What is a Fair Value Gap (FVG) in Trading?

fair value gap

This article will show you how to identify, trade, and understand the fair value gap in trading. 

Fair Value Gaps Meaning Explained for Traders

A fair value gap (FVG) in trading is a three-candlestick pattern that is created by imbalances between buyers and sellers.

Like a regular gap, the fair value gap acts as a magnet, drawing the asset’s price to eventually fill the gap and repair the imbalance in the market.

An FVG can occur on any timeframe, from the 1-minute chart to the daily chart. 

fair value gap

How to Identify a Fair Value Gap

Identifying fair value gaps can be a difficult task, so let’s break it down step by step:

1- Find a Large Imbalance Candle

The first step to identifying a fair value gap is to find an abnormally large candle that causes a clear imbalance between buyers and sellers. Large candles can be caused by news, economic events, or volatile price action. The large candle can be either red or green. 

2- Identify the Fair Value Gap on the Chart

Once you identify the large candle, you must analyze the candles directly to the left and right. The highs and lows of these candles determine the fair value gap range, which we can draw on our TradingView charts with horizontal lines or a rectangle.

If the large candle is green, the fair value gap is defined as the area of the preceding candle’s high and the following candle’s low. Note that the neighboring candles should not significantly overlap the large candle, as in this case, there wouldn’t be much of a gap.  

Fair Value Gap Indicator

One of the best fair value gap indicators around is the LuxAlgo HTF Fair Value Gap on TradingView.

If you want to try this indicator out for free, you can sign up with our TradingView affiliate link to receive a 30-day free trial and a discount on your subscription.

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Bullish vs. Bearish Fair Value Gaps

Fair value gaps can either be bullish or bearish, depending on the overall trend and color of the candles. 

Bullish Fair Value Gaps

A bullish fair value gap is identified by a large green candle and states that an asset price recently increased too quickly and may be temporarily overvalued. Therefore, it is likely that the price will eventually come down and fill the fair value gap before continuing higher. 

Bullish Fair Value Gap Example

An excellent example of a bullish FVG can be found on the SPY daily chart on 1/6/2023. Price was steadily consolidating, then a large green candlestick created an FVG, identified by the rectangle on the chart. The bullish FVG is determined by the preceding candles’ high and the following candles’ low. 

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Bullish FVG Example on TradingView

Bearish Fair Value Gaps

A bearish fair value gap is identified by a large red candle and means that the asset price is temporarily undervalued. Eventually, traders will likely see the price repair this imbalance by increasing and filling the fair value gap. The bearish FVG is determined by the preceding candles’ low and the following candles’ high.

Bearish Fair Value Gap Example

An example of a bearish fair value gap lies on the SPY daily chart on 1/20/2022. The FVG is marked by the purple rectangle, and we also determined the overall trend was down based on the trendline. 

bearish fvg example
Bearish FVG Example on TradingView

Identifying the Overall Trend

The overall trend of an asset is crucial when determining how you will trade the fair value gap. For example, if a stock is in an overall downtrend and you notice a bearish fair value gap, traders will consider shorting when the price fills the FVG. Ideally, the FVG is near a resistance level determined by another indicator or a bearish trendline.

Learning how to conduct technical analysis on your own can be a daunting task and even harder to implement as a trading strategy. However, you can join the HaiKhuu Trading Community to accelerate your learning curve by gaining access to thousands of experienced traders. 

The HaiKhuu Trading Community provides you with live trading calls and daily trading reports to ensure you stay ahead of the curve. 

FVG Trading Strategy – Trading Fair Value Gaps

Now that you understand what a fair value gap is and how to identify one let’s cover a basic FVG trading strategy you can try.

1- Identify a Fair Value Gap

Say for example, you identified the bullish fair value gap we used as an example above on the SPY daily chart. You would draw on your TradingView chart to mark the FVG and proceed to wait for an entry point.

2- Identify the Trend

In our bullish example, we determined that the trend was bullish, identified by our upward trendline. 

3- Determine Entry and Exit Points

To determine an entry point on this bullish fair value gap, you must wait for the gap to fill and proceed to go long once it does. The gap perfectly aligns with our upward trendline, giving it a higher chance to play out. 

4- Risk Management When Using Fair Value Gaps

Nothing is guaranteed in the world of trading, so it would be wise to set a stop loss below the trendline and FVG, in case the strategy doesn’t play out like expected to limit your loss potential.

5- When to Take Profit Using a FVG Strategy

When trading a bullish FVG setup, you can take profit when the asset increases to the next level of resistance or demand zone. Setting a sell order is great, but sometimes, you can miss out on bigger moves.

Alternatively, you can set a stop loss in profit below a support level. You will avoid selling too early by waiting for the asset to break support. However, you may generate less profit than if you attempted to sell at the ‘top’ using resistance levels. 

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The Triangle Chart Pattern Explained

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Even the most enthusiastic value investors know technical analysis is critical to well-informed investing. Major news outlets often tout momentum investing as outperforming value-based strategies over the past decade. Likewise, financial service firms showcase the impact of these technical trading strategies and factors.

This article focuses on a specific technical analysis, the Triangle Chart Pattern. We’ll explain what it is, its different types, and how to best use it. 

What is a triangle pattern?

A triangle pattern is technical analysis tool that signals what’s known as a continuation pattern: an equity or currency’s price movement within a specific range after the trend falls or rises. The triangle pattern is used to identify whether the next move in the security is a breakout higher or a breakdown in pricing towards aligned with a bearish sentiment.

Traders versed in technical analysis use the triangle chart pattern to identify whether the current price movement of a stock or currency is bearish or bullish after substantial volatility and newfound upside or downside. As the triangle pattern forms, traders pause and analyze the signals to assess what may come next.

After range-bound trading, the price movement will often continue the same pattern. If it is an uptrend, it is known as a breakout. However, that pattern can fail, and the pricing trend can suddenly and viciously reverse. This is known as a pricing breakdown. As such, making trading decisions based on triangle patterns requires a nuanced understanding of the rules and knowledge of the different types of triangle patterns

Understanding Triangle Patterns – What are the rules of triangle patterns?

There are no specific rules for interpreting triangle patterns. Instead, there are general guidelines that traders follow in identifying these patterns. Some of these guidelines include:

  • Triangle patterns are often considered continuation patterns. In this case, triangles are used to identify breakouts for profitable trades. This consideration is especially true for smaller patterns and often presents the best trading opportunities.
  • Conversely, larger patterns in triangles are considered both a continuation trend pattern and an indicator of a reversal trend.
  • Breakout of patterns in either direction is often considered to be confirmed when accompanied by a healthy volume increase. 

Type of Triangles

There are three types of triangle chart patterns. These include:

  • Ascending Triangle – this is a pricing pattern in which the equity is attempting to make multiple attempts at a new high, but none go above a certain threshold. One can draw a straight horizontal upper trendline across the price chart directly above all those highs. Simultaneously, as the price drops back down from that threshold, the low the price reaches is always higher than the last low that was set. One can draw a straight upward-sloping lower trendline across the price chart directly below all those lows.
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This pricing momentum indicates increasing confidence among buyers, slowly increasing their bids to place a rising floor on the price.

This confidence-building transpires slowly and then suddenly as buyers detect the rising trend, and all race to buy at once to avoid missing out on the gains. This manifests a massive breakout higher in price as sufficient buyers have stepped in.

  • Descending Triangle – this triangle formation is the inverse of the ascending triangle. In this pricing pattern, the equity or currency makes lower highs at every attempt after an ongoing downward trend before the triangle formation. One can draw a straight downward-sloping trendline across the top of the chart. 
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This is usually a result of buyers sensing an opportunity to bid after an ongoing downturn, slowly easing back into the trade. At this triangle formation, the pricing trend is usually unsustainable and often continues back towards the downward trend, breaching the lower trendline.

