The MACD Indicator
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 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.
Referring to chart below to demonstrate how the macd is calculated.
We added 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.
What is the histogram of the MACD?
Its a visual display of bars which represents the distance between the Macd and signal.
How do we use the MACD?
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.
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.
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 more.
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
This is a basic introductory module for the popular indicator called the RSI.
The follow-up pages are for subscribers only.
In point form:
A) The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset;
B) 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;
C) We see by default that the value of 70 and 30 are given which is meant to indicate that above 70 is extended to overbought area and below 30 is also extended in the selling area. 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.
D) When price is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price, the RSI reading of 30 or below indicates an oversold or undervalued condition.
E) 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.
F) 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.
The chart above demonstrates how the RSI can be used in the correct time frame. However to have a strategy, you need to have the following understanding about moving averages, fibonacci, support and resistance levels and formations, along with divergence and convergence. If you know these and have a keen eye, you can use both the macd and RSI to your strategy, which I call the 5 element trading strategy. However I will not discuss it here but this chart actually does a good job representing the opportunities.
As for the RSI:
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.
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.
The Phoeix or Wave Trend Indicator
The Bollinger Band Indicator
The CPR Indicator
The stochastic or Stochastic RSI indicator