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Today I want to go over in detail about technical analysis indicators and simplify them for you.
I know that many people are always looking for:
- what should they have on their screen
- what indicators should they use
- which one is better
- which one is better for them
And that's what I'm going to explain to you today. There's a lot of different indicators out there. There's so many that you could use and try. Some will be right for you and others will be utterly wrong for you.
If you're getting started with all these different indicators out there, it can be very confusing.
I'm going to share with you:
- what I have on my screen
- how to look at some of these indicators
- some of the popular indicators out there
- what I do
- give you some insights
I'll also simplify things for you on a bigger picture point of view. We're not going to get into the nitty-gritty precisely of how to use every indicator. You won't see ten different ways to use one indicator. The main reason is that it would be getting into the details too much.
That is possible to do in the future, but I don't think it's that important unless you're honed in into one specific indicator. If you're getting started on indicators and you're struggling to figure out which indicator to use this is the place for you.
Maybe you're unaware and unsure of the whole indicator process and how to incorporate them in your charts. I'm going to simplify it for you and show you what I do personally and how I look at the charts. I'll give you some variations.
With that being said keep in mind these are strictly for educational purposes. And any stocks that we talk about are not recommendations to buy or sell any stocks or options or equities.
Getting Started With Indicators and Charts
Let's take a look at some indicators and looking at some charts. Before we get into this, it's essential you understand that there's a lot of different indicators out there.
When you look at indicators you have:
- Momentum-based indicators which also talk about strength
- Overbought or oversold based indicators
When we look at momentum and strength indicators, you're probably going to look at things like:
- Moving Average
If you go into overbought or oversold indicators you're looking at:
- Fibonacci indicators
- Bollinger Bands
- Stochastics - Slow
- Moving Average
These are a few common ones. Keep in mind that in theory and technicality the RSI indicator can be in this bracket or area because they talk about the overbought and oversold condition.
Sometimes specific indicators can be in both areas. And an indicator like a simple Moving Average can be in both.
You can look at a moving average as momentum or how strong a stock is. And also as an overbought or oversold condition. This is why things get a little bit confusing.
When you also look at indicators there's a couple of terms I'd like to discuss:
- The oscillators
- Leading indicators
- Lagging indicators
If you look at oscillators, it's saying how far up or down stock is moving in between a range. Lagging indicators are usually lag the market. They're behind the market - they're delayed.
Leading indicators try to give you a little bit of a signal ahead of the market. It doesn't always work out, but they try to predict what's coming up in the future.
My favorite one is volume. That's the simplified version behind indicators. Usually, people are looking at one of the other fancy indicators when they're looking at leading indicators.
Take a Closer Look At Some Indicators
In either case with that being said let's get into this and let's take a look at some indicators. Before we quickly get into that what is the big picture point of view behind these indicators?
What's the point of these indicators?
Well, it's to see the perspective. That's what the indicators will tell you. Often if you go on a shorter timeframe, these indicators can be less reliable. That's why they often have fake signals or false signals.
A quick look at the charts:
Let's see what they're doing, what you should watch for and how to use it.
One of the ways that I look at charts is a simplified version. It's something like this.
I look at charts and not even on a bar chart. Right here this is a candlestick chart. I look at a bar chart which will look like this. In general, this is my chart setup. This is what I look at most of the time on most charts. I'm looking at volume, and I'm looking at a couple of moving averages. Then I'm also looking at the price.
What these indicators do and as you're looking at indicators they're a relationship between price and volume. If you look at the moving average here that you see in a purple line the moving average is a relationship to price. It averages the price out, and that's your indicator.
The other thing that I look at is like a three timeframe view. If I look at the SP-500 on the left side, you might see a weekly chart. You can see it's coming in from 2016. This gives me about a six-month view. You could look at things like this.
Then the next part of the middle chart right here would give me this short range right there on the left yellow frame. That's the most recent couple of weeks. And that's a daily chart, and I can, of course, zoom in and out of those charts.
And then the one on the right is that same little corner. But it's more of usually a 30-minute, an hour, two hour something where I can see the ticks a little bit more intraday or more actively.
That's another view that I'll use to look at things. It allows me to see things right away in three perspectives.
