The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)
In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. In this Indicator Series, we talk about the mechanics of trading.
Chartmill Value Indicator
Chartmill Value Indicator (CMVI) was authored by Dirk Vandycke in the Stocks and Commodities Magazine, January 2013. The CMVI uses Moving Averages of True Range and the Midpoint price to calculate the adjusted open, high, low and close prices. These adjusted values are displayed as price bars on a separate graph.
INTRODUCTION
The Chartmill value indicator (CVI) is a short-term oscillator which denotes overbought and oversold markets. Just as other oscillators such as the RSI or MACD try to define buying and selling zones, so too does the CVI but in a slightly different way. The RSI is a range-bound oscillator which can remain in overbought territory for quite a while if the market is in a strong uptrend. The MACD is a smoothing oscillator, as it uses moving averages to smooth out the noise and suffers from the same lagging issue of moving averages on price charts. The CVI attempts to find value in the stock whereby a trader will buy the stock when price aligns with their notion of value, since perceived value will vary from trader to trader. After all, isn’t that what makes the market?
The CVI is calculated based on a 5-day moving average of the true range, divided by five, to account for volatility. This standardizes the calculation. The true range is the daily range, the difference between the true high (the largest of the current candle’s high and the previous candle’s close) and the true low (the lowest of the current candle’s low and the previous candle’s close.)
USING THE TOOL
To illustrate this tool, look at the above daily chart of Facebook. The CMVI below the price chart does not appear to have the stickiness of most oscillators which stay overbought in a strong bull market. The RSI is a good example of a range based oscillator. This gives the trader an opportunity to buy in a strong bull market when the CMVI finds support at short term undervaluation, as denoted in the chart with the blue arrows. Similarly, there doesn’t seem to be a lag which is typically associated with moving average based oscillators such as the MACD. The idea is that pricing and fair value align at these undervalued levels.
It is otherwise very difficult for a trader to jump in when a stock is rocketing up as Facebook currently is. The CMVI provides a visual for the trader to feel more confident in buying the stock during its upward move.
The chart below compares 3 oscillators – the CMVI, RSI and MACD. One can readily see the value of using CMVI over the RSI which remains in overbought territory during Facebook’s surge in price. The CMVI gives buy confirmations every time it dips below a certain level. Similarly, this oscillator is quite different from the way the MACD presents as well. The MACD provides buy signals when the MACD line crosses above the signal line but it doesn’t do a whole lot to help a trader buy into the trend once it is entrenched. Timing is money and any method that provides good timing is worth testing and evaluating.
Learn how the Chartmill Value Indicator helps keep traders in the trend longer, providing additional entry points while the market is trending. Start incorporating the Chartmill Value Indicator into your chart set-up. Finally, use the Chartmill Value Indicator in developing trading strategies.
See you next week for another “C” indicator!
If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.
I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.
The Trader’s Pendulum: The 10 Habits of Highly Successful Traders. Copyright (c) 2015 by Jody Samuels. This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.