However, it is essential to note that this isn’t a certainty that this will always happen. There is a breakout strategy to be employed depending on the market dynamics and bullishness. As a result, there may be a case for the trend to reverse and break out higher. So it is always important to pay attention to market conditions overall and the narratives driving those trends.

  • Symmetrical Triangle – this is a unique triangle formation as the top and bottom trendlines converge to the middle towards one another. It is a tug of war between buyers and sellers where the highs are lower than the prior, and the lows are lower than the earlier lows.
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Symmetrical triangle patterns can be tricky as traders must carefully review for the potential of a breakout in prices to move higher or a breakdown of prices where the trend turns bearish. As a result, a symmetrical triangle pattern isn’t sufficient to independently guide pricing movement and must be used in tandem with other types of technical analysis

How do you use triangle patterns in trading?

Traders can use several triangle formations as signals to find opportunities for breakouts and forecast future price moves. These include:

  • The trading opportunity in using triangle patterns is identifying breakouts, that is, when the price of a security exits a continuation pattern and pushes through an upper or lower threshold.
  • A breakout higher allows traders to either go long the security or cover their shorts. A breakout lower is an opportunity for traders to open a short position or exit from their long positions.
  • Volumes confirm breakouts. It indicates that whatever is driving the price movement has broad appeal among traders. 
  • Breakouts from symmetrical triangles usually continue the same trend that the security was in before the triangle formed. So, if a stock had been on an upward price trend before entering a consolidation period forming the symmetrical triangle, more often than not, the breakout move would be higher for that stock. 

What is the triangle breakout strategy?

The core aim of the triangle chart pattern is to determine a triangle breakout strategy. Traders gauge various triangles that form to determine the direction of the breakout direction, whether it will be an upper or lower threshold that will be breached from the continuation pattern that the price movement may currently be in.

Below are a few triangle breakout strategies to keep in mind as you use triangle patterns in trading:

  • Breakouts accompanied by increased trading volume signify a firm conviction among traders, and the breakout is most likely to be successful.
  • Conversely, breakouts with low or no volume spikes are likely head fakes and prone to fail. Most breakouts correspond to news or activity around the security, leading to traders jumping into the trade, causing the volume to spike. Absent those spikes in volume connotate, there isn’t sufficient news accompanying the move, thereby unlikely to be sustainable. 
  • It is essential to note that breakouts accompanied by volume spikes can sometimes fail as well, motivated primarily by short-term trading activity to lock in profits early. However, there are sufficient tactical traders in the market to often sustain the breakouts, given the conditions and activity behind the breakout
  • Most often, the successful breakout strategy is built on triangle patterns observed over several months. A sufficient timeframe is required to build out the cacophony among buyers and sellers that eventually results in the breakout.

Conclusion

Everyone has heard the expression, “the trend is your friend.” Technical analysis is essential in finding profitable market opportunities, especially given the strategy’s outperformance for over a decade.

One form of technical analysis often used by traders as a barometer of great trading opportunities is the triangle chart pattern. This is a continuation pattern or a range-bound price movement for a specific time, and triangle chart patterns can be used to identify which direction the price will trend to next.

Ascending, descending, and symmetrical triangles are the different types of triangles that can form, that traders often identify the potential for bearish or bullish outcomes. 

However, the triangle pattern strategy isn’t an all-encompassing panacea, as millions of drivers and narratives can influence pricing action. As such, overall market conditions should be considered, and it is recommended that assessments derived from triangle patterns be used in conjunction with other technical analysis tools. 

Triangle Trading Pattern FAQs

Is the triangle pattern bullish or bearish?

Triangle patterns can be used as both bullish and bearish prognostication. Remembering that a triangle pattern indicates consolidation just before a price breakout is essential. 

An ascending triangle pattern is a bullish signal as it indicates an upward price breakout, showcasing that buyers are gaining momentum. Conversely, a descending triangle pattern signals bearish sentiment, thereby, a lower breakout based on a rising tide of sellers.

What is the success rate of the triangle pattern?

The success rate of the triangle pattern depends on the trader’s skill level. It can be easier to spot buying opportunities in both ascending and descending triangle patterns, usually after resistance is broken. 

However, as good as triangle patterns can be in spotting opportunities, traders must immerse themselves in these patterns’ intricacies and support market conditions to trade on them successfully.

What are the different types of triangles in Forex?

The same type of triangles chart patterns form in Forex as with stocks; ascending, descending, and symmetrical triangles. However, where fundamentals and overall market conditions can impact stocks when reviewing their triangles, it is vital to consider forex chart readings in context to larger narratives regarding countries’ economics and geopolitical situations, given the outsized influence these matters fundamentally exert on currency markets. 

What is a triangle pattern in stocks?

A triangle pattern in stocks is a continuation pattern in which the stock price remains range-bound for a specific time. The culminating chart of that stock price form a triangle based on straight lines drawn across the stock price’s upper and lower trends. These triangles form ascending, descending, and symmetrical triangles. Each of these triangle patterns can be used to ascertain the future direction of the stock, whether it’s a higher or lower price breakout.

The 7 Best Technical Analysis Books to Improve Your Trading

best technical analysis books

Technical analysis is the study of price movements and patterns in financial markets, using charts and indicators to identify trends, signals, and opportunities.

In this article, we will review the 7 best technical analysis books that every trader should read.

best technical analysis books

Whether you are a beginner or a seasoned trader, these books will help you improve your trading performance and achieve your financial goals.

Additionally, we recommend TradingView for technical analysis, as it is the best charting software for all markets.

The 7 Best Technical Analysis Books

1- Getting Started in Technical Analysis

2- How to Make Money in Stocks: A Winning System in Good Times and Bad

3- Japanese Candlestick Charting Techniques

4- Encyclopedia of Chart Patterns

5- Technical Analysis Using Multiple Timeframes

6- Technical Analysis For Dummies

7- Technical Analysis of Stock Trends

Getting Started in Technical Analysis

Getting Started in Technical Analysis is a great introduction to technical analysis for beginners. It explains the basic concepts and techniques of technical analysis in a clear and simple way. It covers topics such as trends, trading ranges, chart patterns, and more. Getting Started in Technical Analysis also provides in-depth coverage of:

  • Trading systems-trend-following, counter-trend, pattern recognition.
  • Software for charting and analysis.
  • The challenges of trading illiquid and thinly traded markets.
  • How to avoid false signals and whipsaws.
  • Risk control strategies.
  • The psychological aspects of trading discipline, commitment, confidence, and more.

Getting Started in Technical Analysis is a comprehensive and practical guide to the art and science of technical analysis. It is suitable for anyone who wants to learn how to use charts and indicators to make better trading decisions.

How to Make Money in Stocks: A Winning System in Good Times and Bad

How to Make Money in Stocks: A Winning System in Good Times and Bad is a national bestseller that has taught over 2 million investors how to build wealth through the stock market. It is based on a major study of market winners from 1880 to 2009.

How to Make Money in Stocks is not just a book about technical analysis. It is also a book about fundamental analysis, market psychology, portfolio management, and trading philosophy. It teaches you how to use O’Neil’s famous CAN SLIM system to identify and buy the best growth stocks in any market condition.

How to Make Money in Stocks is a must-read for anyone who wants to learn how to beat the market consistently and achieve financial freedom.

Japanese Candlestick Charting Techniques

Japanese Candlestick Charting Techniques is the most comprehensive and trusted guide to this essential technique. It is written by a pioneer trader who has done years of research on candlestick charting. It covers everything you need to know, including hundreds of examples that show how candlestick techniques can be used in all of today’s markets.