I could see things right away:
- in a weekly
- in a daily
- that daily broken down
The daily is broken down on the price momentum on the stock, on the action. This is another way to do it.
Take a Look at Apple Chart
I'm looking at one chart - Apple for example.
There are so many indicators that you could plot around your chart. And 95% of the time if I'm looking at price and volume then the rest of the time I'm not using these fancy indicators.
If I'm in an Apple position in the stock broke out and said I got into this position a lot earlier. It could have been 120, 130 doesn't matter. If I got in it more prior keep in mind what are these indicators tell me.
Well, they tell me overbought and oversold conditions. They also tell me momentum - how strong is the move.
It would be good to see that somewhere as we're powering higher. As we're getting far extended from the move, it would be nice to see how strong is that move. Because here volume is buying out on a relative basis. But maybe I'm not reading something correctly.
Looking at one or two indicators is good. Keep in mind I'm going to cover a few indicators here. But you only want to look at one or two or three at the most.
I think when you're getting started is probably all that you need is 1 or 2. If you start looking at a bunch of them, you're going to have mixed signals and false breakouts.
You're not going to be sure of what's going on what's happening — focus price and volume that is key. Prices always the key. Volume is confirmation of the price.
Once things are stretched whether that's to the upside or even if you're looking on the downside move - how far stretched are they.
You have this ABCD pattern, and again you're looking at how far stretched are we.
- Are we moving on strength?
- Is it overbought?
- Is it oversold?
If it's oversold, then that might give me a chance. Or it might say I should probably get in. If it's oversold, then I probably should get in.
Here's MACD - What to Pay Attention To?
Look at the MACD. Here we're looking at the MACD the variation of Apple.
You can see there are a couple of different lines.
Many of these indicators:
- they have a few lines
- they'll bounce around from a certain range
- they oscillate
- they cross over
That's pretty much how you use some of these indicators. The lines are either too high, too low, overbought, oversold, crossing over and then you're also looking at what are these lines doing.
The resistance or support of these lines as well. That's another way of using these indicators. That's the simplified version of it. That goes along with whether you do MACD or whether you're doing Bollinger Bands or RSI - same thing.
Here's the problem with these indicators:
It's tricky especially as you're looking at like a daily chart. The truth is that it's very tough to look at.
Where do these crossover? Well, we can see there's a crossover in February and Apple that was a gap up. It tells me on a MACD the strength or the momentum. It doesn't necessarily tell me the full direction. But it does tell me there's a bit of strength coming in right there after the pop.
If we start going into a two-day, you start seeing these indicators a little bit smoother. When you look at the monthly, it's pretty obvious. Once you start looking at clean charts and you're looking and evaluating these indicators in a suitable manner that's what allows you to understand and assess these indicators.
You can see we have in late 2012 the MACD was crossing over. You have this green line crossing over the slower gray line. And you can see on the price action right there this stock started to roll over and pull back.
Eventually, we get back, we cross over, and you can see here the histogram where the Green happens as we get back into that price level that's potentially where your next buying opportunity was. That is the case as far as that indicator goes.
If you were looking at resistance lines, support lines (those kinds of things) that indicator was also telling you a signal near the split level.
That's where momentum continued moving and going. You would have ridden that stock, seeing that strength on a bigger picture up until where you start getting that crossover effect. That was mid-2015 or so. Then again the indicator would tell you that things would pullback.
Could you jump in and out of these stocks at those times?
Could you also buy when the indicators at lower prices? When you're starting that crossover, you could get back into that stock. Or add to your position. That's another way of doing it.
But looking at these indicators on a bigger picture is a lot clearer. Most of the time I'm looking at this chart or the daily chart.
And I'm looking at this. Then I'm looking for trading decisions and double-checking something.
If I believe that a pullback is coming around the corner, well, maybe there might be a couple of days of pullback. We've had way back in 2011 some sideways action. But the indicator was still okay.
It was still trending higher. We almost crossed at that price point around 2011, 2012. But we didn't happen, and that's why you look at the bigger picture. Here we're looking at the monthly.
The same thing here. You're looking at it from a more significant picture point of view to see perspective at how strong this move is. That's one thing you could do - you're looking at strength, momentum.
What's All About When It Comes To Extensions?
The other thing we could do is look at extensions.
