Charting for Rules based trading

Hello, Power Profit Traders!

Having the right tools to analyze charts can make a significant difference as you practice rules-based trading.

Each week on our Money Morning LIVE show I view the broader financial markets through the lens of a technical and systematic trader.

Not only do we review the general S&P 500, but we’ll also look at bonds, currencies, commodities, crypto currencies and market volatility charts.

Let me introduce you to my All-in-One Charting tool. Not only is it available through the web, but you can download my app as well. I want you to have a glimpse of the tool that can help separate an emotional trader from a systematic, rules-based trader.

The All-in-One Chart

Welcome to my guide on the All-in-One Chart that can be made available for you to utilize in Tom’s Tools.

Following rules is the secret behind every trading strategy. Not only is it important to define rules and follow them, but the outcome of following rules has to be positive after being tested.

Systematic trading can greatly assist in removing emotions from trading.

I have six categories that I monitor with my All-in-One Chart to give me a broad picture of strength and weaknesses in the financial markets.

  1. Stocks
  2. Bonds
  3. Currencies
  4. Commodities
  5. Volatility
  6. Crypto

My All-in-One Chart can help you evaluate individual stocks along with the broader financial markets.

Accessing the Charting Tool

Access the charts by selecting Stocks/Charts/Stock Charts, illustrated below.

With just a few technical tools we can assess what is happening with a stock’s Price, over a specified period of time and whether options are over or under valued by evaluating Implied Volatility.


How to Apply Chart Settings

To the right of the chart, under Controls,

select the following items – illustrated in the image on the right:

Stock Chart Overlay 1: 7-30 day ATM IV

Stock Type: CandleStick

Moving Avg Days: Long 30; Short 10

Stock Chart Fibonacci: (check box)

After choosing your chart selections, click the UPDATE button near the top of the Controls window. Your chart will populate to the left of the Controls window.

Reading the Chart

Moving Averages

The chart image below illustrates price activity through “candlesticks.” You can evaluate the general trend of price action by looking for higher highs and higher lows (bullish trend), consolidation points (neutral trend) or lower highs and lower lows (bearish trend).

The purple line represents a 10-day simple moving average line (SMA), while the blue line represents a 30-day SMA.

Monitoring moving average crossovers is one way to determine if the trend is likely to change – this is usually followed through with other technical tools to confirm the trend’s change in direction.

(Illustration of candlesticks and two simple moving averages – 10/30)

Fibonacci Levels

Fibonacci sequences are a series of numbers in which each number is the sum of the two preceding numbers…Wait! What? Let’s keep this simple.

Fibonacci numbers and sequences were named after Leonard of Pisa, also known as Fibonacci, which I like better when voiced with an Italian accent.

Traders apply Fibonacci ratios to determine price levels, or where price may retrace or project to – identifying potential levels of support and resistance. Fibonacci trading has much to do with price activity breaking up or down and then following through to a particular price target.

The chart below illustrates the full range of price activity between zero (lower level) and 100 (upper level). Looking up from the zero level, price action is thought to remain between zero and 38%. If price rises above the 38% level, it is anticipated to rise to 50%, and so on until a complete 100% retracement is made.

(Fibonacci Retracement levels from Zero to 100)

Implied Volatility

The red line on the chart below illustrates the fluctuation of Implied Volatility (IV) over time. This is an essential chart for option’s traders.

When volatility is low, it indicates that option premiums ARE NOT INFLATED.

(IV Levels rising and falling over time)

When volatility is high, it is an indication that option premiums ARE INFLATED.

The All-in-One Chart is a tool for analyzing current and historical price movement, trends, implied volatility and projections for future price, and you’ll find me utilizing this chart regularly.

I look forward to talking to you more about finding success with my charting tools.

Talk soon,

Tom Gentile
America’s #1 Pattern Trader

6 Responses to “Charting for Rules based trading”

  1. Virginia Conover

    Thank you, Tom. I think I followed you almost to the end. Does it mean that the time to use options is when the red line merges with the candlestick line, or when the volatility line is lowest from the candlestick line?

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