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Hey, this is Sasha Evdakov.
Today I'd like to share with you some simplifying trading indicators.
We're going to talk about briefly on some of the indicators like:
- Bollinger Bands
When I started trading a long time ago, I fell in love with indicators. It was like a little romantic relationship that you have when you're a teenage person. And you still haven't had your first kiss yet because you're excited about having a girlfriend.
You're excited about dating someone or going out on a date. And it's making things unique. But the fact is that's what indicators become to a lot of traders.
A first relationship that you get overly excited about, and then eventually it burns or breaks you. And for me, this is what happened when I started looking at indicators. I put too much emphasis and attention on them.
In this post, I want to give you a step back and show you the bigger picture. Most of the time, your relationships when you're young as far as dating relationships aren't going to work out.
When it comes to these indicators, the same thing goes with them. They're not going to be long-term relationships. When you use these kinds of indicators, you shouldn't put that much emphasis on them.
I want to emphasize the crucial thing that I always look at - price behavior. The price is still key. Then volume which confirms that behavior and of course the way that it's acting and behaving.
If it's acting sluggish, the follow through sometimes this can be referred to as the price spread. All those things are taken into account.
Those are always the key and more important things that I look at. When we start getting into indicators, a lot of people fall in love with these indicators. I do have a few on my trading platform as a quick little shortcut.
However, most of the time, as you look at things on my screen, you'll typically notice that they're spotless and neat. There's probably one moving average if that on my screen. Most of the time, and that is because I typically like things very clean.
And most of the indicators I can get from this screen. Now for those of you that don't believe me, I'm going to share with you and give you my insight.
Take a Look at My Screen
It's not going to be a perfect insight as far as what an indicator would give you. Because in the indicators based on math. But if you've been trading for a while studying charts for a while most of the things you can get from a simple chart. You can get the same things that you would get from an indicator.
I'll prove it to you here. I like to keep things clean on my chart. It's smart to get rid of all that circus or all those different variables and things because it's coming very confusing.
Let's do a few examples of these different indicators. I'm going to prove to you how to start looking at your charts. Especially if you're just getting started, take a step back to look at things at a bigger picture and simplify things.
Keep it simple when you're trading and when you're investing. I know when you're first getting started you're probably looking for that magic bullet, golden egg and there is none.
It's about finding a strategy that works for you. It's about finding your match and matching it up to what your risk tolerance and strategy is.
Tesla Chart Example
There's a lot of indicators that you could put on a chart. We take a simple chart example - Tesla.
It's a popular company. To put on an indicator hit the plus sign.
I'm using TC 2000 by Warden. If you're using a different platform, by all means, go for that.
But when I look at indicators here you can see we have:
- MACD histogram
- Money flow
- moving average
- price volume trend
- rate of change
- the volume
There's a lot of them, and you'll notice some are more popular than others. Some very popular are volume, stochastic, and RSI.
PPO (price percent oscillator) is not as popular, but the MACD is. For me, I prefer the PPO more than the MACD. We'll talk about that briefly.
You can see there's a lot of choices when it comes to indicators. There's a lot of things that you can do. As you start stacking these things on it can become confusing.
If I stack the ADX which is going to tell you about trend strength than what I might do is put on a few Bollinger Bands. We'll put it on the Tesla motor. There's our Bollinger Bands.
Then I could put on another - a MACD. We can stack the MACD histogram on here. We can overlay that with the MACD, and we can, of course, change the colors to make them look better.
I have a lot of indicators, and I almost can't even see my chart. As you can see as I start stacking more of these things, it overwhelms my chart completely. That becomes damaging to making a trading decision.
- When you start looking at all this, what do you do?
- What do you decide?
- How do you trade?
- What is it that's going to create that trading decision?
- How do you know when to buy and when to sell?
There's a lot of different indicators out there, and you don't know which one you're going to buy or sell. ADX is going to tell you about trend strength. Bollinger Bands are going to tell you about the expansion of price movement, the probability based on the volatility of that price movement.
They're going to try to contain that price. The MACD here is going to talk about the moving average. It's moving average convergence, divergence, oversold, overbought conditions.
Then you have Williams % R 14 and RSI. All these things tell you in similar general concepts. And you have lagging indicators and leading indicators.
That is some of the things that I go into more detail in my technical analysis blue course. Leading indicators typically are live in real time, whereas lagging indicators follow behind.
Further Analysis - Bollinger Bands
Here you can see the moving average on Tesla. It is lagging, and it's behind the price, whereas the price is a leading indicator. The price is what's happening right now. It is real-time.