How far extended are they?
We could look at Bollinger Bands. This is a simple example. The daily you can see this indicator will tell you how far of a standard deviation move. Do we have to an upper range versus the lower range? And again it technically overbought or oversold. If we're outside of that range, you're overbought in the short term. If it's under that range, you'd be oversold in the short range. This is daily.
If you go to the two days all of a sudden things get adjusted. When we get in September of 2016, we're a little overbought. That's why prices pull back slightly. It's not going to be massive.
It's not going to tell you that prices are going to continue heading higher or lower. It's merely telling you how far extended that move is when you get into oversold territory where the Bollinger Bands over here this is outside of that range probably an excellent buying opportunity.
You couple this with volume because sometimes this can continue being oversold for quite a while. Don't make a mistake that because it's outside of that range, it's going to be okay. You go ahead and buy it and then I'll continue heading higher.
In this case, it worked out an Apple, but that's not always the case. If you look at SP-500 and here if you look at the Bollinger Bands let's go back to the daily here. We look at right here this range and here's our daily. In November you can see we were oversold for a couple of days.
These things can continue heading lower. Don't think that they'll reverse very quickly. In that case, it did change. But if you evaluate some of these past price points things can continue heading lower. Be mindful of the move.
When you're over oversold in these conditions on the Bollinger Bands might be an excellent opportunity to buy a few shares. If you go to three days you go to the two days there's different scenarios and situations. Depending on what you're looking at. It gives you perspective.
Is this the only thing that you do to make a trading decision?
No. You evaluate it on three-time frames. You evaluate the bigger picture.
Go through it on:
- a daily
- the weekly
- the monthly
Evaluate it with the volume and evaluate the chart patterns And then once you have your analysis then you might take a quick peek at Bollinger Bands. Every month we're a little bit extended. So a slight small pool may not be bad for the stock.
That's the way you look at it. Any of these indicators you're looking at the last point to double-check your analysis. To reconfirm that what you've already evaluated is correct.
Even though the stock is heading higher and it can continue heading higher it can stay above the Bollinger Band. We did it over in 2014-2015. We were at the upper range of that Bollinger Band almost for a year and a half there. It can stay in that range, but keep in mind that we're a bit extended.
That's all, and that's why when you're a bit extended you have to take profits in the strengths. That's what that indicator does.
Fibonacci Sequences - Good To Know
When you're looking at Fibonacci sequences, it tells you the potential retracement the amount of retracement. And I draw it from the swing points from a swing low to a swing high. And a typical normal retracement is 50%.
If you take that across and we go from a swing low to a swing high, we pull back to 50%. Now, you think about it.
Well, we had a pullback. Volume is also showing there that we're pulling back. Or the price pattern showing you is pulling back. We're coming into 50%. Then you also evaluate it maybe with another indicator if you want.
We're at the lows of the Bollinger Band as well. It could be a good value if you want to look at the MACD look at what was that a weekly and monthly.
Here you can see we're on that histogram where we're reversing in that direction. You want to be very careful about this.
That's why you're using other indicators to combine that analysis. You can see it's moving up and then you finally get that crossover a little bit later. That means putting that together can show you a pretty decent entry point.
This is another way to look at these kinds of indicators. But this is the analysis after you've already done your homework. After you've already done your analysis.
RSI indicators - Relative Strength Index
If we look at the daily, there's a lot of clutter in there. People still use that, and you can modify these to be a little better for day trading and so forth. One of the simple ways you can look at these indicators is overbought, oversold.
If you're looking at this indicator in 2012-2013 and Apple - are creating resistance. Strength is not building anymore. Whereas in the past strength was growing.
And then finally you had the pretty good crossover and a break of this trendline. You can still create and draw trend lines and lines of support on these strengths. If strength continues to be linear and then it breaks then obviously that strength is getting weaker.
On the chart, you can see the strength broke. This is not showing your direction. This is showing you strength or overbought or oversold conditions. That's why you have these red lines and these teal lines between the 30 and 70 on the RSI. What's their overbought.
If they're overbought, they are beyond that 70. And if they're oversold, they're under the 30. It's not always the case. That's because if you're looking for an up trending stock like Apple, you have your oversold condition you have to redefine that line.
