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Trading Indicators (Ichimoku Cloud / Ichimoku Kinko Hyo (Tenkan Sen (blue…
Trading Indicators
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Moving Averages
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The smoother the moving average, the slower it is to react to the price movement.
The choppier the moving average, the quicker it is to react to the price movement.
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With the use of SMAs, we can tell whether a pair is trending up, trending down, or just ranging.
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Trading
When price action tends to stay above the moving average, it signals that price is in a general Uptrend. Below->Downtrend.
If the faster moving averages cross over slower ones, it could signal that the trend is about to change soon.
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You will get hit with tons of crossover signals and you could find yourself getting stopped out multiple times before you catch a trend again.
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Pop on two moving averages, and only buy or sell once price is in the middle of the space between the two moving averages.
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In an uptrend, the “faster” moving average should be above the “slower” moving average and for a downtrend, vice versa.
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Trend identification
Place a 7 period, a 20 period, and a 65 period Simple Moving Average on your chart. Then, wait until the three SMA’s compress together and begin to fan out.
If the 7 period SMA fans out on top of the 20 period SMA, and the 20 SMA on top of the 65 SMA, then price is trending up.
On the other hand, if the 7 period SMA fans out below the 20 period SMA, and the 20 SMA is below the 65 SMA, then price is trending down.
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Divergences
Regular
Bullish
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How to trade it
After establishing a second bottom, if the oscillator fails to make a new low, it is likely that the price will rise, as price and momentum are normally expected to move in line with each other.
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Definition
price is making lower lows (LL), but
oscillator is making higher lows (HL)
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Bearish
Definition
price is making higher highs (HH), but
oscillator is making lower highs (LH)
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How to trade it
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After price makes that second high, if the oscillator makes a lower high, then you can probably expect price to reverse and drop.
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Hidden
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Bullish
Definition
price is making higher lows (HL), but
oscillator is showing lower lows (LL)
How to trade it
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Once price makes a higher low (HL), look and see if the oscillator does the same. If it doesn’t and makes a lower low (LL), then we’ve got some hidden divergence in our hands.
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Bearish
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Definition
price is making lower highs (LH), but
oscillator is making higher highs (HH)
How to trade it
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Once the price makes a lower low look and see if the oscillator makes a higher high. This makes a continuation more probable.
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Definition
What does it mean?
It is a divergence between the price action and the movement of an indicator. E.g. RSI, MACD, the stochastic, CCI,...
Rules
- Price Action - price must have formed one of the following
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- Draw lines on successive tops and bottoms
If you see any little bumps or dips between the two major highs/lows, ignore it.
- Connect TOPS and BOTTOMS only
Once you see two swing highs are established, you connect the TOPS. If two lows are made, you connect the BOTTOMS.
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- Some indicators such as MACD or Stochastic have multiple lines. Use the highest on top and lowest at the bottom
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- If you draw a line connecting two highs on price, you MUST draw a line connecting the two highs on the indicator as well. Ditto for lows also.
- The highs or lows you identify on the indicator MUST be the ones that line up VERTICALLY with the price highs or lows.
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- Divergence only exists if the SLOPE of the line connecting the indicator tops/bottoms DIFFERS in direction from the SLOPE of the line connection price tops/bottoms.
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- If you spot divergence but the price has already reversed and moved in one direction for some time, the divergence should be considered played out.
- Divergence signals tend to be more accurate on the longer time frames.
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Bollinger Band
When the market is quiet, the bands contract and when the market is LOUD, the bands expand.
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The longer the time frame you are in, the stronger these bands tend to be.
Bollinger Squeeze
When the bands squeeze together, it usually means that a breakout is getting ready to happen.
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Trade the trend
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The green upper zone between the outer and the inner BB is the buy zone and the red lower one is the sell zone
Bear in mind that price has to close within the bands in order to be considered in the buy/sell zone.
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Average True Range (ATR)
It tells us the average trading range of the market for X amount of time, where X is whatever you want it to be.
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If you set ATR to 20 on a daily chart, it would show you the average trading range for the past 20 days.
When ATR is falling, it is an indication that volatility is decreasing.
When ATR is rising, it is an indication that volatility has been on the rise.
MACD
Calculation
The slower moving average takes the last 9 periods of the faster MACD line and plotting it as our slower moving average.
This smoothens out the original line even more, which gives us a more accurate line.
The faster moving average is the moving average of the difference between the 12 and 26-period moving averages.
The histogram simply plots the difference between the fast and slow moving average.
As the two moving averages separate, the histogram gets bigger.
Trading
When a new trend occurs, the fast line will react first and eventually cross the slower line.
When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.
Since the MACD represents moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag.
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