Beachman's technical chart setups
FinHabits: My favorite technical indicators and how I use them in charts
One of my readers asked me about technical indicators and charts that I use for my investing and trading analysis. I figured that it was better to respond via a post with visuals, explanations and examples. So here goes…
As you know by now, I like to keep things simple when it comes to my investing process. I look at lots of underlying data and metrics for a given company, however I prefer to boil things down to a few attributes that really matter to me, with a strong preference for leading indicators. I follow the same mantra when it comes to price charts.
3-month daily chart
This is the chart I use most frequently.
In the main section:
10-day simple moving average...simulates a 2-week period...RED line
21-day exponential moving average...tracks a 1-month period...PURPLE line
55-day exponential moving average...3-month focus...YELLOW line
200-day simple moving average...shows what happened in 1-year...ORANGE line
Parabolic SAR...PURPLE dots
Price-Trading Volume Profile...LIGHT BLUE bars on the right side
In the lower section:
Daily trading volume showing accumulation or distribution...RED or GREEN bars
50-day average trading volume...LIGHT YELLOW line
RSI Relative strength indicator...WHITE line
CMF Chaikin Money Flow...LIGHT BLUE line
Vortex Indicator...RED and GREEN lines
CCI Commodity Channel Index...WHITE
The Parabolic SAR helps me track when there is a switch in the price trend for the stock. I use the dot points to identify buy points (support), trim points (resistance) and stop loss order levels, which I can then confirm using the moving averages and volume profile.
The Volume Profile shows me trading volume distributed across specific price points. Longer bars denote heightened buying and selling interest at that price level. I use these bars to validate levels of price support and price resistance.
The RSI, CMF, Vortex and CCI are all momentum and underlying strength indicators that show if there are more buyers than sellers over a given time period. Interestingly, they don’t always agree with each other, hence the need to cross-check them frequently.
3-year daily chart
A simpler view of how a stock is performing over a much longer time period using the same four moving averages from the 3-month daily chart.
3-year weekly chart
Another simple chart with a weekly focus to check if there is a unique trend that might not be showing up on the 3-year daily chart. For the weekly chart, I use two moving averages:
20-week exponential moving average...YELLOW line
50-week exponential moving average...ORANGE line
5-day 5-min chart
I use this chart, almost exclusively, for short-term trades or to track the internals of the indexes. It shows the 5-min price candles against the trading volume profile. Across the trading week, I can see where buyers are coming in and where they are exiting.
Everyone has their preferences for how they digest information and how they communicate with others. Some prefer to read words on a page or a screen. Others like visuals (me!). Some like to talk over the phone (my wife) and others (me again!) prefer to text message or email. In a similar manner, over time, investors and traders figure out which technical indicators they trust and gravitate towards them in their chart setups.
I recommend starting with simpler charts and fewer indicators. If you want to test an indicator, add it to your chart for a few weeks. If it is not helping you, take it off and try something else.
Less is more when it comes to technical charts.