In this case, it's right around that 40 range. That's the case because when you looked at it in 2013, we hit that 40 range. And then again when we hit 2016 the lows there you can see also we're around that 40 range. And it bounced right off of that.
Because this stock is trending higher, you're looking at the strength of this move. And you're drawing a support level on the indicator themselves.
Using WYNN Stock As an Example
Now if you're looking at another stock (WYNN) here on this stock, you can see where it's breaking below the thirty on the RSI. This is the monthly chart keep in mind.
That's oversold, and that's why you can see when we get into oversold levels this stock eventually starts to climb back. And that's what happened at the end of 2015 and in 2016. Now, we're slowly starting to get into a little bit more normal level. Not overbought, not oversold. That means it could go either direction if you base it on that indicator.
In that case, you have to be very careful. The main reason is if that indicators smack-dab in the middle of 50 then you have to be prepared. Stock can go up or down because it's overbought or oversold. But it's based on strength (RSI) - Relative Strength Index.
It makes it confusing because it's a strength indicator, but it also measures overbought and oversold.
Some Other Indicators That You Might Need
We've covered a handful of these indicators so far. Let's see what other ones are there?
I mean there's Williams ad percent are that's another pretty popular one. It works similarly. MACD we've covered. RSI we've covered. PPO is another one that sometimes I look at. Price percent oscillator from time to time.
ADX is the same thing. You have the ADX strength index that you're looking at overextension one way or the other. I'm not going to go in that much detail on all these indicators. The thing is that they work in a very similar fashion. You can look at them. They have certain advantages and disadvantages between them, but overall they work similarly.
They're trying to find the range of strengths, or they're trying to find momentum or overbought or oversold conditions. And you pair this with a volume. The volume is key.
Pro tip: Volume with the price - put it together. Then 90% of your view should be right here - take a glance.
I'm looking at WYNN, and then you're looking at the weekly. Then you might like it. The stock is breaking out, but let me look at the Bollinger Band.
You want to know: How far extended?
We're a little bit on the high end on the Bollinger Band.
How about the weekly?
Yeah, a little extended. Maybe I'll wait for a slight pullback. Or if I'm getting in and I want to buy a thousand shares. Perhaps I'll only buy a hundred or two hundred now and see if it can keep heading higher in the upper range of the Bollinger Bands.
But I'm expecting a pullback some time. Because it's in the upper range, that's the way you use these indicators. It's not like you're watching the indicator and all of a sudden you're buying or selling based on the indicator.
What you're doing is you're putting multiple things together and money management together to see the bigger picture. You're doing that to see the perspective.
In either case that's the way, you do it — looking at multiple time frames. That's the way I watch it. I watch my prices and my charts - that's key.
Remember, price is number one. Volume helps confirm the price move. And ultimately you're looking at how the stock is behaving. Is it behaving sluggishly? Is it acting strongly?
And sometimes you can read these things from these indicators.
- Bollinger Bands
And that's how you do it. That's how you put these things together as far as indicators go.
There are little secrets of using these indicators, different settings for different types of trading. We didn't get into that stuff in this post because it would be too much to cover.
However, the standard settings work fine. Specific indicators may need a certain tweak of settings if you're trading a little bit differently. As you can see here like on the MACD, it's a lot easier to view this on a longer timeframe. And it's a little bit more clear.
As you get a little better with it, you could get into smaller timeframes - like the weekly or even the daily. But until you get better with them, I recommend sticking to a longer timeframe. That's because it's going to whip you around on the signal.
You can see here on the MACD we have a lot of crossover signals. It'll whip you in and out of stock a little more than maybe you should especially if you're getting started in trading.
Be careful of that because there's always a lot of false signals. If you go a little bit longer or more extensive, it's a lot better.
You can see there's a crossover signal. In 2013 there was a bullish crossover. In 2014 there was a bearish crossover. You can see how that worked out well, but that's on a longer timeframe.
Maybe you're getting started with all these different indicators. In that scenario, it can be very confusing, and this post cleared the matter for you.
In this post, we've covered technical analysis indicators, such as MACD, ADX, RSI, and moving average.
Besides those we've covered and ones, you need to know if you go into overbought or oversold indicators. These are Fibonacci, Bollinger Bands and Stochastics.