Japanese Candlestick Charting Techniques will teach you how to:

  • Recognize and interpret the most common candlestick patterns
  • Combine candlestick analysis with other technical tools such as moving averages, trendlines, support and resistance levels
  • Apply candlestick techniques to various time frames and markets such as stocks, forex, futures
  • Use candlestick signals to identify trading opportunities and manage risk
  • Enhance your trading performance with advanced candlestick concepts such as continuation patterns, reversal patterns, gaps, windows, harami, doji, shooting star, hammer, morning star, evening star, dark cloud cover, piercing line, engulfing pattern, and more.

Japanese Candlestick Charting Techniques is a classic book that every technical analyst should have in their library. It is not only a reference book but also a trading manual that will help you master one of the most powerful and effective methods of chart analysis.

Encyclopedia of Chart Patterns

Encyclopedia of Chart Patterns updates the classic with new performance statistics for both bull and bear markets and 23 new patterns, including a second section devoted to ten event patterns.

The author tells you how to trade significant events, such as quarterly earnings announcements, retail sales, stock upgrades and downgrades, and more!

Encyclopedia of Chart Patterns will show you how to:

  • Identify and profit from the most reliable chart patterns
  • Use pattern recognition to filter out noise and focus on the most important price movements
  • Measure the strength and reliability of each pattern with performance rankings and failure rates
  • Optimize your entry and exit points with precise trading rules and guidelines
  • Avoid common mistakes and pitfalls that can ruin your trades

Encyclopedia of Chart Patterns is a comprehensive and authoritative reference book that covers over 100 chart patterns, including classic patterns, event patterns, rare patterns, and failed patterns. It is an invaluable resource for any technical trader who wants to improve their pattern recognition skills and increase their trading success.

Technical Analysis Using Multiple Timeframes

Technical Analysis Using Multiple Timeframes is written by a trader and author for traders. It provides real-world examples of price action. It is considered a short textbook that offers practical knowledge. The author developed a method called Squeeze Dynamics Theory, which uses technical analysis and multiple timeframes.

Technical analysis using multiple timeframes involves analyzing stock price charts in different time frames. Higher time frames can help identify trends, while lower time frames can help identify entry and exit points.

Technical Analysis Using Multiple Timeframes will help you:

  • Understand the principles of technical analysis and how to apply them to any market
  • Learn how to use multiple timeframes to identify the best trading opportunities
  • How to develop your own trading plan
  • Trade with confidence and discipline using clear and objective rules
  • Avoid emotional mistakes and overcome psychological barriers

Technical Analysis Using Multiple Timeframes is a book that will change the way you look at the markets. It will teach you how to combine different perspectives and tools to create a holistic and profitable trading approach.

Technical Analysis For Dummies

Technical Analysis For Dummies helps you take a realistic look at what securities prices are actually doing rather than what economists or analysts say they should be doing.

The book teaches you how to:

  • Determine how markets are performing and make decisions using real data
  • Spot investment trends and turning points
  • Improve your profits and your portfolio performance

Technical Analysis For Dummies is a friendly and easy-to-understand guide that introduces you to the basic concepts and techniques of technical analysis. It covers topics such as:

  • Chart types, patterns, indicators, oscillators, and signals
  • Trend analysis, trendlines, channels, support and resistance levels
  • Trading systems, strategies, styles, and tactics
  • Risk management, money management, position sizing, and stop-loss orders
  • Technical analysis tools, software, platforms, and resources

Technical Analysis For Dummies is a book that will help you get started with technical analysis in a fun and simple way. It will also help you avoid common pitfalls and misconceptions that can hinder your trading success.

Technical Analysis of Stock Trends

Technical Analysis of Stock Trends is widely considered to be one of the seminal works of the discipline. It was published in 1948 and is exclusively concerned with trend analysis and chart patterns.

It remains in use to the present. It is clear that chart analysis was the main method of technical analysis in the early days because computers did not have enough processing power for statistical analysis.

Technical Analysis of Stock Trends will teach you how to:

  • Identify the major trends of the market using the Dow Theory
  • Analyze price movements using bar charts, point-and-figure charts, line charts, candlestick charts
  • Recognize and trade various chart patterns such as triangles, rectangles, head-and-shoulders, double tops, double bottoms, wedges, flags, pennants, and more.
  • Use volume, breadth, sentiment, moving averages, trendlines, support and resistance levels to confirm or refute chart signals
  • Apply technical analysis to different time frames, markets, sectors, industries, and stocks

Technical Analysis of Stock Trends is a book that every serious technical analyst should read. It is a classic book that has stood the test of time and has influenced generations of traders. It is a book that will help you understand the logic and psychology behind price movements and chart patterns.

The Best Technical Analysis Tools

Technical analysis is not only about reading books and learning theories. It is also about using the right tools to apply your knowledge and skills to the real markets.

There are many technical analysis tools available in the market, but not all of them are created equal.

TradingView is a web-based platform that allows you to use hundreds of indicators and draw patterns on your chart. TradingView supports stocks, forex, futures, cryptocurrencies, and more.

It also has a powerful backtesting and paper trading feature that lets you test your trading system before risking real money.

TradingView is completely free to use, but if you want to access more features and benefits, you can upgrade to a premium plan.

If you are serious about trading, you can test out the premium features by using our link to sign up for a free trial. You will also get a discount on your subscription if you sign up using our link.

TradingView is the best technical analysis tool that we have ever used. It is easy to use, reliable, and versatile. It can help you improve your trading skills and results in any market. We highly recommend it to anyone who wants to take their trading to the next level.

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Anchored VWAP

Disclosure: This post contains affiliate links from Amazon and TradingView. As an Amazon Associate, I earn from qualifying purchases. This means that if you click on these links and make a purchase, I will receive a small commission at no extra cost to you.

MA vs. EMA vs. SMA vs. WMA – Moving Average Indicators

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Moving averages are fundamental tools used by traders and analysts in financial markets to understand and predict price trends.

This article explains the primary types of moving averages: Simple Moving Averages (SMA), Exponential Moving Averages (EMA), and Weighted Moving Averages (WMA), highlighting their differences and practical applications.

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What is a Moving Average (MA)

A Moving Average (MA) is a statistical tool used to analyze data points by creating a series of averages from different subsets of the complete dataset.

SMAs, EMAs, and WMAs are types of MAs.

The MA smooths out price data on a chart to create a single flowing line, making it easier to identify the direction of the trend.

MA vs. EMA Compared

When comparing MA and EMA, the primary difference lies in sensitivity. The EMA is more sensitive to recent price changes than the MA, which can lead to early signals for entering or exiting trades.

SMA vs. EMA Compared

SMA and EMA are both types of moving averages but differ in their calculation. The SMA assigns equal weight to all values, while the EMA gives more weight to recent data, offering a quicker response to price changes.

SMA vs. MA Compared

The SMA is a type of MA with a specific method of calculation – it calculates the average price over a set period without weighting. In contrast, other MAs, like the EMA and WMA, apply different weightings.

WMA vs. EMA Compared

Both WMA and EMA give more importance to recent data but differ in their approach. The WMA uses a linear weighting method, while the EMA uses an exponential approach, making the EMA quicker to react to recent price movements.

What is the Simple Moving Average (SMA)

The Simple Moving Average (SMA) is the most basic form of the moving average. It is calculated by taking the arithmetic mean of a given set of prices over a specified period.

The SMA gives equal weight to each price point within the period. The SMA is most commonly used by swing traders and investors with longer timeframe trades and investments.

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SMA on TradingView

Common Lengths for SMAs

The most common SMAs utilized are the 50 and 200-day simple moving averages, also known as the 50 and 200-day moving averages.

