Greeting Traders and welcome back to another survival guide.
In the trading world, most of us are already aware that we can go long
or we can go short. We can buy or we can sell,
but the concept behind that, even though it's very simple,
gets a lot more difficult in knowing when to do either.
As day traders, we're usually looking for ways to increase
our accuracy and one of the ways that we do that, is by using indicators.
In today's discussion, we're going to talk about different indicators
that can be used and their entry requirements for either going long or short,
based on the read that the indicator is providing us with
So sit back, get tight and learn a thing or two about a
variety of different indicators and perhaps at the end of all of this
you'll have a little bit more power in your trading arsenal. Let's get going.
In the trading world, there are a variety of styles and ways to trade.
One of the most common in today's day and age is what we call day trading.
This is a form of trading where we're actively buying and selling
multiple securities, or the same security multiple times
within a single trading session, so within a single day.
The concept here is, we're looking to take advantage of price discrepancies
or intraday price swings, and we generally don't want to, as day traders,
carry positions overnight and normally we will, as day traders,
prefer more liquid assets so we don't really risk being locked into a trade
that we don't want to be locked into. It's also known
in the world that day traders can be seen trading on pretty much all markets,
whether it's Forex or futures or stocks. The list goes on and on,
but in order to trade successfully, we need to know how to get in and when,
and in the beginning of our trading career, one of the ways that we do this,
is by relying on the reads that indicators can provide us.
The reads that the indicators provide us can give us a bit of
clarity inside what is actually going on in the market,
in a way that we actually understand it and there's a variety of ways
that this information can be related to our brains.
Now how it's going to be the most efficient, is going to be very subjective
on who you are. An indicator that works for your neighbor
may not work for you and vice versa and it's important to understand this.
We don't want to get attached to any one indicator, because we saw
someone else achieving great success with it.
We don't want to determine that, that is the only way
that we're going to also achieve great success, because that's just
not a true statement. But as we move along, let's talk about indicators even,
that are going to be very common for you to find in the beginning
of your training careers, but also time tested indicators,
that many people on a daily basis do actively use to day trade.
The relative strength index, otherwise known as the RSI,
will be the first that we cover. We have a picture of it here on this chart.
It is an indicator that is going to be listed below your candlesticks
or below whatever charts that you have displaying, whether it's bar charts or
what have you, line graph, it doesn't matter. It's not going to overlay price,
instead it will be listed below it and on the right hand side
you'll see a column of numbers. These numbers represent an idea,
that the market may be overbought or it may be oversold.
On the left hand side here, we can see very simple entry requirements,
to either go long or to go short. If we sell when the indicator climbs above 70
and falls back below it, which occurred over here, on the chart.
This would have resulted in a very nice downturn in the market
and we would have caught it in time. If we buy when the indicator
falls below 30 and rises back above it, essentially just completely
inversing those rules, which occurred over here on the chart,
then we would have also seen a very nice outcome for our position.
The RSI is very simple to use, we are paying attention to how
this line is oscillating between the 70 mark and the 30 mark.
The idea is, that when the market is going to be at or above 70,
we are possibly witnessing an overbought scenario, especially
when that line comes back below the 70 mark. On the other hand,
when the market is at or below the 30 mark, we're considering
the market to be a bit oversold, especially when it comes back above
that 30 mark, and these can provide us good value opportunities
potentially to get into the market.
Next up, we have the Moving Average Convergence Divergence,
which we'll just more aptly refer to as the MACD.
The MACD really is the ultimate moving average indicator,
as it's constructed by subtracting a 26-period EMA from a 12-period EMA.
The MACD is the main slower line, while the faster line is going to be
the signal line. When we say slower and faster, just to clarify,
that's generally going to refer to the lower number setting.
So a 12-period line is going to respond faster, than a 26-period line.
So the MACD is really an example of a lagging momentum indicator,
that day traders often use to plan their next moves.
By looking at the lines of the MACD, day traders can timely spot crossovers,
convergences and divergences, all of which we're going to cover,
so don't panic. They're very easy to identify as well,
kind of like the RSI, but perhaps one step further.
A crossover is going to happen when the MACD lines cross
as we can witness here and here.
We're witnessing the lines cross over themselves, but there's another
cross that can happen or way we can refer to something crossing
and that's when these lines cross above or below the zero mark,
which is going to be more easily viewable if you apply this indicator
to your own charts, because these numbers are probably quite small
at the time that you're watching this video,
but they will be listed in the column on the right.
All of this provides this information.
So, the zero line, center line crossover happens when these MACD lines
move above or below it. That's all we really need to understand about that,
but if the MACD crosses above the zero line and becomes positive,
that would then be considered a bullish crossover. If it crosses
below the zero line and becomes negative, we then have
a bearish crossover. So the concept here is,
by paying attention to the orientation of these lines
and their position with the zero line, we can justify buys or sells
or longs or shorts. So down here, we witnessed our MACD line
cross over our signal line and what happened is, we got ourselves
a buy opportunity, which would have been met with a nice bullish run
in the market. Then the opposite happened and we could have been met
with a nice signal to sell if we jumped in
and the market did downturn after this point.
In this scenario, we can see how falling below the zero line,
as we just referred to as a zero line crossover,
in conjunction with a bearish MACD orientation of the lines,
can be used to further confirm the lower lows and lower highs
that we're witnessing in the market as a viable selling location,
because of heavy bearish momentum.
Down here we crossed below the zero line with a proper orientation
or a bearish orientation of our MACD and signal line.
