This section is all about Indictors and how they can be used. This is a basic introductory module for the popular indicators.
The follow-up pages are for subscribers only.
The MACD Indicator
The moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages (ema) of a price action. The MACD is calculated by subtracting the 26-period exponential
moving average (EMA) from the 12-period EMA. The result of that calculation is the MACD line.
The moving average is defined by calculating the total, in this case the last 26 candles and then divide it by 26 with a multiple of logarithmic equation then plot it on the chart, and keep doing that every time a new candle or
price is completed (lagging indicator). Similarly do the same for the 12 period EMA.
So the average of the 26 will be a larger sample size than the 12, so it makes sense that if the price is very volatile, the MACD becomes almost useless as the average will struggle to represent price action. However at times,
it will provide the mean price value, so it becomes important how to use it and when.
Referring to chart below which demonstrates how the MACD is plotted.
It’s a visual display of bars which represents the distance between the Macd and signal. Looking at this chart, the histogram is the red and green bars, which represent the MACD (moving averages) in another form. Some prefer the lines and others the bars. When the MACD lines cross, the histogram should be at level 0.
The 26 ema and the 12 ema as orange and white. You will note that when these 2 ema’s cross over, their value should be zero. Hence the macd on the bottom indicator will have the macd (blue) line match zero on its own chart.
Traders may buy when the MACD crosses above its signal line and sell—or short—the stockcryptosecurity when the MACD crosses below the signal line. However this is a basic strategy that will have little success rate.
In general, there are many strategies and in conjunction with the macd, one can narrow down the choices of the trade. With our strategy, we use the macd to help stay out of a potential trade (not take the trade) or show
us convergence is there for particular setups, mainly in our CRADLE Strategy.
If we find that there is bearish divergence against an uptrend, we will look to finding another setup which has at a minimum convergence and not divergence. The same is true in a downtrend.
However we can use a bullish divergence or bearish as a bonus factor amongst the few strategies we use to trade with.
The further the macd and signal are apart, the bigger the histogram blocks become. You will note when the macd and signal cross over, the histogram is equal to zero. This helps us understand the momentum of the price action
as well, the wider the better and the closer they get, the likelier that it can bounce or be a reversal in that time frame.
To find out more about how we use the MACD in a strategy with a higher success rate, you will need to subscribe to the individual coarse or the premium package coarse. You can find the details under the “PRICE” tab.
We will discuss an example here, the below chart with its aspects to the MACD in relations to a chart. Click on the chart for a closer look.
From the chart below you can note the following:
A) When price spikes up in an accelerated fashion, you will note how the Macd and signal get wider apart. As buying and price starts to lose momentum, you will also note that the macd and signal start
to get closer until they actually cross over. In many cases, if you have the right time frame aligned, a cross over for these to can denote a reversal.
B) As price tries to make its way back up, there is a point where the signal (orange line can act as resistance for the macd to pass (blue line) and hence along with a bearish candle, price drops much
C) At the bottom of the chart, you will note bullish divergence and over time, from the point of the 1st time they cross back, where the macd is back on top, you will see are reversal taking place.
We see that price really makes a uptrend the moment the macd crosses over the zero level and hence the cycle starts all over again. Note how the ema’s cross over as well.
D) MACD limitations: One of the main problems with divergence is that it can often signal a possible reversal but then no actual reversal happens, a false positive signal. So be careful as how you read divergences as
they tend to play out eventually but you need more than just an indicator to know when, hence this is when formations become important as part of the strategy. False positives occur often when the assets price moves sideways
like in a range or in a trend. You will not on many occasions, in a bull market, you will see many bearish divergences but they seem to not play out. Its true in the opposite direction, in a bear market, bullish divergences
seem to get rolled over.
