Like a drug, charts can be both used and abused. When used properly drugs can put you in calm, serene, objective state. When used improperly they can make you fidgety, unstable, and sometimes paralyzed. Charting plays out in a similar fashion. I find it quite ironic that charts bring clarity to some while sowing confusion for others. Similar to the ingestion of medicine, there is both a right and a wrong way to go about charting.
Despite how vehemently a chartist may argue to the contrary, the extent to which they error is easily betrayed by their charts. Take the following chart for instance:
[Source: MachTrader]
A short study of a chart like this likely leads to feelings of confusion, paralysis, instability, and information overload.
Now, try this one one for size.
Feeling calm and clear? Do you hear the gently flowing stream and Enya music in the background?
I do.
In A Forest of Tree Candles, I recommended traders develop some type of hierarchy outlining how they breakdown a chart. My simpleton approach is as follows:
1. Trend and Momentum
2. Support and Resistance
3. Volume
4. Candlestick Analysis
5. ATR, Historical Vol, and any other indicator
While there is certainly room for personal preference, I suggest price action should reside atop everyone’s hierarchy. Whether or not you swear by the MACD, RSI, or one of the other zillion indicators, price action should lead. If we were engaged in a friendly card game of War (the only card game I remember playing as a kid) and you flipped over a MACD card, my price action card would trump yours every time.
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What is ATR?
Hey John,
ATR stands for Average True Range. It’s a multi-purpose indicator used to measure how much the stock moves per day and works as a gauge of volatility. By default it looks at the last 14 trading days and calculates the average range per day. Most charting platforms allow you to add it at the bottom.
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