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5 simple steps to build, understand and use charts
- Trend definition: A bullish trend is a succession of Higher Highs and Higher Lows. A bearish trend is a succession of Lower Lows and Lower Highs.
- Paint and annotate price bars: This is a simple intuitive visual aid. Olive for bullish, Tomato for bearish. Swing Highs are in green, swing lows are in red
- Draw Volatility Channels: Volatility channels are the dotted lines with annotations. They are only featured and colored in the direction of the dominant trend: Olive for bullish, Tomato for bearish. They are calculated as: Bullish Volatility Channel = Swing Low – 1 * Average True Range of 14 days (ATR)
- Annotate the Distance from Volatility Channel: This is the distance from the Volatility Channel to the Bar when swing is identified. Think of it as a simple position sizing algorithm: what size should be traded to risk 1% of the portfolio ?
- Bullish weakness and Bearish strength: are short term counter-trend signals. Weakness is over, bullish trend resumes. Strength is over, bearish trend resumes.