Charts, Channels and Events

Basic Charts

3-year Price Chart

The 3-year chart provides a panoramic view of what the security has been doing. This provides context for what the short-term charts show. It’s important to start with a macro view before zooming in to look at smaller time periods.

1-Year Price Chart

This is a mid-level view. As I’m looking at the short-term charts, I sometimes find it useful to go back and see what happened during the months leading up to what the short-term charts are showing.

4-month Price Chart

This is a detailed picture of recent price action. It’s short enough to allow you to look at what happened on specific days.

4-Month MACD Chart

This is Gerald Appel’s classic Moving Average Convergence/Divergence indicator. I have changed one thing about the calculation. Instead of the closing price of the day, I use the median price of the day because it gives you results that are a little smoother without introducing any lag. I will discuss the MACD in detail in the “Events” segment of this paper.

4-Month Smooth RSI Chart

Welles Wilder’s RSI indicator tends to be somewhat jumpy. Taking a cue from Dr. John Ehlers, I quiet the RSI indicator by using a two-day moving average on the inputs. This gives a smoother indicator and introduces less than one day of lag in the output. The smoothing does affect the range of the indicator, so while the oversold/overbought range for the standard RSI is 30/70, the Smoothed RSI is not considered overbought* until it is above 80 and it is not considered oversold* until it is under 20.

4-Month Volume

One of the most important things that volume can tell you is whether there is enough liquidity to make it worthwhile to trade a stock. If there are not enough shares being traded on a daily basis, then you may have difficulty closing out a position when the time comes. Be cautious about buying any stock if the average volume is less than 200,000 shares a day.