You can access these on TradingView by adding ‘Moving Average Simple’ twice to your indicators. Then, you must set the length of one to 50 and the other to 200 and use the daily timeframe.

When the 50-day SMA crosses above the 200-day SMA, this is called a golden cross.

What is the Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) is a type of moving average that places a greater weight and significance on the most recent data points.

Unlike the SMA, it reacts more quickly to price changes, making it a preferred choice for traders looking for sensitivity to recent price movements, such as day traders.

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EMA on TradingView

Common Lengths for EMAs

Common lengths for EMAs include 9,12, and 26.

You can access EMAs on TradingView by adding the ‘Moving Average Exponential’ to your chart. You can check out my full article about adding moving averages to TradingView for more information.

You can then adjust the length in the indicator settings to whichever you prefer. Generally, when a short-term EMA like the 9-EMA crosses over a longer one like the 26-EMA, this is considered a bullish crossover.

What is the Weighted Moving Average (WMA)

The Weighted Moving Average (WMA) assigns a heavier weighting to more recent data points. The weightage decreases linearly for older prices, making it similar to the EMA but with a different method of calculation and emphasis.

The WMA is much less popular than the SMA and EMA indicators. Additionally, if you’d like to save your moving average settings on TradingView, you can consult my article about saving your chart layouts on TradingView.

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WMA on TradingView

How to Use Moving Averages to Trade Effectively

Moving averages are pivotal in trading strategies. They can indicate potential buy or sell signals and help in identifying support and resistance levels.

Traders often use two moving averages together for a crossover strategy, where the crossing of a shorter period MA over a longer period MA indicates a potential trend reversal.

The Best Lengths for Moving Averages

The best length for a moving average depends on the trader’s objectives and the market’s volatility.

Short-term traders might prefer shorter periods, like 5 or 10 days, for more sensitivity, while long-term investors might opt for 50 or 200 days to filter out market noise.

Additionally, long-term traders may prefer SMAs, while short-term traders may prefer EMAs since they use more recent price data.

Which Moving Average is Best for Day Trading?

For day trading, where quick decisions are crucial, shorter-period MAs like the 5 or 10-day EMA or WMA are typically preferred due to their responsiveness to recent price changes.

The most common moving average for day trading is the combination of the 9-EMA with the 26-EMA.

MA vs. EMA vs. SMA vs. WMA – Bottom Line

Each moving average – MA, EMA, SMA, and WMA – has its unique features and applications. Which you should use depends on your strategy, the time frame of trading, and the specific market conditions.

Understanding these differences is key to employing these tools effectively in trading scenarios.

If you’d like to get better at technical analysis, you should create a free TradingView account to analyze all markets within a single platform.

If you sign up for TradingView using my link, you will also get a discount on your subscription if you choose to upgrade to a premium plan.

Disclaimer: Financial Tech Wiz is a TradingView affiliate and will be compensated if you use our link to purchase a TradingView subscription.

The 10 Best TradingView Indicators to Improve Your Trading

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Discover the best TradingView indicators to improve your technical analysis skills.

What are the Best Indicators on TradingView?

There are tons of indicators on TradingView. However, the best ones include:

  • Volume Profile – view volume by price instead of by time
  • Ichimoku Clouds – quick “one look” indicator to identify entries and exits
  • Auto Fib Retracement – draws Fibonacci retracements automatically
  • Market Profile – view how much time is spent at various price levels
  • VWAP – the volume weighted average price intraday
  • MACD – moving average convergence divergence determines momentum
  • RSI – quick way to tell if a stock is overvalued or undervalued on a scale of 0-100
  • Anchored VWAP – VWAP anchored to a specific date
  • IV Rank and Percentile – detrmines whether a stock’s implied volatility is high or low

1- Volume Profile Indicator

The volume profile shows you volume by price for a defined time period. Traditional volume charts show you volume by time, which is not nearly as valuable.

Traders can determine what price has the most supply and demand, which is extremely helpful in determining support and resistance levels on a chart. 

tradingview volume profile indicator
Image From TradingView

The volume profile indicator on TradingView is an advanced tool that requires you to have a premium subscription. However, new users can usually get a TradingView free trial to test it out for 30 days.

2- Ichimoku Clouds

The Ichimoku Cloud is a dynamic trend following indicator involving several moving average lines. It consists of five lines and a “cloud” formed by the interaction of two of these lines.

ichimoku cloud
Image From TradingView

A green cloud signals an uptrend, while a red cloud signals a downtrend.

Additionally, you can use the baseline and conversion line crossovers to determine entry and exit points.

The baseline and conversion lines are similar to a 9EMA and a 26EMA, another common indicator traders use.

The Ichimoku Cloud allows you to identify trends easily and determine entry and exit points based on TK crossovers.

3- Auto Fib Retracement

The Auto Fib Retracement indicator automatically plots Fibonacci retracement levels on a chart, helping traders identify potential support and resistance zones based on the key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, and 78.6%).

auto fibonacci retracement indicator on tradingview
Image From TradingView

While traders often draw their own Fib Retracement lines manually, the Auto Fib tool is a great way to save time and view retracement levels on several time frames.

You can also change the depth to a larger number if the indicator is drawing the lines too close to the current stock price.

Auto fib retracement tools are also available on Trendspider. To learn more, check out my article on Trendspider vs. TradingView!

4- Market Profile

The market profile is similar to the volume profile, except it also shows time spent at prices on top of volume by price. The market profile is commonly used by futures traders to interpret the market structure and identify trading opportunities.

tradingview market profile indicator

While the market profile isn’t a default indicator on TradingView, you can use the Market Profile custom indicator by RunStrat. Once you add it to your favorites, you will be able to utilize the market profile on your TradingView charts.

5- VWAP (Volume Weighted Average Price)

The VWAP is an intraday indicator that shows you where the most volume has occurred through a particular trading day. It is considered about the fair price for a stock since it is where the most shares have been traded.

tradingview vwap indicator

VWAP strategies include buying when the price breaks over the VWAP for a continuation play. Alternatively, you can wait for the stock price to be far away from the VWAP and use a mean reversion strategy. You can also check out the anchored VWAP if you are not a day trader.

6- Moving Averages

There are two types of moving averages, SMA (simple moving average) and EMA (exponential moving average). The most common ones for swing traders and investors to utilize are the 50 and 200 SMA lines on the daily chart. Otherwise known as the 50 and 200-day moving averages.

tradingview moving average lines

Short-term traders use EMA lines such as the 9 and 26-period lines on shorter-term time frames like the 5-minute and 1-minute charts for day trading and short-term swing trading.

7- MACD

The MACD (Moving Average Convergence Divergence) is a popular trend-following indicator. It is the result of two lines: the MACD line and the signal line. 

  • MACD Line: The MACD line is the result of subtracting the 26-period EMA by the 12-period EMA, typically for days when used on the daily timeframe. 
  • Signal Line: The signal line is the 9-period EMA of the MACD line.
macd on tradingview

When the MACD line crosses above the signal line, it’s considered a bullish signal (suggesting it might be a good time to buy). Conversely, when the MACD line crosses below the signal line, it’s viewed as a bearish signal (suggesting it might be a good time to sell).

8- RSI

The RSI indicator is a popular tool for identifying whether an asset is overbought or oversold. It is a momentum oscillator that measures the speed and change of price movements on a scale from 0 to 100. 

RSI on tradingview

The RSI is calculated based on an asset’s price movements over a certain period, typically 14 days. It compares the magnitude of recent gains to recent losses to determine the speed and change of price movements.

