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Top 3 Technical Analysis Indicators - Technical Analysis - Options Trading for Beginners - YouTube
Channel: Option Alpha
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Hey everyone, this is Kirk, here again from
optionalpha.com.
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And in this video tutorial, what I want to
do is help you guys figure out where a stock
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may or may not go in the future.
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And I think as we start to talk a little bit
more about technical analysis, it's important
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to realize that it's not the end-all(?) tool.
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And even in my own progression of trading,
I used to use technical analysis a lot more
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than I do now.
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But it still serves a really good purpose
because you can get some insight into where
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a stock again, may or may not go in the future,
and I think if you have technical analysis
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set up the right way on your charts, it's
very easy to again, just use it as a little
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bit of an edge.
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Now, one quick comment on setting up too many
technical indicators: I often find that when
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I coach people that they have 45 different
technical indicators they're looking at, and
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you get into this mode of analysis paralysis
where you're just looking at this indicator
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and that indicator and whatever.
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So, I'm definitely a fan of setting about
three to five technical indicators that you
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like to use, that you found to be successful,
and sticking with those long-term, and getting
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to know how they work and how they move, and
what kind of signals they give.
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So, that's my suggestion on the types of trades
that you should be making and how you should
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be using technical analysis.
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Now, what we're going to do today is we're
actually going to show you how to set up three
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of the different technical indicators that
I use, including MACD, CCI, and RSI.
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And I'll show you how to set them up in [Unintelligible].
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And obviously, you're a broker if you're using
some way different, might have a different
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set up.
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But it's all basically about the same.
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So, the first thing that we're going to do
is we're going to start with this base chart.
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And today, we're just looking at IWM.
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So, we're just looking at one of the major
market index ETF's.
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And you can see we've got pretty much nothing
on this chart.
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That gives us an idea of where the stock may
or may not go, we can draw lines and all that
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stuff, but no real technical indicators.
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So, what I want to do first is I want to go
up to here where to studies.
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And I want to edit studies.
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And so, you can see, there's no studies on
here right now, but I'm going to add a study.
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So, on the left, I'm just going to search
for the first one which is MACD.
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So, I want to use MACDTwoLines.
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And there's a bunch of different ones you
can use � Histogram, Crossover, TwoLines,
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just regular MACD.
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But I like to use TwoLines.
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And then, inside MACD, you can see that there's
a couple of different settings.
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So, the first setting that I want to do is
I want to change the fast length which is
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this one right here.
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Fast length which is currently at 12.
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I want to change that to 15.
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So, that's the first change I'm going to make,
and then I'll explain what these different
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lengths mean.
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And then, the slow length is currently at
26.
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I'm just going to even that out just a little
bit more to about 30.
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So, here's what they mean.
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With MACD, basically, what you're looking
at is two different moving averages, and you're
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using a faster moving average which in this
case is about 15 days, and a slower moving
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average which is 30 days.
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And what we want to see with these two moving
averages is this convergence and divergence
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in them, meaning is the momentum and the security.
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Does shorter term momentum relative to the
longer or slower term momentum?
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Is that increasing or expanding against itself?
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All right, so is it momentum coming into the
security or is momentum coming out of the
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security?
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And so, once we actually put those on our
charts, you'll see all I do is hit apply.
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And go here and hit apply.
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And you can see that now MACD is on the bottom
side of our screen.
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Now, once we have these on these charts, you
can see that the green line which moves a
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little bit faster and is kind of a little
more edgy, it moves quicker with the market
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because it's a faster moving average, it's
only 15 days.
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This one is going to move much quicker with
the market as opposed to this purple line
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which is our slower moving average at about
30 days.
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And you can see, they generally both move
in the same cycle, but there's periods in
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which we see a cross of the slower term moving
average which is green that crosses above
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or below the purple line.
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Now, in our case, we are looking for specifically
that cross in the moving average.
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So in this case, the one that I'm pointing
to right now on the screen, this is the moving
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average that has now crossed under the purple
line, and that gives us a very clear sell
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signal.
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So, when we see that shorter term moving average,
that green line, cross under or below the
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purple line which is our longer term moving
average, that means that short term momentum
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is getting sucked out of the security relative
to long term momentum, and therefore, we should
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be out of the security or at least be weary
of a selloff.
