram is red (or below the zero line) for a swing low it is confirmed. Using this method of confirmation will help keep you out of false highs and lows.
The RSI The RSI The Relative Strength Index indicator is a technical analysis indicator that is used to measure the momentum of a stock’s price movement. Overbought/Oversold It’s often used to determine the overbought and oversold condition of a financial asset. The Relative strength index (RSI) measures the magnitude and speed with which prices are changing, using data from recent trading sessions. RSI is typically set between 0 and 100, with anything above 70 being generally considered an overbought situation on most exchanges and anything below 30 being considered an oversold situation.
Divergence
Just like the MACD histogram the best way to use this indicator is to use the tops or “humps” of the indicator to catch divergences in price. When the tops of the candles create an up slope and the tops of the humps create a down slope then there is a divergence. The same goes for the bottoms of the candles and the bottom of the humps. When the bottom of the candles creates a down slope and the bottom of the humps creates an up slope there is a divergence. When there is a divergence price usually reverses. It’s best to catch these divergences on larger timeframes and then to enter your trade on a smaller timeframe.
Trendline Break
Another way to use the RSI is to look for trendline breaks of at least 2 “humps.” Millionaire trader Barry Thornton used this technique to make millions. It’s best to wait for the candle to close and make sure the indicator line has crossed the 50% line of the RSI. This will add to the likelihood of the trade turning out in your favor.
The ATR The Average True Range (ATR) indicator is an oscillator that uses the current price of a stock and the average of the high-low prices over a given timeframe to determine market volatility. This indicator is used in technical analysis to measure the strength of a trend. The higher the ATR, the stronger the trend. The Average True Range indicator can help traders determine where to put their stop-losses and take profits.
The best way to use the ATR is when you are placing a trade. You want to consider the ATR value when you are deciding on a stop loss and your take profit. If you are looking for a large profit target but the ATR is low then you may not reach your profit target. Conversely, if the ATR is high then you should have a large stop loss. You should use 1 ATR of your current timeframe (15 minute chart or 1 Hour chart) for your stop loss and maybe consider using 2xATR for your stop loss for a more conservative buffer. For your take profit you can look at the daily ATR and make sure your take profit is less than the daily ATR. You can also us the ATR as a trailing stop loss. Use smaller multiples of the ATR for short term trends and larger multiples for longer term trends. We’ve saved old faithful and the most used indicator for last.
Moving Averages Moving Average Indicators help traders to identify trends and make trades by defining the average price of a security over a set period of time.
Simple Moving Average
A common technical analysis indicator is the simple moving average. It helps traders identify trends on a price chart and is used to enter and exit trades. The SMA is calculated by adding the closing price of a security over a specific number of time periods, then dividing that by the total number of periods.
Exponential Moving Average
An exponential moving average is a type of mathematical calculation of the average price that is used to show the change in the rate over time. It was first introduced by Jules Henri Poincare in 1881. The exponential moving average calculates an exponentially weighted moving average that takes into account more recent data points, or in other words it weights more recent data significantly more than older data points.
The best way to use moving averages is to plot a 200 moving average (MA), a 4 EMA with a shift value of 4. When price is below the 200 SMA, look for sell trades only. When price is above the 200 SMA, look for buy trades only. When price crosses the 4 EMA look to buy when the cross is above and sell when he cross is below. To increase your win rate look for crosses on a larger timeframe, then enter on the smaller timeframes when a signal is given.
Buy Signal
Sell Signal
</span style=”font-weight:>
Which indicator do you like best?