The market was working its way downward at the time,
as well to further confirm it, so a short at this location would have
potentially paid us off. Then, on the opposite side of that coin,
if we have our MACD and our signal line and a bullish orientation
moving above the zero line, we now have ourselves an opportunity
to look for a buy if the market, the price action itself,
was showcasing higher highs and higher lows, to further confirm
that a buy makes sense to take advantage of bullish momentum.
We have yet another way that we can use the MACD to identify signals
or justify entering into a long or short position.
We refer to this way as the divergence way.
This is when we have the market trending one way
and the MACD trending another in a very simple term.
This is going to be when the market is showcasing
lower and lower lows, essentially trending downwards.
If you can draw a line on the bottom and it angles downwards,
but the MACD on the other point, is actually trending upwards.
The lows are actually getting higher. This is an indication of
a market reversal potentially. That's what the MACD is trying to tell us.
With this scenario, we would actually expect the market
to stop going downward and begin going in the direction
of what the MACD is highlighting.
So if we see the MACD and it is starting to get higher but the market
is still getting lower, we want to be prepared for the market
to potentially make an upturn. The opposite is true if the market
was getting higher and the MACD was getting lower. In that case,
we want to get ready for the market to possibly make a downturn
and that's an opportunity to short.
Next up, we have the stochastic oscillator, which is really very similar
to if you were to cross the MACD with the RSI.
So if you got the first two, then this one should be a very easy grab.
On the right hand side, we have a column of numbers.
On the bottom of those numbers, the indicator is going to begin at zero
and it is going to end on the top side at 100 and we'll see these lines
oscillate between these two locations. The goal here, is to
pay attention to when they're above 80 and when they're below 20.
Those are the magic numbers for the RSI. When we're above 80,
we're going to consider that overbought. When we're below 20,
we're going to consider that oversold. So the idea is that,
when the indicator lines cross from the 80 level back below,
we can look for an opportunity to sell the market.
Let's look at how that turned out here. So we crossed back below,
indicator shows it did work with this particular example in the market,
and then back again down here, this would be the exact opposite.
So this would represent an opportunity for the market to be oversold
and we could look for the buy. At this time, when the indicator
crossed back above the 20, the market did rally,
you are probably getting the idea.
If you're wondering what these exact lines are,
there is a K-line and a D-line. This doesn't matter as much,
but you need to know that the K-line is going to be faster than the D-line.
So when the market is responding, the purple line in this case
is going to be the K line and it is going to respond first, it is your faster line.
Another cool thing about the Stochastic Oscillator is
just like the MACD, we can use it to spot divergences
and you're going to do it in the same way that you would be doing it
with the MACD. If the market is marking higher highs and higher lows,
but the Stochastic Oscillator is not in agreeance with that,
generally we want to favor what the Stochastic Oscillator is telling us.
Next up we have one of my all-time favorites, Bollinger Bands.
Now Bollinger Bands are going to be displayed on top of price.
It is not going to split your charts and be displayed below your price graph,
Instead, it will overlay it with three lines.
Depending on the trading software that you're using,
it may shade those lines in, it may not, but either way,
I like Bollinger Bands because I do feel that they are very clean
and they still allow you to view what's going on behind the scenes,
behind the indicator, as we'll say. The concept with Bollinger Bands
is the indicator is giving us a range, within which the asset that we're looking at,
price is typically trading. So, based on the recent volatility,
the width of the bands increases and decreases.
The wider the bands are, the larger the volatility and vice versa.
If the bands are close to each other, then the volatility is low.
So for example, if we look at this portion of the chart over here,
this perhaps could have been, say, at lunchtime.
Lunchtime behavior will look more like this.
When we get out of lunchtime or before lunch time,
the market might look more like this.
Where it is more volatile, the bands are wider and price is going to
be a bit more playful with, the location of those bands.
Now there are two ways we can find decisions to long or short,
based on Bollinger Bands. The first is by using those outside bands
as areas of potential support or resistance. Generally speaking,
price is going to remain inside those outside bands, so by that theory,
we would be expecting a long or short, so a long if we are outside
the bottom of the bands, to favor the price going back into the bands,
because the majority of time it will be. And when I say the majority of time,
we're talking well over 80% of the time, depending on if, once again,
you monkey around with your settings. But that's going to be it on
default settings. So if we were at the top end of the bands
or outside the top end of the bands in a range-bound market,
this could be a very good location to look for a short position,
because once again, we're treating these titan bands almost like
an area of support and resistance even though it's dynamic and it is moving.
Now once the bands open up, as we see on the right hand side of things,
the price being outside the bottom of the bands can be an indication
of heavy bearish momentum. Especially if it has just broken through
an area of support. So, the read that we were just talking about,
more or less gets completely inversed. When price is traveling heavily
in a direction, at that point, being outside of the bands
after something substantial has happened, like breaking an area of support,
we can use that, to further justify the momentum and strength
in the market and look to go in that direction.
So it is different in a range-bound scenario, than it is
in a momentum bound scenario. When the market is directionally
heading in either up or down this applies the same.
If hypothetically the market was traveling upwards and it was riding
the top of the bands and the bands have expanded and we just broke out
through an area of resistance, we could use that as justification
to look for a long. So one of the cool things about the Bollinger Bands is,
it's really good for any type of market behavior, once you begin
to get good at identifying which type of scenario you are in.
Are you in a range-bound market or are you in a trending market?
So yes, there are a variety of ways that you can use indicators
to identify whether you should be going long or short,
if you are day trading, or really, any type of trading for that matter.
The indicators that we covered are a great place to begin,
especially if you are a new trader, but do not forsake them,
even if you are a veteran. If you haven't used them,
I strongly advise checking them out, you can always practice on a demo account.
Demo accounts are a godsend. Please make use of them,
but until next time, good luck out there, happy trading.
I'll see you all very soon.