When investors first decide to try out technical analysis it can be a bit intimidating. Every chart comes with dozens of add-ons and often investors get flustered and either add way too many things to their charts or exclusively stick to the price data. This article will highlight the elements that every chart should have and why.
Normally, when you are looking at a chart on a website, it is just going to start off having the price plotted:
You can very quickly add volume to the chart and you will have the bare minimum required for analysis. Volume is used to determine the supply and demand levels. It will also let you gauge the importance of each price move.
Now, from here it is useful to add a 50 and 200 EMA (Exponential Moving Average) to the price chart and a 50 EMA to the volume (if possible). To explain the moving average let me use the 50 EMA as an example. The 50 EMA takes today’s price and the price of the last 49 days and averages them together to plot a point. Because it is exponential, it puts more weight to recent price movement whereas the SMA (Simple Moving Average) has equal weight on every day.
I like the EMA because I think that current price activity is more important than past activity. The moving averages on the price data are useful because they often show up as points of support and resistance.
Finally, for my chart I like to use MACD (Moving-Average-Convergence-Divergence). I use a (12,26,9) MACD which means that it measures the distance between the 12 EMA and 26 EMA over a period of 9 days and plots it. You can either get it as the two moving averages or as a histogram. I choose the histogram. I will do an article on the MACD later so I won’t go into any more for now. This step is totally optional.
This is all that I like to have on my graph. I have gone through phases using various indicators, but for now this is how I like it. How you set up your chart is a very personal thing and I suggest you play around with it to find the optimal group of indicators for your trading style.
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