Chris uses the same basic indicators he’s used for years – don’t change it if it’s not broken!
His core setup includes:
- The ATR Trail Stop
- Moving averages
He also uses chart patterns and correlations heavily in his trading.
Download Link: Click here to download Chris’ ATR Trail Stop indicator for ThinkorSwim or TradeStation: ATR Trail Stop
STUDY GUIDE: ATR Trail Stop
Using the ATR Trailing Stop for further “Hint” of direction:
- ATR Trailing Stop is simply a calculation, using the stock’s Average True Range.
- Average True Range is the average stock price fluctuations within a certain time period.
- Chris uses the ATR Trailing Stop crossover as a visual indication for possible direction changes.
- ATR Stop crossovers usually coincide with moving average crosses.
Chris uses a 2.9 ATR with 9 periods with EXPONENTIAL for his ATR trailing Stop in Thinkorswim.
The ATR Trailing Stop will change color from Red to Green depending on if the price is above which will display a green line or below it which will display a red line.
Chris’s TOS settings – All Indicators
Chris’ TOS Settings – ATR Trail Stop
STUDY GUIDE: Learning the MACD
- MACD stands for Moving Average Convergence Divergence.
- It’s simply a trend following momentum indicator.
- Chris typically uses the 3,10,16 MACD.
The MACD consists of 2 lines:
- The Short-Term line, in red, is the difference between two moving averages. I use the 10 period and the 3 period simple moving averages. The difference is a line that can be positive and negative.
- The blue line is the Intermediate Line. It is the Simple Moving Average of the Short Term Line. I use a 16 period simple moving average.
How to use the MACD:
Using the Red MACD Line.
I use the Red Line much more often than the Blue Line. I use the Red MACD line to look for 6 things.
- Overbought readings
- Oversold readings.
- Positive divergences.
- Negative divergences
- Positive reversals.
- Negative reversals
Using the Blue MACD Line:
The Blue MACD line is used to determine changes in intermediate term direction. A cross above the zero line is a sign of a positive trend change. A cross below zero is a bearish development. The Blue line crossing the zero line shows direction.
Using Both MACD Lines:
There are 4 things to watch with the 2 MACD lines:
- The slope, or direction of each
- The location of each, relative to the zero line.
- The crossovers of the zero line.
- The crossovers of the 2 lines with each other.
Why Are Divergences Important?
When a stock moves, momentum should move in the same direction. The MACD can be used to spot weakening momentum in a stock trying to make new highs. Conversely, you can look for strengthening momentum in a stock making new lows. These divergences are usually the first “tell” that a trend change in imminent.
What Is A Negative Divergence?
The 3,10,16 MACD is great at spotting divergences. A negative divergence is when stock price goes to a new high, but the Red MACD line fails to go to a new high. It is a warning sign to look to get out of longs, or start to look for a short idea. It HAS to be used with moving averages to time entries.
What Is A Positive Divergence?
Positive divergence is just the opposite of negative divergence. It occurs when price goes to a new low, but the Red MACD fails to follow. It is warning sign to get out of shorts, or to think of initiating a long. It HAS to be used with moving averages to time entries.
What is a Positive Reversal?
One of the benefits of using the 3,10,16 MACD is the ease in identifying positive and negative reversals. A positive reversal is when price sells off to a level higher than the last sell off, but the MACD goes to a more oversold condition than the last sell off. This oversold condition gives the stock a lot of energy to resume its uptrend.
What is a Negative Reversal?
As the name implies, the negative reversal is the opposite of the positive reversal. It occurs when the stock is failing to surpass its last high, but the MACD is higher than the last rally. Most of my favorite shorts are when a stock becomes “overbought in a downtrend.”
Bulls vs. Bears:
Bullish Configurations using both lines:
The best bullish formations occur when the blue line is above zero, or approaching zero with a positive slope, indicating intermediate term strength, while the red line is under zero, but “hooking” up. These buy signals are even more powerful when the blue line slope is positive. I trust the buy signals more when the stock price is above the 49 EMA.
Bearish Configurations using both lines:
The best bearish formations occur when the blue line is below zero, or approaching zero with a negative slope and the red line is “hooking” down. These sell signals are more powerful when the blue line slope is negative. Sell signal are much more reliable when the stock price is below the 49 EMA.
STUDY GUIDE: Moving Averages
Moving Averages for Trend Identification and Timing Entries:
Chris explained determining the “Longer Term Flow” of a stock using Longer Term Moving Averages.
- Longer term moving averages show overall direction.
- Establishing a longer term trend makes the MACD signals more reliable.
- Chris accomplishes Trend Identification with 2 longer term moving averages.
200 period, in green, of an simple moving average.
49 period, in purple, of an exponential moving average.
Using Shorter Term Moving Averages for Timing Entries:
- Shorter term moving averages help me with timing.
- Many traders have many different configurations of their moving averages.
- Chris has found the 9 period EMA, and the 20 period SMA work best for me.
- Using crossovers of 2 moving averages to time an entry works best with 1 EMA and 1 SMA.