It's the same thing with the volume. It's what's happening right now. When you look at these things, most of the indicators are going to be lagging. That's the case especially with these indicators that you start overlaying on top of charts.
When they're lagging, they're going to give you delayed signal. These indicators are better used for when trends are over. It gives you some indication of an ending or a change in movement in a trend. That's a better approach to using them. But you can use them for entry positions in terms of confirming what you already know.
What you already know should be based on:
- price action
That's where everything stems from. I've used this example in the past as far as Bollinger Bands go and I'm going to do it one more time.
We'll put in the volume here since I can't trade without volume. Volume is pretty much always necessary. We have the Bollinger Bands on the daily, and you can customize it.
In either case, the simple goal behind these Bollinger Bands is they try to contain the price. Take a look at the weekly Bollinger Bands. The price spread the width of the price bar increases typically when you sell off. As those increase, the Bollinger Bands get wider.
As they decrease as prices typically move up, but as they move very little, they contract. There are contractions in certain areas. If we look, there's a contraction, and then we get an expansion because of the volatility that comes in.
And then we get me other contractions. There are some contractions over here. But then there's also some expansions over here that happen.
They try to contain the movement in case the stock sells off. That's what happens in terms of these Bollinger Bands.
How to Calculate if You Don't Have Bollinger Bands?
Well, the Bollinger Bands are calculated based on the price spread. If you draw this moving average, you can see that the middle is the moving average. Then if we remove the Bollinger Bands, you can get an idea, and I could probably draw where the Bollinger Bands would be.
That is depending on:
- the volatility
- the price spread
You get an idea of where they should be based on the moving average and based on the prices. If you put the Bollinger Bands back, you'll get an idea. It'll probably get close to that. It won't be perfect, but you can see that I've hit some points properly and other points not so great.
I can get a rough idea based on my calculations, and based on the moving average - using the moving average as a guide.
Let's pick a different chart - Tiffany's. Now we'll try to draw in the 20-day moving average. I'm doing this completely blind. Typically the moving average will lag.
It will typically be behind the actual price movement. The moving average will probably try to catch up. I'm starting at this point because it will be easier to draw the lines. And then slowly we might average out, and we might dip under that moving average.
I can draw that moving average. And if I put it in the moving average of the 20-day, you can get a rough idea.
As you can see that without even having any indicators except for having a price, you can get a lot of these indicators. You can do the same thing with Williams AD. You can do the same thing with RSI, which is one thing that I removed.
This is overbought or oversold conditions. If you go to RSI, you can see here, and this one is hitting this resistance point.
And when it hits that resistance point, you can see it's coming in and what happens to the indicator.
Let's take Bristol-Myers if this price was somewhere down over here that would probably be oversold.
You can look at that chart, and if this price were down here, it'd probably be oversold.
- Right now is it oversold?
It could be getting into oversold. But I see the volume right here still reasonably strong. Maybe it's a midway. It's not perfectly oversold, but it's slowly getting into better value — that one's selling off in a big way.
With Tesla, you can see it's getting into those levels because it's had this rolling effect. But it could probably go much further. Remember these stocks can sell off violently. In general, these indicators can tell you exactly how far extended you are.
You might be looking at the price without even a moving average. You could tell that this pullback is pretty good compared to this extension that we had.
You can see that from these lows on Tesla in June when we pop for one month. You're popping for a month, and then you take into account all this other price behavior. A pullback probably about the same amount to where you broke out from would be healthy.
If you had even more selling pressure coming in a pullback to 150 would be just fine and healthy. There's nothing wrong with the stock.
Where do you start getting into what something's wrong with the stock?
Well, when now all of a sudden you might see things come back down to the 50 levels. Now, something's wrong with the stock. A pullback is fine. Coming back to something like 185 would be a standard pull back from this extension that we've had from February.
If you're looking at the Bollinger Bands, RSI, or ADX, you can still gauge it from the price action and the behavior. If you're looking at price and volume, this is the best way to simplify things. If you start putting more things on the chart, it becomes confusing.
You can use some of these indicators to help you guide into position. For example, if I look at this indicator and I'm looking for value by when is this going to turn over.
I'm going to take Tesla, and we'll use the February value buying area. I could overlay the Bollinger Bands. It's effortless to understand. Prices are extended. Here we get out of the Bollinger Bands.
We're extended over the Bollinger Bands we're beyond it on the weekly. If we take a look on the daily and we're looking at the February lows, you can see that we're beyond that extension.
