A. Moving Average Crossover Combos:
Trading signals are generated by either the price moving through a moving average or by one moving average moving through another. We are going to concentrate on moving averages that cross each other.
We use several different moving average crossover combos, and the choices you have will be determined by the time frame that you like to trade in and how early an entry and exit you feel safe and secure with.
Here are the basic crossover combos, listed from the slowest to the fastest.
The slower combos are safer to use and the faster the combo, the more whipsaws you'll encounter.
9/18/50, 7/18/50, 5/18/50 and 3/18/50 and 7/11/18/50, 5/9/18/50, and 3/10/20/50 and my favorite hybrid, 5,13,26,62
We like all moving averages to be EMA or Exponential Moving Average (except in The Secret Weapon which uses SMA).
Your “triggers” are the 9, 7, 5, and 3 – notice that they are the first number in all pairs.
Basically, your buy or sell signal is “triggered” when the first number in the pair crosses the second number.
For instance, in the first pair, the 9 is your trigger and when it crosses either above or below the 18, you have a buy or sell signal. If it crosses up, it's a buy signal; if it crosses down, it's a sell signal.
The 50 is the moving average (MA) long term trend line,. When the price is above this MA line, the trend is bullish (going up); when the price is below this line, the trend is bearish (going down).
The fifth, sixth, and seventh pair all have four numbers, instead of just three.
Your first number is the “trigger” and when it crosses the second number, it gives you a buy or sell signal. And when the second number crosses the third number, it's another strong signal, signaling a continuation of the trend; when the first, second or third number crosses the 50, this is indicating a very strong continuation of the movement.
For example, when the 7 crosses the 11, it's a buy or sell signal. If the 7 or 11 also crosses the 18, it's another strong signal that the movment will be continued. If any or all of them cross the 50, especially at the same time, it's a very strong signal of a continuation of the trend.
In all cases, the 18 is the middle Bollinger Band, that we have adjusted manually from the default setting of 20, to 18, which is a little faster. We also make it thicker and a brighter color than the two outer bands.
The “trigger” is our immediate trend line which is showing us the immediate direction or trend of the price. The second number is the short term trend and the18 is our medium term trend lines. The 50 is our long term trend line.
In every case, you should only place a trade when the short and medium term trend lines are also going in the same direction as your immediate trend line.
For instance, if your 7 crosses up through the 18, and you want to go long, if the 11 or 18 is flat or turned down, wait to put on the trade when it also turns up.
B. Bollinger Bands:
Bollinger Bands are used to confirm trading signals. Normally from a Momentum, the bands indicate overbought and oversold levels relative to a moving average.
Contracting bands warn that the market is about to trend: the bands first converge into a narrow neck, followed by a sharp price movement. The first breakout is often a false move, preceding a strong trend in the opposite direction.
A move that starts at one band normally carries through to the other, in a ranging market.
A move outside the band indicates that the trend is strong and likely to continue - unless price quickly reverses.
A trend that hugs one band signals that the trend is strong and likely to continue. Wait for divergence (when the price is flat or rising or falling, but the MACD is going in the opposite direction...the price will break out in the direction of the MACD) or a Momentum Indicator to signal the end of a trend.
C. The Chaos Awesome Oscillator Indicator:
It is the same thing as the MACD Histogram and the MACD Line, but it has colored bars, green and red, to indicate the changing trend.
NOTE: IF YOU AREN'T USING THE CMS VISUAL TRADING (VT) PLATFORM, YOU PROBABLY DON'T HAVE THIS INDICATOR AVAILABLE.
IN THIS CASE, USE THESE SETTINGS FOR MACD HISTOGRAM or MACD LINE ANYWHERE WHERE WE MENTION THE CHAOS: 10,w, 10, w, 30 close.
The Chaos Awesome Oscillator (Chaos for short) indicates the trend.
The Chaos fluctuates around it's zero (0) line.
When the Chaos is above it's zero line, the trend is bullish.
When the Chaos is below it's zero line, the trend is bearish.
A major trend change occurs only when the Chaos crosses thru it's zero line, either up or down.
If this is accompanied by the Momentum also crossing thru it's zero line, either up or down, but in the same direction, it is confirmation of an especially strong move.
I mainly use the changing color bars for knowing when to exit my position and take profits. When the bars change color, it indicates that the present trend has slowed and it is time to take profits.
I use it for entry ONLY if the EMA's, Momentum and Stochastic RSI Oscillator or Slow Stochastic and RSI are confirming my entry.
