Thank you for taking the time to read today's blog post. We are going to discuss how to build a simple charting setup to help you invest and trade wisely! Also, be sure to read the big reveal, why I use black backgrounds on charts!!
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One of an investor's and trader's most important tools is a good no frills charting setup that can help you chart price action in the market to identify setups in any chart that has price (Bonds, Commodities, Cryptocurrency, Forex, Stocks, etc.).
We can use these tools to help identify and spot the trends in the market and than position ourselves correctly to benefit from from these trends in up or down markets. It's heullva a lot easier than attending every earnings conference call, looking at prospectuses, reading net income statements and creating a fundamental analysis!
Trust me, I have seen the reports that banks create that are 100 pages long on biotech stocks, seems like a waste of time and money to me. If you look at a chart, we have all the information we need.
Price! This is created by supply and demand, simple.
If you don't already have a platform, like Power E*Trade which I use, to setup your charts a great free charting solution is Investing.com (which I highly recommend), here you can access publicly traded companies, crypto, stocks, etc. It's a great addition to trading apps like Robinhood, and WeBull that don't have the functionality to properly chart your stocks. Be sure to create an account on this site before moving forward if using this tutorial so it's easy to save your charts!
Below I've provided a screenshot to help identify important tools in the charting platform we will utilize to build the optimal charting solution. (If you are using any other charting provider you should still be able to follow along and use the the tools we identify to setup your charts.)
First things first!
We want setup our charts so it's easy to utilize and perform our analysis. This means having are charts in flawless shape to chart price. Nothing less than the best!
So let's first enlarge the chart with the full screen icon in the upper right hand corner (icon with four outward pointing arrows). The box next to the full screen icon with the Down (load) and Up (save) arrows in the clouds allows you to easily load and save chart layouts at Investing.com. Since we have a chart up of Crude Oil (Symbol T on Investing.com) we can save this chart with the name 'Crude Oil WTI Futures, $CL_F'.
We want to have a price scale on our charts that allows us to view our charts correctly. We are going to use a logarithmic scale (toggle the button entitled 'log' in the lower right corner) for our charts as it will allow us to chart trend lines correctly against price. This is very crucial because using arithmetic or linear charts will give false buy and sell signals when charting price. When it comes to money and making decisions we want to ensure that we get true buy and sell signals otherwise it impacts our decisions financially.
Next we want to setup our charts with Japanese Candlesticks to be able to properly identify chart patterns. There are a couple of options within the website and my preference to chart price is the 'Candles' selection below (in Figure 1.2).
Next we are going to add two important indicators to our charts: the Moving Average Convergence Divergence oscillator or MACD, and the Relative Strength Index or RSI. These tools can be added using the indicators icon (the chart icon in the top middle of our charts).
The MACD is measured using the difference between two exponential moving averages, in this case (what's traditionally used) and for our purposes the 26-period EMA is substracted from a 12-period EMA. Investing.com has these as presets, in case you need to change or update them the standard presets have been provided below (Figure 1.3).
For the MACD, an unbounded oscillator, I prefer to have it setup with colors to easily recognize crossovers in the MACD oscillator that show positive and negative movement in price (Figure 1.4). I have provided the style I use and width length of lines to suit my needs. The will give the optimal chart like ones that I post.
The Relative Strength Index (RSI), created by J. Welles Wilder in June of 1978, measures the strength of an issue against its own price history change by comparing "up" days to "down" days, which helps us determine when an issue gets overbought or oversold. This is very important as it allows to determine the strength of a particular set of stocks, cryptocurrencies, commodities, etc. in order to place our money in the best performing assets. We will use a standard period of 14 to measure the RSI.
Just like MACD we can setup our own style to make the look and feel of our charts unique. Below are my presets that are meant to help identify in trading when to take profits the (RSI is at or above 70 in the UpperLimit), or looking to buy into weakness (RSI is at or above 30 on the LowerLimit).
Excellent! Our charts are now starting to take shape, we'll kick it up a notch by adding another important indicator that I have referenced before called the Simple Moving Average or SMA (sometimes referenced as 'smoothed' moving average'), which measures the average of a selected range of prices by the number of periods in that range. It's a very powerful and simple indicator that helps us determine whether what we are looking at is a bearish or bullish trend.
For our purposes and to keep it simple we'll add just the 200 SMA for now an important long term average. [Take note! There is the benefit of adding multiple moving averages to your charts which we'll discuss in a later post]. This can be found by typing 'SMA' into the search box of the indicators box, next we can select the 'Length' and 'Style' ( see Figure 1.6 below) of the SMA by using the 'Format' button next to that indicator in the upper left hand part of the chart underneath the symbol of the chart your viewing.
I'm sure you thinking - why do we want to only add the 200 SMA for now!? Great question! Because the 200 SMA is the defining trendline for long term charts for technicians, if we are above the 200 SMA generally the chart is in a positive trend and if we are below it the trend tends to be more negative and we don't want to be long.
By now you should be exclaiming, oooooh that's one sexy chart (yours should look like the one below, I have added the 10 SMA to show a short term trend)! And you'd be right, your taking steps on the path to make better decisions in the market! Now in order to draw these patterns that we see in the market that we review we'll show the tools you can utilize to use segments to create the chart patterns and start charting Fibonacci levels!
Now, I am sure you're wondering, how the heck did he get the background to look black and so beautiful and why does he use a black background instead of white like most people on his charts?!
Crazy fact! It save's energy! As a sustainably focused company we are always looking at ways to cut down our energy usage. This is simple easy solution.
Here are the presets that I use to make that happen (Figure 1.8):
Lastly, we are going to find the tools we need on Investing.com to chart the patterns in price that we identify in the market to make money. We have our trend lines on the second row in the first column and the Fibonacci Retracement is located on the ninth row in the drop down menu of the third row in the tools selector column (see Figure 1.9). Be sure to check out and explore the tools investing.com has to be able to make annotations on your charts.
Finally, you can start charting like a Pro and use Fibonacci to make that money in the market!
Now, we put it all together and voila, we got one sexy professional chart!
Here's the analysis that I see on Crude Oil: Crude Oil is creating a descending triangle pattern which is short term bearish, however as the RSI has remained very overbought on the daily chart this shows a very strong trend that may continue upwards. Thereore, we would only want to be shrot below $57.25. The weekly chart of Crude Oil is bullish so we don't want to be overly bearish and we have a rising 200 SMA which indicates a strong trend.
According to the Fibonacci analysis below, which is called a Fibonacci retracement because we are looking at support levels below the currnetly highs (an extension is when we measuer the fibonacci above all time highs), our next level of support is $55.14, if we hold current levels and break back above the 38.2% retracement of $60.21 we can see a retest of the highs.
Will price go up in a straight line? Probably not, that's why we use risk management and stops below important price levels to ensure we keep our capital unless we are wrong.
Congrats! Now you have the tools to chart like a pro! You're one step closer to making better decisions in the market. If you created chart be sure to post and tag us on our social media channels. Thanks for taking the time to invest in yourself and learn how to trade better.
Feel free to be creative with the tools that Investing.com has to offer, for me I like to keep it simple and just see what the technicals are telling us.
Trade confidently,
@WizDayTrader
Essex's Trading Quote of the Day (QotD)
“Technology is nothing. What's important is you have faith in people, that they're basically good and smart, and if you give them tools, they'll do wonderful things with them."
~ Steve Jobs (1975 - 2011)
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