9- Anchored VWAP

The Anchored VWAP (Volume Weighted Average Price) is a trading indicator that gives traders a comprehensive look at a stock’s price in relation to its volume over a specific time frame.

anchored vwap on tradingview

The regular VWAP is the average price of a stock weighted by its volume. The unique feature of the Anchored VWAP is that it allows traders to choose a specific starting point (or “anchor”) from which to calculate the VWAP.

10- Implied Volatility Rank and Percentile

Implied volatility represents how much volatility the market is pricing for a specific asset. When implied volatility is high, options are generally more expensive to account for the perception of large price movements in the future. It is a key factor in options pricing and trading strategies.

iv rank and percentile on tradingview

Implied volatility rank and percentile help you determine whether a stock’s implied volatility is high or low based on the last year of data. Implied volatility rank is free to use on TradingView but is not native to the platform. You can use the IV Rank and Percentile custom indicator by Martin Shkreli for free. 

How to get a TradingView free trial

If you don’t want to spend your hard-earned money testing out these indicators, new users can usually get a 30-day TradingView free trial.

TradingView is one of the most widely used charting tools available, and it is great for beginners and advanced traders. We have an entire article explaining how to get a TradingView free trial you can read if you have any questions.

tradingview banner

Which indicator is best for entry and exit?

There isn’t a single indicator that is “best” for determining entry and exit points. However, the Ichimoku indicator provides traders clear signals when the baseline and conversion lines crossover.

When the conversion line cross above the baseline, it is a signal to buy. On the other hand, when the baseline crosses below the baseline, it is a signal to sell.

Once you are in a position, you can use one of the several lines to determine your stop loss and take profit levels.

What indicator do most traders use?

There are tons of indicators to use on Tradingview, and each trader must find the one that works best for their trading strategy.

However, the most common indicators include Fibonacci Retracements, simple moving averages (SMAs), and exponential moving averages (EMAs).

The Best TradingView Indicators | Bottom Line

Selecting and utilizing the appropriate indicators is crucial for successful trading. The right indicators can provide valuable information on market trends, support and resistance levels, and potential trade opportunities.

By understanding how each indicator works and using them in conjunction with other technical analysis tools, traders can enhance their market analysis skills and improve their overall trading performance. Check out our article on the best day trading indicators to learn more!

FAQs

What are TradingView indicators?

  • TradingView indicators are tools or mathematical calculations applied to price data on the TradingView platform.

How do I access indicators on TradingView?

  • To access indicators on TradingView, simply open the platform and select the “Indicators” button located at the top of the charting window. This will open a menu where you can search for and select various indicators based on your trading needs.

Are the best TradingView indicators free?

  • TradingView offers a wide range of both free and paid indicators. While there are many excellent free indicators available, some more advanced or specialized indicators like the volume profile that may require a paid subscription or purchase. However, there are plenty of powerful indicators that can be utilized at no cost. You can learn more in our TradingView pricing article.

What are some popular TradingView indicators?

  • There are numerous popular TradingView indicators that traders often find useful. Some examples include:
  • Moving Averages: These indicators smooth out price data and help identify trends.
  • Relative Strength Index (RSI): A momentum oscillator used to detect overbought or oversold conditions.
  • Bollinger Bands: Indicators that show price volatility and potential price breakouts.
  • MACD (Moving Average Convergence Divergence): A trend-following momentum indicator.
  • Fibonacci Retracement: A tool used to identify potential support and resistance levels.
  • Volume Profile: Shows volume by price.
  • Ichimoku Clouds: A dynamic trend-following indicator.
  • Auto Fibonacci Retracements: Automatically draws Fibonacci levels.

How can I determine the best TradingView indicators for my trading strategy?

  • Selecting the best TradingView indicators for your trading strategy depends on your individual preferences, trading style, and goals. It’s essential to consider factors such as your preferred timeframes, market conditions, and the specific insights you need from indicators. Experimenting with different indicators and analyzing their performance in relation to your strategy can help you determine which ones work best for you.

Can I create custom indicators on TradingView?

  • Yes, TradingView provides a feature called Pine Script that allows users to create their own custom indicators. Pine Script is a domain-specific scripting language designed for creating and modifying indicators and strategies on the TradingView platform. It offers a flexible and powerful framework for traders who want to develop their own unique indicators.

How can I install and use custom indicators on TradingView?

  • To install and use custom indicators on TradingView, follow these steps:
  • Write or obtain the Pine Script code for the custom indicator.
  • Open TradingView and go to the chart where you want to apply the custom indicator.
  • Click on the “Indicators” button and select “Invite-Only Scripts” or “Pine Editor” depending on your TradingView subscription plan.
  • Open the Pine Editor and paste the custom indicator’s code into the editor.
  • Click “Add to Chart” to apply the custom indicator to your chart.

Before you go

If you want to keep educating yourself about personal finance and options trading, you must check out these posts as well:

Mark Minervini’s Trading Strategy: 8 Key Takeaways

The Best Options Trading Books

The Best Laptops and Computers for Trading

The Best Monitors for Trading

The Cup and Handle Pattern

Inverse Cup and Handle Pattern

Consider this article about trading using confluence as part of your strategy.

This article contains affiliate links I may be compensated for if you click them.

The 6 Best Indicators for Day Trading

best indicators for day trading

Day trading is a style of trading that involves opening and closing positions within the same day, taking advantage of small price movements in the market.

In this article, we will discuss some of the best indicators for day trading, how they work, and how to use them on the best charting platform available.

The Best Charting Platform With Integrated Indicators

One of the most important tools for day trading is a reliable and powerful charting platform that allows you to access real-time data, customize your charts, and apply various indicators to analyze the market. There are many charting platforms available online, but one of the best ones is TradingView.

TradingView is a web-based platform that supports all markets, including stocks, forex, futures, cryptocurrencies, and more. It offers advanced features such as multiple chart types, drawing tools, alerts, backtesting, and more.

TradingView is free to use, but you can also upgrade to a premium plan to access more features and indicators. If you use our link to sign up, you will get a discount and a free trial of TradingView’s premium features and indicators.

The Best Indicators for Day Trading

There are hundreds of indicators that you can use for day trading, but not all of them are equally useful or effective. Some of the best indicators for day trading include the volume profile, auto fib retracements, simple moving averages, exponential moving averages, the Ichimoku clouds, and the VWAP.

Auto Fibonacci Retracements

Fibonacci retracements are a popular tool among traders that use the Fibonacci sequence to identify potential support and resistance levels in the market. The Fibonacci sequence is a series of numbers that starts with 0 and 1, and each subsequent number is the sum of the previous two numbers (e.g., 0, 1, 1, 2, 3, 5, 8…).

The Fibonacci ratios are derived from dividing one number in the sequence by another number that is one or more places to the right (e.g., 1/2 = 0.50, 3/8 = 0.38, 5/13 = 0.38…). The most common Fibonacci ratios used by traders are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

best indicators for day trading fibonacci

The normal way to draw Fibonacci retracements is to identify a significant high and low point in the price movement (also known as swing points) and connect them with the Fibonacci drawing tool.

However, drawing Fibonacci retracements manually can be tedious and time-consuming, especially for day traders who need to constantly update them as the market changes. That’s why using an auto Fibonacci retracement indicator is extremely useful for day traders. Check out our complete article on Fibonacci retracements for more information.

Volume Profile

Volume profile is another useful indicator for day trading that shows you how much volume was traded at each price level over a given period of time. It helps you understand where supply and demand zones are in the market and how they affect the price movement.

The main parts of the volume profile indicator are the volume point of control (VPOC), the high volume node (HVN), and the low volume node (LVN). The VPOC is the price level where the most volume was traded, indicating a balance between buyers and sellers.

best indicators for day trading volume profile

The HVN is a price level where a lot of volume was traded, indicating a strong interest or activity in the market. The LVN is a price level where little volume was traded, indicating a lack of interest or activity in the market.