D. The Momentum Indicator:
The Momentum indicator shows the rate of a price change. If the price change is strong, the Momentum goes up. If the price change is slowing down, it goes down. Bottoming up of this indicator may be bullish (price going up)...a drop may signal bearish (price going down). It fluctuates around it's zero (0) line.
This is a current indicator, not a lagging one. The Momentum indicator is a little ahead of the RSI in terms of a current signal.
A price moving up with greater acceleration is statistically more significant than a price moving more slowly. If you want to make sure that a potential trade you’re thinking about putting on has sufficient market momentum to push it up or down enough for your desired profit, then check the Momentum.
If it’s flat and going straight at the zero (0) line, I’d wait until there is more momentum. If it’s going down sharply below the zero line, this is a good sell signal. If it’s going up sharply above the zero line, this is a good buy signal.
A refinement of the Momentum is the Volume Rate of Change (ROC). Here's a link to study it:
http://www.incrediblecharts.com/technical/rate_of_change_(volume).htm
E. Moving Average of Relative Strength Index (MA of RSI):
This is an advanced indicator and combines the RSI (the faint dotted line) with the moving average of the RSI, the green and blue lines. The red and blue lines represent an average or smoothing out of the RSI and is used for confirmation of a trend or even actual entry and exit points.
F. The Directional Movement System (DMS):
This is the name that the CMS trading platform gives it, but some of you may know it as ADX or DMI (Directional Moving Indicator). The ADX is actually the thick black line in the system.
This is an indicator that is used as another confirmation of trending, either major or minor. It is an advanced indicator that takes a little more study to learn how to best use it. However, because it is a lagging indicator, it's best used in the slower time frames.
A buy signal is generated when the +DMI line (green) crosses the -DMI line (red) to the upside and a sell signal is generated when the -DMI line (red) crosses the +DMI line (green) to the upside.
In other words, whichever line, red or green is turned up and going up, that is the trend...red is for selling pressure and it means the price is coming down, that is the trend. Green is for buying pressure and it means the price is going up, that is the trend.
There is also a black line (ADX) that is used to confirm the + and – DMI
indicators.
If the black line rises in the direction of the DMI that is going up, whether red or green, it is confirming the trend.
If the black line rises to 30 or 40 and then turns down, the existing trend is waning and it is time to take profits.
However, it lags behind the crossing of the DMI lines and so can't be used successfully to confirm trends in the faster time frame like the 1 minute chart.
It is best used, even in the 1 minute chart, to identify consolidation periods, when trades should not be put on. When the black line is under both the +DMI and the -DMI, this is a stay aside signal and it is usually a consolidation period for gathering momentum.
This indicator is optional since it's so hard to understand and use, so if it confuses you, just don't use it. I use it mainly in the slower time frames to indicate the whipsaw consolidation periods when I shouldn't be in a play.
G. The Stochastic RSI Oscillator:
The Stochastic RSI Oscillator is a combination of Stochastic and RSI. It is more accurate and less lagging than the Slow Stochastic. Like the Stochastic indicator, it shows you when the price has become overbought or oversold, and like the RSI, when the line crosses the 50 line, it is a buy or sell indicator.
Overbought is above 80, undersold is below 20. The general rule is, sell when it's overbought and coming down, and buy when it's oversold and coming up, but of course, only when the other indicators support this action.
And like the RSI, if it is coming up from the bottom, the safer time to buy is when it has hit the 50 line. If it is coming down from the top, the safer time to put on a short is when it has hit the 50 line.
The Stoch can become overbought (or oversold) and remain overbought (or oversold) for an extended period. A move above 80 may imply overbought, but it can also indicate a strong up trend and remain above 80 for a prolonged period. Conversely, a quick move below 20 could indicate the beginning of a strong downtrend. Therefore, extremely high or low readings can mean a continuation of the current trend, but not always.
IF YOU PREFER THE SLOW STOCHASTIC, MY FAVORITE SETTINGS ARE
14,5,3,E. THIS IS A BETTER SETTING THAN THE DEFAULT AND WILL
SHOW YOU THE TOPS AND BOTTOMS.
H. Support and Resistance:
Simply stated, support and resistance can be defined as the price levels that the bulls and bears have agreed upon to either "catch" a stock's downward movement or the level at which the stock's upward movement will be held back.
Another Look at Support and Resistance Areas of support and resistance form through the normal price action of buying & selling.
http://stockcharts.com/education/ChartAnalysis/supportResistance.html
Support and resistance represent where supply and demand meet. In the financial markets, prices are driven by supply and demand.