The thing is we're past these Bollinger Bands. We're outside of it. Probably a bounce is looking to come sometime soon. That's the thing when you're looking at price extensions, and prices are far extended; this will give you an indication.
This will give you a clue. Could you still have seen this from a moving average? Yes, absolutely.
I can look at a moving average. And I can do a 20-day moving average. How far extended above or below is the price?
We're looking in this October-December area. The most significant extension was probably around this October time. That was the most significant extension.
I start looking at this range, and now I draw the extension. We're the biggest around February. The biggest line away from the moving average is right there.
You didn't even need the Bollinger Bands. You could still look at it from the moving average. With volume, it's going to tell you when things are starting to reverse. It'll let you know when things are beginning to move and if they're real.
Because if you have a pullback with weak volume, things can snap the other way. That could happen because value buyers are coming in. Or somebody else could be stepping in. But you can see how using these indicators will help you to gauge that movement.
What are Your Favorite Settings?
The settings for these are different for all kinds of different things. You could make them a lot different. It just depends on what settings you're comfortable with.
Right now I have two standard deviations on the Bollinger Bands. I can widen this out which will contain more of the prices, but it is wider.
They try to contain. This gives you some insight. When I'm trading, I will trade or look at things without any indicators.
This is what I need:
- moving average
- the chart
- the volume
And that is it. That is the way I trade. When I'm looking to take on a trade, I might take a look at the Bollinger Band. I'll see how the Bollinger Band is looking relative to where I want to get in on the value play.
After I did all my analysis, I'm looking at is this a good point and is this an excellent value buy. When I look at it, then I go to the Bollinger Bands. I see if it's coming into the extreme levels. You might get a snap there, but you might get a further continuation.
But it's getting into those extreme levels, and we could snap back to let's say 205 or something like that.
That's how I look at it in terms of taking an indicator and starting to apply it.
Pro Tip: I do all my analysis first ahead of time. I do it first without any other indicators, lagging oscillators, or any other indicators.
I look at price and volume because that's more important. When you look at choosing an indicator, it's like choosing a match for you, for your date for your relationship.
It's about choosing the right indicator that works for you. And it's something you glance on though. It's not something that you're going to be looking at and making full trading decisions on constantly.
You want to stick to one or two that you're comfortable with. For me, I like to have a few indicators here at the bottom of the screen.
I check things reversing. Sometimes because these are lagging indicators, you'll see that indicator is coming in later.
It's giving you an indicator that now the short-term bullishness is getting ahead of the longer-term bearishness.
Right there's the crossover. That's your signal, and you can see that also on the histogram right there.
If you look at it, there's your movement. And then also right there's your cross over. When you watch those things, your entry point is not going to be perfect. And now you ride it until potentially you get another cross over.
Here you have a fake-out which sometimes happens in the cross over. That's why I like price, action, and behavior. If you looked at it, this was just fine. If you're looking at volume and price action, this was still just fine for a little while. But it's showing you that things are getting weak. You can see right there things are getting weak. That's because there you have this empty spot right there and you have a slight cross over.
There's your second cross over which tells you to get out this region. And then we slowly start the pullback. If you've already taken shares off in strength, you might be excellent for that stock. You might be fine to come back here again up to the point where now you get back in and buy more shares.
For you, it could have worked out just fine when you would have done these kinds of strategies and systems. It comes down to how you're planning and strategizing based on these indicators. I don't put that much importance into them. The way that I do it is the way that I've shown you right now.
I'll glance at them, and I'll say how is it looking for my position. Then I see if it is ready to cross over, is it crossing over. Good, I'm in, done, next.
Making the Right Trading Decision
Then I might look at Williams AD or Williams percent. You start looking at other things overbought, oversold conditions. You're looking at these different price levels. You see overbought oversold conditions. I'm looking at elementary things.
And if I'm looking at the RSI or ADX, it also tells me the trend strength. Then I might check how strong is that trend. But this comes up from what is the ADX stem from.
If you look at how the calculation is done, it's done through the price. It's done through the calculation of the price. It's a bunch of the upticks and the big ticks, and then you calculate it. It gives you the ADX line. Once you get that calculation, it plots it on this line.
You can change these variables, but in general, what does this mean? You get all these indicators and data coming in into your mind. But you still need to make a trading decision. That's where I find a lot of people lack is that you get stuck.
What happens is that you get stuck into choosing an indicator and into deciding what to use. That's when I got frustrated, and I cleared my chart. Then I said I'm done with this and I'm going to use something simple. We go down to volume, price, and a moving average.
Once I started doing this, everything else began to fall into play. Because now, I began to understand the charts better. If you're struggling and getting confused and you got to one or two indicators on you're probably overdoing it at the beginning.
