| | | Introduction to my "Trigger" Chart
We are pretty much through with Point & Figure charts from a initial discussion POV. I have written about the basics and that should be enough to get you started playing with this type of chart. Every P&F chart is different. there are many many ways to combine the basic elements to give you a unique perspective on the share price of a company. To try to address all issues is impossible. Having said that, if/when you have questions about a particular chart, please post a public message so we can puzzle it out and all will learn from the analysis.
P&F charts are limited by design. You cannot see daily or especially intraday movements without making the chart yourself or buying specialize software. I know of no website that does intra-day P&F charts and then there is the issue of if nothing happens in the share price or oscillates within the reversal window...nothing will be noted in that type of chart.
This leads to the development of a different chart(s) for analysis. The first one I want to show is a real workhorse for me. I call it my "Trigger Chart". Why? Because this is a market timing chart. I know there is a continuous buy/sell of stock shares. But I would never just buy or sell on a whim. I usually try to anticipate a breakout whether it be bullish/bearish and then monitor the status of the shares after that.
Here is the main arrow in the my quiver... the "Trigger Chart"
This is in reality a Stockcharts.com "Sharpchart". You can customize each sharpchart through the boxes at the bottom. You can see that I use well known indicators and overlays in this chart but in many cases I use non-standard ways of using them. The MACD indicator is a good example... You note the absence of a histogram and signal line... there are reasons for that and I will discuss them later on. We will talk about my choices as we go along... it will be a long process to show everything you can deduce from this chart. I think I will devote at least 6 posts before I am finished with this chart.
There is so much in this chart and it took me years to find this combination. I think you will be impressed with what you can do with this chart in the end.... it is not JUST a pretty chart.
Trigger Chart Components
Main chart
- The main body of this chart uses a Candlestick line format. I don't use it in the way it is normally touted. I don't interpret candlestick combinations. I do look at individual candle sticks themselves sometimes as they do describe a battle in a very small period of time. But that is only the current candlesticks... there are other uses of this way of presenting share price data and that will be the subject of another post.
- I use Bollinger Bands which you will find me referring to them as BB's or Bollies often. If you look in most TA books on the subject of Bollinger Bands they will slough them off with a half page to at most 2 pages of discussion if the include a chart example or two. Not me...I could spend a chapter on this amazing overlay. I will explain why I prefer this overlay to Keltner Channels and more.
- I use Simple Moving averages in the main chart.... This post will end with a detailed discussion of these averages
Indicators
- When I started investigating chart indicators, I was like everyone else. I was searching for the holy grail of indicators... the magic bullet that would reveal all. I spent a year or so following this dream.... very frustrating... there are several tens of them and more are added every year. Sometimes they gave good information... other times the lied through their teeth... very frustrating. Then I gave up on individual indicators... I investigated how they REALLY worked and then culled out eventually 8 of them that were independent in calculation and look when charted. For example MACD and TRIX have very different calculations but but they look surprisingly similar when plotted... more about that in a future post.
- I then looked at comparing indicators in combination and sharpcharts in its free form allows 3 at a time. I discovered that while all indicators lie at one time or another... They don't lie at the same time. This was a discovery after a couple of years... I then played with developing a consensus of opinion of my selected indicators + overlays and discovered this was an amazing way to decide on whether or not I would invest in a company.... this will be a major discussion once the three remaining charts are discussed.
- The three indicators in this chart perform a very special function. They will tell you when a breakout bullish or bearish will occur and also during consolidation of share prices whether things remain bullish or bearish or are these conditions deteriorating. We will discuss each indicator separately and once you understand why their parameters are they way they are... we will look at how to use them in combination with many examples.
Trigger Chart Components
Moving Averages
There are 2 types of moving averages... Simple Moving Averages (SMA) and Exponential Moving Averages (EMA)
A SMA is easy to show the calculation. Let's arrange 5 numbers in a row each number is a day result... the latest number is the first on the right, while the oldest number is the last on the left
3,8,4,5,2 so this would be a 5 day Simple Moving Average = (3 + 8 + 4 + 5 + 2) / 5 = 22/5 = 4.4
to have a "moving average" we add one number to the right (9) and kick off the last number on the left and you are left with
8,4,5,2,9 so this would be a new 5 day Simple Moving Average = (8 + 4 + 5 + 2 + 9) / 5 = 28/5 = 5.6
So we continue... at regular intervals (once per day or hour or minute ...etc) we add one number to the right, kick off the oldest number and average all that remain..... A SMA is an honest average ... I call it honest since there is no manipulation to the numbers making up the average
An EMA is an artifical average. This is because the final average is weighted to the new number added. to give it a faster response to a change.