The volume profile indicator can help you identify potential support and resistance levels based on the volume distribution. For example, when the price is above an HVN, it acts as support. When the price is below an HVN, it acts as resistance. When the price moves from an LVN to an HVN or vice versa, it indicates a breakout or a reversal.

There are different types of volume profiles that you can use for day trading, depending on your time frame and preference. The most common ones are the session volume profile and the visible range volume profile.

The session volume profile shows you the volume profile for each trading day, while the visible range volume profile shows you the volume profile for everything visible on the chart.

The best way to use the volume profile indicator for day trading is with TradingView, as it offers a built-in volume profile tool that you can easily customize and apply to any market.

For more information on how to use the volume profile indicator on TradingView, you can check out our article on TradingView Volume Profile.

Ichimoku Cloud

The Ichimoku cloud is an all-in-one indicator that provides entry and exit signals, support and resistance levels, and trend identification. It consists of five lines that form a cloud-like shape on the chart:

best indicators for day trading ichimoku
  • The conversion line (Tenkan-sen) is the average of the highest high and the lowest low in the last nine periods.
  • The base line (Kijun-sen) is the average of the highest high and the lowest low in the last 26 periods.
  • The leading span A (Senkou span A) is the average of the conversion line and the base line, plotted 26 periods ahead.
  • The leading span B (Senkou span B) is the average of the highest high and the lowest low in the last 52 periods, plotted 26 periods ahead.
  • The lagging span (Chikou span) is the current closing price, plotted 26 periods behind.

The Ichimoku cloud indicator can help you identify trading opportunities based on various signals and rules. For example:

  • When the conversion line crosses over the base line, it is a buy signal. When it crosses under the base line, it is a sell signal.
  • When the price is above the cloud, it indicates an uptrend. When it is below the cloud, it indicates a downtrend. When it is inside the cloud, it indicates a consolidation or a transition.
  • When the cloud changes color from red to green or vice versa, it indicates a potential trend reversal or continuation.

The Ichimoku cloud indicator works well for day trading because it adapts to different time frames and market conditions. You can use it to scalp, swing, or trend trade, depending on your preference and strategy.

The most common time frames for day trading with Ichimoku are the 1-minute chart for scalping and the 5-minute chart for day trades.

To learn more about how to use Ichimoku cloud for day trading, you can check out this Ichimoku Cloud Thinkorswim Guide.

Volume Weighted Average Price – VWAP

The volume weighted average price (VWAP) is an indicator that shows where “fair value” is for a stock on a particular day. It is calculated by multiplying each trade price by its volume and then dividing by the total volume traded on that day. It creates a single line that moves along with the price action.

best indicators for day trading VWAP

The VWAP indicator can help you identify potential support and resistance levels based on where the price is relative to the VWAP line. For example:

  • When the price is above the VWAP line, it indicates that buyers are in control and that sellers may be willing to sell at lower prices.
  • When the price is below the VWAP line, it indicates that sellers are in control and that buyers may be willing to buy at higher prices.
  • When the price crosses over or under the VWAP line, it indicates a change in momentum or sentiment.

The VWAP indicator is especially useful for day trading because it reflects how much value was traded at each price level on that day. It helps you avoid buying too high or selling too low by showing you where most traders are trading. There is also the anchored VWAP indicator, which is similar but can be used on all timeframes.

Simple Moving Averages – SMA

Simple moving averages (SMA) are indicators that show the average price of a stock over a certain period of time. They help you identify the direction and strength of the trend, as well as potential support and resistance levels.

The most common SMA lines are the 50 and 200-day moving averages (i.e., the 50 and 200 SMA lines on a daily timeframe chart). These lines indicate the long-term trend of the market and are often used by investors and traders to make trading decisions

best indicators for day trading SMA lines

However, for day trading, you may want to use shorter time frames and periods for your SMA lines, as they will be more responsive to the price action and provide more signals.

For example, you can use the 1 or 5-minute time frame and apply the 50 and 200 SMA lines to your chart. These lines will act as support and resistance levels for day trading, as the price will tend to bounce or break from them.

To learn more about how to use simple moving averages for day trading, you can check out our article on TradingView moving averages.

Exponential Moving Averages – EMA

Exponential moving averages (EMA) are similar to simple moving averages, but they give more weight to the recent prices than the older ones. This makes them faster and more sensitive to the price action, which can be useful for day trading.

Exponential moving averages can also act as support and resistance levels for day trading, depending on where the price is relative to them.

best indicators for day trading EMA

For example, you can use the 9 and 26-period EMAs, which are commonly used on the 1 and 5-minute time frame by day traders. These EMAs can help you identify entry and exit points based on their crossover or divergence.

For example:

  • When the 9 EMA crosses over the 26 EMA, it indicates a bullish signal. You can buy when the price is above both EMAs and sell when it crosses below them.
  • When the 9 EMA crosses under the 26 EMA, it indicates a bearish signal. You can sell when the price is below both EMAs and buy when it crosses above them.
  • When the 9 EMA diverges from the 26 EMA, it indicates a strong trend. You can follow the trend until it converges again.
  • When the 9 EMA converges with the 26 EMA, it indicates a weak trend or a consolidation. You can wait for a breakout or a reversal.

To learn more about how to use exponential moving averages for day trading, you can check out our article on TradingView moving averages.

The Best Charting Platform for Using Day Trading Indicators

As we have seen, there are many indicators that you can use for day trading, but not all of them are available or compatible with every charting platform. That’s why we recommend using TradingView as your main charting platform for day trading, as it offers many advantages over other platforms.

TradingView is a web-based platform that supports all markets and every indicator you can imagine with real-time data. It also allows you to customize your charts, create your own indicators, and backtest your strategies. It has a user-friendly interface and a responsive design that works on any device.

TradingView is free to use, but you can also upgrade to a premium plan to access more features and indicators. If you use our link to sign up, you will get a discount and a free trial of TradingView’s premium features and indicators.

We hope this article has helped you learn about some of the best day trading indicators and how to use them on TradingView. Remember that indicators are only tools that can help you analyze the market and make trading decisions, but they are not infallible or magic.

You still need to have a solid trading plan, risk management, discipline, and patience to succeed in day trading. You can also check out our article on the best TradingView indicators for more information.

Anchored VWAP Strategies You Can Use

anchored vwap on a chart

The anchored VWAP is a popular trading indicator that can help you identify support and resistance areas based on various reference points.

anchored vwap on a chart

What is the Anchored VWAP?

The anchored VWAP stands for anchored volume-weighted average price. It is a trading indicator that provides the average price of a security from a specific starting point (the “anchor”), factoring in price and volume. It is used to confirm trends and identify areas of support and resistance on the chart.

The main difference between the anchored VWAP and the traditional VWAP is the traditional VWAP resets daily. On the other hand, the anchored VWAP is always calculated based on where you set the anchor point.

Similar to the regular VWAP, the anchored VWAP takes price and volume into account to determine the average price that which the asset is bought and sold most frequently. This is useful to determine what is considered “fair value” for an asset based on a specific timeframe and anchor point.

Anchored VWAP Strategy – How to Use the Anchored VWAP

It is most common to use the anchored VWAP on longer timeframes like the daily chart. However, you can use it on any time frame, depending on your trading style and objectives.

How to Pick the Anchor Point

You should pick an anchor point at key areas on the chart, such as the highest or lowest point of the price action, a gap, a breakout, a reversal, or any other significant event. The anchor point should mark a change in market sentiment or behavior that you want to measure.

