Tuesday, January 24, 2006

Chart description

I received some requests to explain, what you see on my charts:
Let's start with the feature, most will think is really unimportant:

Most charts I know have a black background and use harsh colors for bars, trendlines or any other feature  on the chart. Consider this: As daytrader you are sitting in front of your charts for quite a long time per day. So go easy on your eyes.
1. As background use a color, which does not tire you, even when you look into the screen for hours.
2. For trendlines on the chart, use colors which are shades lighter or darker than the background color. This way the colors you see on the chart are harmonic. Also think about, what you consider as important information and what is secondary information. The more important an information is, the better visible the color used for this feature should be.

My charts have 2 sections: The main section for the pricechart and a subsection for the oscillator used.

The main feature obviously are candlesticks colored light blue for bars closing up, red for bars closing down.
Then you see a lighter/darker than the background colored zone, which has some lines in it. That’s my Moving averages zone. I don’t buy the idea, that prices turn right where a certain moving average is calculated to be. That’s like staying in front of a train at full speed and calling: Stop and Reverse right here on the spot. No a train needs some space to stop and turn and I see the same happening with prices reaching a moving average. Sure price turn somewhere, and you might have the impression, that they often do it atthe 20 sma or a 34 ema, but in truth, the turn near these moving averages. That’s why I introduced the Moving Averages Zone (MAZ) one border is a 10ema, the other side is a 55ema. Inbetween you see a 20ema and a 34ema. The ema lines change colors depending whether they trend up or down and the zone changes color depending on the placement of the shorter ema compared to the longer ema. The effect is, that the MAZ is darker than the background in a downtrend and lighter in an uptrend.

In addition to the MAZ I have a 204 and a 340ema on the charts, as they provide information, if prices are near them.

Then I have standard Bollinger Bands on the chart (20, 2) and (340, 2) used to be reminded that moves will not go forever.

Recently I added a Least Square Moving Average (or Regression Curve) on the chart, as there are some price patterns, which will not form a double top or bottom, but test the LSMA (14) instead. It’s a thin line, as I’m not yet sure whether it is worth keeping it on or not.

As usual the subsection is reserved for an Oscillator of some kind. I’ve tested and traded with most of them on the chart. For a very long time I used the CCI, then I used a Stochastic, then the RSI or combinations of them. Recently I finally saw, what confused me most with these oscillators. They are detrended, meaning they work nicely in range markets, but fail miserably in trending markets. To compensate you usually are advised to use multiple Oscillators of different length, but that does not really help either.

I was introduced to the Advance / Decline Indicator (ADX) on Akuma’s Blog, but to tell the truth, I could not trade with this indicator, which has 3 lines, one going up in a downtrend, the other going up in an uptrend and a third going up in trendmarkets. Looking at a chart with ADX you have to think, you need to look at the chart and first identify which line is which, before you get the information needed. I have 6 currencies and 5 indexes on my screens and I need information fast, I can’t bother looking exactly at my chart saying, well this line is up, that one is down…oh the trendline is down as well, so no trade here.

On the other hand the ADX made sense to me. It looked like an interesting indicator worth investing time into. So I designed a formula, which reduced the indicator to 1 line without losing too much information. The result is seen on my chart labelled ADX and shown as blue/red line:

new ADX = (ADX up – ADX down) * ADX trend

In the subwindow you also see a Moving average of the ADX to show me the longer trend of the ADX and standard Bollinger Bands to announce extremes of movements.

The color band at the bottom is just the standard ADX information telling me we are in an uptrend/downtrend or consolidation at the moment using the standard definitions of the ADX. It’s actually redundant information, but sometimes it’s better to get information twice, than taking the risk to ignore it.


jcrecruit said...

Very nice indicator you have made there friend with the ADX. I wonder if you wouldn't mind sharing its parameters. The biggest problem with most of these indicators is that they are lagging. There are a couple of folks out there that have developed indicators with minimal lag, eg. Jurik indicators. However they still primarily should be used to indicate the map of attack, and price action should provide with which road to take. The true strength indicator is regarded as a leading indicator. However I am only experimenting with it at this time, and am not convinced. Neural nets offer perhaps the best possibility for probable leading indicator patterns. Just experimenting for now. thanks again, Frank B

Akuma said...

Thanks for the mention by the way in regards to the ADX, I am curious what period moving average you are applying to your simplified ADX (you need to give it a name ;)). Keep up the good work.

Globetrader said...

The ADX settings I use to get the new ADOC (AD-Oscillator) are a 5,1 setting on the ADX, which makes it very responsive to trend changes. Even if I use this short period, the Oscillator usually stays below the zeroline in downtrends and above in uptrends, something not seen with other oscillators, unless you use longer periods.