You start the EMA with the first number being a SMA... so using the above SMA we use 4.4 from that first set of numbers as the first EMA.
Now we compute a multiplier using the formula multiplier = (2 / (time periods +1) = 2 / ( 5+1) = 0.333
using the earlier example
the next EMA = (new number - old EMA ) x multiplier + old EMA = (9 - 4.4) x 0.333 + 9 = (4.6 x 0.333) + 9 = 10.53
As you can see the EMA result is much higher than the SMA.
Here is a chart of price data to show the difference between a 20 day SMA and the corresponding 20 day EMA
the red line is the EMA and the blue one is the SMA. You can see that each rapid change in price results in a small pos/neg shift in the EMA from the SMA.... but essentially they give the same information... at least.
Is it different for an intraday chart... lets look
you can see the shift when you compare grid lines in the box.... But does one give more information over the other? I find them very similar. However when Indicators use moving averages in their calculation they use EMAs.... nothing you can do about that but frankly the differences would be minor as I see it.
As far as what averages to use I use 3... 20day SMA, 50daySMA and 200daySMA. Sometimes you see a whole chart full of moving averages. That is just clutter as I see it.
Information from a SMA
The 20 day SMA is a special case as related to Bollinger Bands and I will discuss this average in detail then.
1. When a smaller moving average rises through a larger moving average this is bullish. Conversely a smaller moving average falls through a larger moving average this is bearish.
2. With respect to the 20 day SMA specifically , the share price above and moving higher from the average the is mildly bullish, the share price below and falling from the average is mildly bearish.
3. You can see that occasionally that a SMA line will seem to act as a resistance or support .You can see that from January to mid February in the above example where the share price cannot rise above the 20 day SMA .
There we go again... the 20day SMA... it is a very important moving average.
You see it again with this stock where the 20day SMA forms a support that when broken is caught by the 50 day SMA. You also see in late Nov - Dec 1 where the 20 day SMA briefly touches the 50 day SMA and then rises off it again to a nice bullish run that lasted til a few days ago... now we hope the 50 day SMA will preform as in the past and the run will continue in the future.
4. Some investors use a small SMA (usually a 9 or 10 day SMA) to indicate the end of a bullish run and use it as a trigger to get out os a position
I have tried this with mixed results... I tried to automate it with a limit stop loss based on the last SMA value... but you can get tripped up by a spike shown by the purple arrow tripping a premature sale.
This is really a tool for the swing trader (as a long term trader, I think of a short term swing is a trade lasting less than one month {sigh}).... One of the hardest things I find is selling a stock.... buying is easy but selling..man, I want that last drop of blood from that stone... usually to my loss.
IF you decided ahead of time that this bullish breakout was just a swing and followed the share price with a 10 day SMA like above the manually watched it...things would be better.... WAIT my next chart uses a LINE chart eod close. Perhaps that would be better. (never tried that before)
Yep.... it worked better on the first circle... we weren't tripped up by the spike.
Wow... a 30 odd % gain.... nice.
I wonder if it would work on a short????? I don't short stocks so someone else who does would have to confirm it was practical
Looks like there are possibilities there too.
It seems you want a share price that on an day-by-day basis is not too volatile but moves in a definite direction.
Conclusion
Well this has been a nice introduction to my Trigger chart. This last bit does not belong there but it is the nugget of the post. That is what I like about doing this... it causes me to think outside the box and often I come up cherries... this was one of those times :)
Good Trading
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Disclaimer:
I am not a registered broker. I am retired and use Technical Analysis as the main tool in my investment decisions. Accept or reject my comments as you will, but do your own Due Diligence (DD) before making any decisions based on the information I provide.
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