For example, if we look at a chart of SPY, we can see a bottom in October of 2022 and a peak in January 2022. We can set the anchor point at either the bottom or the top. As shown in the image below, when we plot both anchored VWAPs, they are at nearly the same price, making the level more significant in this case.

anchored vwap anchor points

How to Determine Entry and Exits

Depending on each specific situation, the anchored VWAP can allow you to determine trading opportunities in a few ways.

For example, if you set the anchor point to a swing low, and the stock is trading above the anchored VWAP, you can wait for the price to drop back to the anchored VWAP and buy it using the anchored VWAP as a support level.

However, if the price continues lower below the anchored VWAP, this may signal a trend change, and you may want to use a stop loss.

You can also trade continuations with the anchored VWAP. For example, if a stock recently broke above its anchored VWAP, this may signal a trend shift to a new uptrend.

The anchored VWAP will change from resistance to support, and you can buy the stock and set a stop loss below the anchored VWAP.

What Charting Platforms Offer the Anchored VWAP?

The best charting tools that offer the anchored VWAP include TradingView, thinkorswim, and TrendSpider. You can use it with a free account on TradingView, free as a Schwab or TD Ameritrade customer with thinkorswim, or with TrendSpider.

TradingView is a web-based platform that offers advanced charting tools, technical indicators, drawing tools, and social features. You can access thousands of markets and instruments across stocks, forex, crypto, futures, and more. You can get a free trial and a discount when you use our affiliate link to sign up for a new TradingView account.

thinkorswim is a desktop-based platform that offers powerful trading tools, analytics, and education for active traders. You can trade stocks, options, futures, forex, ETFs, and more with thinkorswim.

TrendSpider is an automated technical analysis platform that uses artificial intelligence to scan charts for patterns, trends, indicators, and candlestick formations. You can also backtest your strategies, set alerts, and monitor multiple time frames with TrendSpider.

You can get a free trial of TrendSpider when you use our affiliate link to sign up. Additionally, you can use the TrendSpider discount code FTW25 to get 25% off!

How to Use the Anchored VWAP on TradingView

The anchored VWAP on TradingView is a drawing tool that you can access from the left toolbar. It is the fifth tool from the top on the left part of the chart. Once you click on it, you will see the anchored VWAP tool under the volume-based section.

how to add anchored vwap on tradingview

To use it, you simply click on the candlestick that you want to use as the anchor point. This will plot the anchored VWAP and two additional band multipliers.

These band multipliers are customizable and signify 1, 2, or 3 standard deviations above and below the anchored VWAP.

anchored vwap settings bands

You can remove these by clicking on the anchored VWAP, clicking the settings icon, and unchecking the band multiplier boxes.

anchored vwap tradingview settings icon
Click on the Anchored VWAP, Then the Settings Icon

How to Use the Anchored VWAP on TrendSpider

To use the anchored VWAP on TrendSpider, you must first pull up a chart of your desired instrument and time frame.

trendspider anchored vwap how to add

Then, you can right-click on the candlestick that you want to use as the anchor point and select “create an anchored indicator,” then select anchored VWAP.

You can also adjust the color, style, and thickness of the line by clicking on the three dots that appear when you hover over the anchored VWAP in the indicator list at the top left of your chart.

trendspider anchored vwap settings

You can also add multiple anchored VWAPs from different anchor points to compare them.

How to Use the Anchored VWAP on thinkorswim

To use the anchored VWAP on thinkorswim, you must use a custom indicator that you can download from HaiKhuu Trading. They have an excellent post and a video tutorial on how to install and use the custom anchored VWAP thinkorswim indicator on their blog.

Once you have installed the custom indicator, you can add it to your chart by clicking on “Studies” and then “Edit Studies.” Then, you can search for “AnchoredVWAP” and add it to your chart. You can also adjust the color, style, and thickness of the line from there.

Anchored VWAP vs. VWAP Compared

The traditional VWAP is only used intraday, primarily for day traders, while the anchored VWAP allows you to determine the volume-weighted average for a longer time period than just one day.

The traditional VWAP can help you gauge whether you are getting a good deal on your trades based on the average price of that day. The anchored VWAP can help you gauge whether you are getting a good deal on your trades based on the average price since a certain event or date.

For example, if you want to know whether you are buying or selling at a fair price relative to the market sentiment since the last earnings report, you can use the anchored VWAP with the anchor point set at the earnings date.

If you want to know whether you are buying or selling at a fair price relative to the market sentiment since the beginning of the year, you can use the anchored VWAP with the anchor point set on January 1st.

The traditional VWAP can also be used as a dynamic support and resistance level within a trading day, as prices tend to bounce off or break through it. The anchored VWAP can be used as a dynamic support and resistance level over a longer time frame, as prices tend to bounce off or break through it as well.

Raindrop charts are another great way to view the VWAP for the first and second part of the day.

Anchored VWAP – Bottom Line

The anchored VWAP is a useful trading indicator that can help you identify support and resistance levels based on various reference points. You can use it to confirm trends, spot reversals, gauge market sentiment, and enter or exit trades.

If you want to try out this indicator for yourself, you can get a free trial of either TradingView or TrendSpider using our affiliate link.

When you use our affiliate link, you will also get a discount on their premium plans. You can read our articles on how to get a TradingView free trial and how to get a TrendSpider discount using our coupon code FTW25 at checkout.

Disclaimer: Financial Tech Wiz is an affiliate of TradingView and TrendSpider, and will be compensated if you purchase a TrendSpider or TradingView subscription using our affiliate link or discount code.

The Best Indicators for Options Trading

best indicators for day trading volume profile

Learn how technical analysis can benefit your options trading.

Magic options trading chart indicators do NOT exist

Technical analysis for options trading is a somewhat controversial topic, as many hedge funds have proved that it is tough to time the market accurately.

There are no magic indicators out there that will be able to give you perfect buy and sell signals consistently. However, this does not mean there is no merit in studying options trading chart indicators.

There is a wide range of technical indicators, such as moving averages, volume profile, fibonacci retracements, pivot points, and much more.

Technical analysis provides context for options trading

To become a successful options trader, you are not required to learn any of this, but technical indicators can be a great way to provide context to what is happening in the market.

If you simply look at a candle chart of two different stocks with no indicators, it could be challenging to determine how the market is pricing these stocks.

Keep it simple

Using a common indicator such as the 200-day moving average, you can compare different stocks based on this line alone.

Let’s say you notice a stock index like the Nasdaq is trading below its 200-day moving average and an oil ETF is trading above its 200-day moving average.

You can conclude that stocks are not doing as well as oil, providing that context.

If you are looking for universal charting software, I highly recommend Tradingview. Since Tradingview is not tied to a specific broker, you can always rely on it if you decide to switch brokers. You can try Tradingview out for 30 days free with my affiliate link.

Best Indicators for Options Trading

1- Moving Averages

There are two types of moving averages: a simple moving average (SMA) and the exponential moving average (EMA). They are one of the best indicators for options trading because they provide support and resistance levels.

Both require a length input, which determines how far back in time the indicator covers. One of the most common SMAs used is the 200 SMA on a daily timeframe.

When a 200 SMA line is plotted on a daily chart (each candle represents one day), this is also known as the 200-day moving average.

best indicators for options trading moving averages
$GLD with moving averages and volume profile plotted.

When a stock is trading above this 200-day moving average, it is considered to be in an uptrend; if it is trading below this line, the stock is generally considered to be down trending.

2- Volume Profile

The volume profile is not as well-known as other indicators, but it is one of the best indicators for options trading.

Usually, we can view the amount of volume traded on a stock per day as a vertical bar. This is great, but it does not tell us what price the most volume was occurring at.

The volume profile will show you volume by price and is plotted horizontally on the chart.

You will notice that there is a lot more volume occurring at certain prices than others.

