In our last Analyzing charts piece, we looked at familiarizing yourself with the layout on TradingView, as well as EMA’s, Volume and Bollinger Bands®.
Today we’ll further expand on some indicators to factor into your chart analysis. It’s important to remember that you should never base your decisions on only one indicator, pattern or trend, so when you start producing your own charts, you should factor as many of these indicators in to get the greatest mathematical consensus possible before taking a position.
The MACD calculation is a simple one. MACD has three main aspects; MACD, Signal, and Histogram. The MACD calculates the difference between the 12 and 26-day EMA’s. The signal is a 9-day EMA. The histogram is a visual representation of the difference between the MACD and the signal (9-day).
When the MACD is above the 9-day signal, it signals traders to buy, and when it is below, it signals traders to sell.
The histogram shows positive when the MACD is above the signal and negative when it’s below, If prices are rising, the histogram also grows larger. The histogram is a tool that many traders use to gauge momentum because it gives an indication of the speed of price movement.
Above is an example of what a 1-minute chart might look like, and if you were looking to put in a position, or increase a position you have in a coin, this is an example of a signal you would look for. The histogram is showing a quick increase in price as the MACD (blue) moves closer to the signal line. This indicates that the price is moving in a more positive trend, and is getting closer to the 9-day average (signal).
Fibonacci (Fib) Retracements are ratios that we use to identify potential reversal levels. These ratios are found in the Fibonacci sequence named after Leonardo of Pisa, who was known as Fibonacci, who is credited with introducing western mathematicians to the sequence. Fibonacci numbers are characterized by the fact that every number after the first two is the sum of the two preceding ones, for example;
The key retracements we use most commonly are 23.6%, 38.2%, 50%, 61.8%, 76.4%, and 100%.
Retracement levels alert traders and investors of a potential trend reversal, resistance area or a support level. It is a commonly used tool to identify strategic places to place buy-in’s, selloff points and to calculate stop losses.
To use the Fib retracement levels effectively, it is important to use it in conjunction with a momentum indicator, such as the MACD histogram. It is also imperative that you gain perspective on these momentum indicators.
The two charts above are the same chart, one being a 1-hour candlestick chart, and the other being the 1-minute candlestick chart. The green blocks show the same time frames. The 1-hour chart shows the MACD momentum in an upward trend, BUT, the momentum on the 1-minute chart shows a downward trend. This should perfectly illustrate the need for you to always look at the charts you analyze from as many perspectives as possible, particularly if you’re making a big play.
In a downtrend, you can use the Fib levels to short sell when the price bounces off of a retracement level. If that level happens to overlap another indicator, say for example a 100-day moving average, it strengthens that support or resistance level.
The most significant Fibonacci levels are the (uptrend) 61.8% level and its (downtrend) inverse of 38.2%. As a rule of thumb, in an uptrend, the 61.8% level point is where the last of the day’s sellers usually stop selling and buyers tend to come in looking for a good price on the currency. In a downtrend, a 61.8% decrease in price from the day’s starting point (meaning the price is at around the 38.2% level) is a rule of thumb selling point as the day’s buyers have been exhausted and the downtrend will continue on thereafter. A way to accurately predict whether you have reached that Fibonacci level earlier in the day is to look for longer periods of stagnant momentum in the MACD histogram. This will definitely take some time to wrap your head around, so read through it a few times, open up a chart on TradingView, add the Fib reversal indicator and look for examples, maybe even watch the charts for a bit until you manage to get it.
Using a 100 or 200-day moving average alongside the Fibonacci Reversal and MACD indicators are a great combination for shorting as well as short-term trend analysis. I would highly recommend using TradingView’s sandbox to practice using these in combination a few times before trying it with your own funds.