If you're trading less than three years and you have already more than just volume on and a moving average - you're probably overdoing it. You're going to be confused about when to enter and when to exit. In my case, I got rid of everything except the moving average of 20 days. And that is because it gives me a nice little average. This is the simple, not the exponential and I use 20 also because it's a line of support and resistance for many people.
Then also I do the volume, and I too do this 20 days. Because there are 20 trading days in a month, I'll put the moving average there on the volume. It gives me a nice average on the volume, and this is how I look at things.
This is how I look at the charts. Now I put together a lot of things.
I look at:
- price patterns
- chart patterns
- where's the resistance
- where's the swing points
- how wide is the price spread
You start looking at all these things, and you start evaluating and seeing different things. You see how far things are extended, what's the price action and how is the volume behaving.
Later on, you put all these things together. After you do all that evaluation and analysis, then I might look at the Bollinger Band. Is it getting into oversold conditions? And that is the right way.
Let me take a quick look at the MACD. Where are we getting ready to bounce or we get into this topic action, or are we at those highs? Are we overextended?
- If I was in Tesla from February to April when else has this happened?
I mean any kid could look at this and say it's pretty extensive. You know the run has been pretty large relative to the past. That's a pretty sharp line.
If you look at a rollercoaster going on the upscale right before you dive right back down that's a pretty severe incline.
You know the steeper the angle, the harder the drop. If you had an incline like this, that's more logical or reasonable. You start looking at what's a rational or reasonable retracement, pullback, incline, or movement.
If you get something that's moving almost straight up that's pretty extreme. That means chances are were over overbought.
On CRM from November to February that's probably oversold relative to the past. That is far away from that moving average. You don't even need these indicators. I know they seem like they're the magic formula. But using your brain and logically putting these things together is all you need. And then you pick one or two, and you slowly start putting them in.
I still use only probably two or three at most. The main ones are:
- Bollinger Bands
- Williams AD
Even then, I rarely look at them. I'll look at them probably once or twice a week. That's perhaps 10 minutes for the whole week that I might look at these things.
That is because most of my analysis and decisions are made from:
- the volume
- the price action
- the charts
Then I'll glance at these to see where's the extreme level. You get into those levels and those price behaviors that you can figure these things out without these indicators.
What about Using PPO?
I like using PPO rather than MACD. That's because if you use the MACD, it doesn't average things as well. Whereas the PPO can sometimes average things better.
The PPO sometimes is friendlier for more significant fluctuations. But in general, that's what you do.
This post is not about showing you the fancy indicators. It's not about how to use them. I could spend hours on every single indicator. But you're only going to use them for about five to ten minutes a week.
That is simply because they're lagging. They're typically behind. Instead, I showed you the big picture overview of how you should use these things.
Get rid of everything on your chart. You get rid of everything except volume. You put the 20-day volume average on there. 20 day because there are 20 trading days.
You can put the 50 days on there as well. I use the 20 days because it gives me more signals, but you could use the 50, 100, or 200 days. It depends on the length of your trades.
After that, you start learning about the price. Take a look at the price spread. There's a little bar, little price movement versus larger price movement.
All these things are to take into account, and you can get an indicator of all these things. Typically after smaller price movements, you'll notice a more significant price movement.
Stocks digest, and then they power higher. Unless you get a dominant down whip on and then a major whip back up, that's what you're doing when you're trading.
First, you're looking at the prices. Then you're looking at the volume.
- How does the volume act in conjunction with the prices?
The larger this volume surge, the more massive the spike in the price. We've had minimal volume before and then we get volume spike. Then we get follow-through, and that's what happens when it comes to the volume.
Then after you do all of that, that's when you start adding in an indicator. You don't do that until you've already had a good foundation on the volume, the price, and the behavior. And after getting the idea of all of these things working together. Then you can slowly start adding in these indicators.
Don't jump into a lot of these indicators right away. They're only going to confuse you especially if you have a bunch of them on screen. They will confuse you. You don't know when to take a trade and when to get out of the trade.
It'll play tricks on your mind and tear you up emotionally. Keep it as simple as possible. Create a system for you that's consistent, and it's all about finding which one works for you.
You don't need ten indicators. You need one or two. And then it might help you out in a few little instances where you're unsure of a stock.
When I first started trading if I was unsure of a stock when I looked at price action, volume, and the behavior I would move on to the next stock.
There's plenty of other stocks. Find one that works. If you have to resort to an indicator to make a trading decision, then you're not sure of the stock yet.