This price is known as a high volume node or an area of value. It is the price in which shares have traded hands most times, so it is viewed as an area of value to both the buyers and the sellers.

best indicators for options trading volume profile
TradingView High and Volume Volume Nodes (HVN/LVN)

From this information, we can gather that these high-value areas are where most people’s cost basis will be, whether short or long.

The price of a stock generally tends to revert to these points of value often, so people often try to fade the extremes of the value area.

For example, when the price falls below the high volume area to another area with a lower volume, they will buy here to fade the shorts and attempt to ride the shares back up to the value area. This is just one strategy, and this indicator has many nuances.

3- Ichimoku Cloud

Ichimoku cloud trading strategies rely on stocks to be trending up or down. The Ichimoku cloud will be green when a stock is trending up, as you can see in the chart of $XLE below.

When the conversion line crosses over the tenkan-sen line, this is called a TK-crossover, and it is a buy signal.  This happened on the weekly chart of $XLE in October, above a green cloud, indicating a strong buy.

best indicators for options trading ichimoku
Chart from TradingView

Technical Analysis for Options Trading: Bottom Line

Trading with technical analysis should come second to developing an options strategy that is expected to have a positive expectancy in the long run.

It can be advantageous to find areas of value and determine that one price might be a better spot to buy than another. Still, this can become useless information without a strategy to manage your risk and take profits.

What I mean by this is that support levels are only valid until they are broken, and you are left with an unrealized loss. One way to combine technical analysis with an options strategy is to go long at support areas and set a stop loss below this area in case it breaks.

If you put the risk to reward in your favor each time and have a strategy of where to cut losses and take profits, then technical analysis can be a fantastic tool to improve your win rate and profitability.

Bearish Engulfing Pattern: Spotting and Trading Tips

bearish engulfing candle pattern chart

Understanding chart patterns forms the backbone of technical analysis for traders and investors. One such intriguing pattern is the bearish engulfing pattern, a key tool in predicting potential price reversals.

This article will shed light on this pattern, comparing it to its bullish counterpart and exploring its practical implications in the trading world.

What is a Bearish Engulfing Candle Pattern?

The bearish engulfing pattern is a technical chart pattern that signals lower prices may be on the horizon. It consists of a rising (depicted in white or green) candlestick that is subsequently overshadowed or “engulfed” by a larger descending (represented in black or red) candlestick.

If you need a refresher on various candle types, you might want to check out our article on Doji Candle Types.

The Importance of Pattern Context

The bearish engulfing pattern can occur anywhere, but its significance heightens if it forms after a price advance, either an uptrend or a pullback to the upside within a larger downtrend. Ideally, both candles are substantial in size compared to the price bars around them.

To understand how different these patterns can be in bullish scenarios, take a look at our piece on the Bullish Green Hammer Candle.

Interpreting the Message of the Bearish Engulfing Pattern

When deciphering a bearish engulfing pattern, it’s crucial to consider the relationship between the open price of the engulfing candle and the close of the first candle. The pattern is more reliable when it follows a clean upward price move.

Traders typically wait for the second candle to close before taking action, which could include selling a long position or entering a short position. However, it’s important to consider the overall market trend before acting on this pattern.

tradingview banner

Bullish vs. Bearish: Understanding the Difference

Contrary to the bearish engulfing pattern, a bullish engulfing pattern indicates higher prices to come. It starts with a down candle, followed by a larger up candle that fully engulfs the down one.

If you’re interested in exploring more bearish patterns, don’t miss our article on the Hanging Man Candle.

Evaluating the Limits of the Pattern

Despite its usefulness, the bearish engulfing pattern has limitations. It is most significant following a clean upward price move. If the price action is choppy, the pattern’s relevance diminishes. Additionally, the second candle in the pattern can be disproportionately large, possibly leading to a larger stop loss for traders.

Traders often use other methods, such as trend analysis or indicators, to complement their strategy. Check out our list of Best TradingView Indicators to enhance your technical analysis toolkit.

The Bearish Engulfing Pattern in Action

Let’s look at a practical example to understand the bearish engulfing pattern better. On Day 1, the market closes near the day’s high, indicating bullish sentiment. Day 2 opens higher, but the bulls run out of steam, and prices fall, closing near the day’s lows and lower than Day 1’s lows. This creates a bearish engulfing pattern.

Trading Tips for Navigating the Bearish Engulfing Candle

Here are three methodologies for selling using the Bearish Engulfing Pattern:

  • Selling at the close of Day 2: If there is a substantial increase in volume accompanying the large downward price move, it might signal a stronger indication to sell.
  • Selling the day after the pattern occurs: By waiting until the next day, a trader verifies that the bearish reversal pattern is genuine and not a one-day occurrence.
  • Waiting for other signals: Often, traders wait for other signals, such as a price break below the upward support line, before entering a sell order.

Remember, while patterns like the bearish engulfing provide valuable insights, they aren’t foolproof. Always complement your technical analysis with other trading tools and stay updated with market trends.

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What is the Volume of a Stock? In-Depth Analysis

What is the volume of a stock

Exploring the Fundamentals of Stock Volume

Stock volume is a vital metric in the world of trading and investing. It refers to the total number of shares of a particular stock that are bought and sold during a specified time frame, often measured on a daily basis.

But what does this mean for traders and investors, and why is volume such a critical indicator in technical analysis? Let’s delve deeper.

What is the Volume of a Stock?

  • Defining Volume: Stock volume reflects the total number of transactions (both buying and selling) for a specific stock within a given period. For example, if ten transactions occur for a stock in a day, the daily volume is ten.
  • Time Frames: Volume can be measured over different time frames, such as hourly or daily volume. Traders often analyze intraday volume for short-term strategies.
  • Liquidity and Execution: Higher volume indicates higher liquidity, which results in better order execution and a more active market for connecting buyers and sellers.
What is the volume of a stock
Volume on TradingView

Volume in Technical Analysis

Technical analysts rely on volume as a key component of their decision-making process. Volume provides valuable insights into the relative significance of price movements and potential entry and exit points.

  • Price Movement Significance: The higher the volume during a price move, the more significant the move. Conversely, low volume casts doubt on the strength of the move.
  • Trend Confirmation: By examining volume trends, analysts use volume to confirm price movements. For instance, increasing volume on an upward price trend is a bullish signal.

Volume Analysis Tools: Volume Profile and VWAP

In addition to basic volume analysis, traders use advanced indicators, such as Volume Profile and VWAP, to read volume in a valuable way.

Discovering Key Support and Resistance Levels with Volume Profile

Volume Profile is a powerful analysis tool that provides a visual representation of volume distribution across different price levels.

Assessing Fair Value with Volume Weighted Average Price (VWAP)

VWAP is a benchmark indicator that calculates the average price of a stock weighted by volume.

Impact of High-Frequency Trading on Volume Dynamics

High-frequency traders (HFT) and algorithmic trading contribute significantly to trading volume. Passive investors, such as ETFs and index funds, account for a large portion of trading volume, influencing market dynamics.

Making Informed Decisions with Volume Analysis

  • Confirming Trends: Use volume to confirm price trends and detect potential reversals.
  • Unusual Activity: High spikes in volume may indicate significant news or events affecting the stock.
  • Market Sentiment: Volume analysis helps gauge overall market sentiment and investor confidence.
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Concluding Thoughts: Maximizing the Potential of Volume Analysis

In summary, volume analysis is a versatile and essential tool for traders and investors. While it offers valuable insights, volume should be used in conjunction with other technical indicators for a holistic approach. By harnessing the power of volume, traders can make more informed decisions and navigate the ever-changing landscape of the financial markets.

Learn how to add volume to your TradingView chart in this article.

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