The RSI Indicator
The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. In addition, signals can be derived by looking for divergences and failure swings. RSI can also be used to identify the general trend which is the 50% mark.
i) The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100. An example is given below;
ii) We see by default that the value of 70 and 30 are given which is meant to indicate that above 70 is extended as overbought area and below 30 is also extended as oversold area or undervalued conditions. This can be true
only in context with other elements of the chart. We can have situations that price can continue in either direction even if its over extended so these numbers are not to be taken literally.
iii) When the RSI is above or below the 50% area (it can be a range), then that can also signify a change in trend for that time frame and one can also expect more or less momentum in that direction. We will discuss
this in the example below.
iv) The RSI vs MACD: RSI aims to consider overboughtoversold and trend change with recent price levels. The MACD measures the relationship between 2 emas. Using the 2 can provide a more complete TA picture.
v) At times, used correctly, we can use RSI to confirm formations and breakout levels (examples provided further on)
The RSI can show bearish or bullish divergence just like the MACD. One has to look at a specific time frame and then another higher TF to confirm divergence. For example, If you look at a 4 Hourly chart and see divergence,
you would then want to confirm that there is also divergence at the 8 Hourly time frame to be confident that a resistance level is probable.
Finding a divergence:
In an uptrend or bull market, the RSI tends to remain in the 40 to 90 range with the 40-50 zone acting as support. During a downtrend or bear market the RSI tends to stay between the 10 to 60 range with the 50-60 zone acting
as resistance. These ranges will vary depending on the RSI settings and the strength of the security’s or market’s underlying trend.
With this example, we can see that as we make new highs, the RSI is making newer low, showing bearish div. You will note, the moment it drops below 50%, we see price drop significantly.
RSI also often forms chart patterns that may not show on the underlying price chart, such as double tops and bottoms and trend lines. Also, look for support or resistance on the RSI.
The chart above demonstrates how the RSI can be used in the correct time frame for formation confirmation and breakout trades along with divergences.
A) You can note that if you place the RSI Trend Lines correctly and in context with price action, you will be able to pick out the key pivot pointslevels along the way to trade, in this case the 4 hrly chart.
Where the RSI breaks or crosses those TL, you can note with the vertical lines where those key pivot levels are.
Hence along with the moving average on the chart with the MACD indicator, you can represent a change in direction for price action. Combine it with the candle stick strategy, you will have a more favorable idea as to
the direction of the trade and when to enter or exit it.
B) The red band on the RSI which denotes the range from 48 to 52% also helps identify level of support and resistance for the trigger chart.
C) Rising wedge with bearish divergence on the RSI and TL can be identified as to where you can take a short entry. Similarly finding a bullish divergence on the RSI and a break through the TL along with a bullish candle,
can signal a long entry.
In an uptrend or bull market, the RSI tends to remain in the 40 to 90 range with the 40-50 zone acting as support. During a downtrend or bear market the RSI tends to stay between the 10 to 60 range with the 50-60 zone acting as resistance. These ranges will vary depending on the RSI settings and the strength of the security’s or market’s underlying trend.
The Wave Trend Indicator
This indicator is a customised one, meaning it was created with some scripts based on RSI methodology and is available on TradingView. Its one of my go to indicators to look for confluence for macro structures and momentum
changes. You can find it under TradingView as “Wave Trend With Signals [ChuckBanger“.
The indicator has some signals for divergence as well. You can see my customised one in the Practical Example section along with the RSI. When you compare, you can see how the WT does a better job in terms of support and
resistance levels with the signals, crossing over. Yes, grant it is a lagging indicator but if you put it in context to the chart, its a useful tool, along with a strategy.
This indicator is a customised one, meaning it was created with some scripts based on RSI methodology and is available on TradingView. Its one of my go to indicators to look for confluence for macro structures and momentum changes. You can find it under TradingView as “Wave Trend With Signals [ChuckBanger”.
The indicator has some signals for divergence as well. You can see my customised one in the Practical Example section along with the RSI. When you compare, you can see how the WT does a better job in terms of support and resistance levels with the signals, crossing over. Yes, grant it is a lagging indicator but if you put it in context to the chart, its a useful tool, along with a strategy.
The Fixed Volume Indicator
This indicator helps find levels where historically had strong and weak volume activity. It is thought that areas where there is high levels of volume compared to low areas will be a strong level for either support and resistance.
This comes in handy to find the average level of significance.
To find the tool on Tradingview, go to Indicators & Strategies > Built-Ins > Volume profile > fixed Range
On the trigger chart, select the 2 ranges where the volume will be required to worked out. Here we provide an example.
Note where we placed the ranges and how the volume profile appears. Its no coincidence that it helps find resistance and support levels. It therefore makes more sense if we have confluence with the volume profile with a
fibonacci level and moving average to be a strong level of interest.
To be provided