This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I think this idea works with Richard’s VWAP indicator, but it would apply to a moving average as well.

I have a chart setup that is supposed to identify trends. Its a 50 cent Renko chart with a few indicators to help. However, one problem I’ve been having, is quickly recognizing a chop zone.

Here’s the problem and solution. Let’s say you use a 10-period weighted moving average to identify the trend. When its moving up, and your trend indicators are in agreement, you want to be long. That part looks easy after the fact. How can you identify a possible reversal, or chop zone, before the fact? If you can do this correctly, you can stay in your trade longer, having the confidence to exit closer to the end of the move.

One way is to plot a double smoothed TSI using the same period as the moving average. On this chart, the red line determines trend. The double smoothed TSI has less lag, and turns in the opposite direction right as the congestion starts.

If there is a slope divergence between the two, do not initiate new positions. You also want to start looking for an exit when the divergence occurs. I wouldn’t use this to play reversals, because it doesn’t mean it will reverse. It just picks up the change in trend. Flat prices, at the very least, are a momentary change in trend.

If this helps, buy William Blau’s book. There’s a ton of great information, that will have you thinking in new ways.

Edit: I’m not going to paste the other chart, but I put the TSI on the price pane, so I can see the divergence easier. I followed it up with a couple of signal markers that identify when the slopes are congruent. This system will be called “Trading for Monkeys.” Monkey see, Monkey Do. Monkey Did!

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com