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Now, in this case, that ended up being a pretty
good signal, right?
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And we look back historically with IWM, and
that signal really carried us until the next
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buy signal that we had down here in August.
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So, you can see now we got a new signal where
that shorter term moving average, the green
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one, crosses above the purple line which is
our longer term moving average.
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And that right there gives us a very clear
cut buy signal.
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And you can see that again, that was a very
good signal because that buy signal here carried
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us through to the next sell signal, and so
on and so on.
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So, MACD is one of my favorite ones to use
because it is just a little bit more reliable
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in just judging where a stock may or may not
go in the future.
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Now, as I say that, I'll point out, and even
on this chart right now with where stocks
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are trading right now, we had a point in time
where the signals weren't that clear.
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So, there's obviously flaws to technical analysis,
and this really kind of drive some of the
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point here that these signals weren't 100%
clear at this time.
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You can see we had a couple of different crosses
as MACD was continuing to move lower.
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But as that happen, the stocks just basically
stayed sideways.
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There's a lot of volatility in there, but
the stock really stayed sideways, heading
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towards the future.
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And so, it's important here to just as always,
take this with a grain of salt.
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What's really important with technical analysis
is just where a stock may or may not go, and
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how relatively overbought or oversold it is.
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So, if you start to see MACD really, really
starting to extend like this and just run
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for a month in a half, it might be best to
start again, pairing down your positions or
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at least getting a little bit bearish in some
of your trades.
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So, that's the way that I use it.
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And again, it's pretty reliable on those stocks,
but you'll have to go back through and back
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test a lot of those.
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So, as we go through here, let's add a different
study.
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So, we're going to keep this one up here,
and we're just going to add another study
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to it which is my second favorite, and that
is CCI.
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So, CCI is a little bit different.
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We're going to change this one as well.
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The length of CCI's is similar to MACD, and
then it judges timeframes in the past.
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It's currently set at 14, and we're going
to widen this out to 31.
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And what that does by widening it out to 31
is just takes in more data, and gives us a
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smoother transition.
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So, if you have a 14 day setting on your CCI,
you're going to get a lot of signals because
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it's based on data going back and forth about
14 days.
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And sorry if you're heating a bunch of those
alerts.
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That's just trades that are going off as I'm
doing this video.
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So again, with a shorter term indicator of
14 days, you're going to get a lot of signals
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back and forth.
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Moving out to 31 days and changing that timeline
just gives you a lot more smooth data and
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a lot less signals, but more defined signals.
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So, the way that I use CCI is for basically,
trend analysis, judging to see where the market
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is relative to an overall trend.
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So, what I'm going to do here is I'm just
going to take the oversold and the overbought.
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I want CCI to be in blue.
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So, I just want it to be a little bit more
defined here.
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Okay, so here we are with CCI.
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What's important to notice about CCI is that
the most important line on this chart is actually
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the zero line.
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Now, on here, I do have the 100 and the -100
because that's what defaults in the indicators.
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On my particular charts, I like to take those
off if I can because I'm not looking at that
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line.
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I really want to be focused on kind of this
zero line, and that's where we get our buy
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signal or sell signal.
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So with CCI's, basically an indication of
continuing momentum in the security, and so,
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what we want to see is we want to see a cross
of the indicator above or below that zero
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line.
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And that gives us an idea of where a stock
might go in the future.
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So, you can see, we got a cross back here
in - This is in October, if you can't see
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the date here.
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And you can see that that cross in CCI did
lead to some nice rallying in the stock as
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we kind of headed towards the end of the year.
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And it's not all about being overbought or
oversold.
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So, just because CCI gets to extremes does
not mean that that creates an opportunity
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necessarily to buy our sells.
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So, that's one difference with CCI's opposed
to some other indicators, it's that it's not
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about being overbought or oversold, it's about
crossing that zero barrier.
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And here on the charts, you can see that we
had a CCI kind of cross or go to an extreme
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here back in December, and it dropped low
to an extreme.
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And although it was a slight little buying
opportunity, it wasn't some huge bottom because
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the stocks obviously haven't bottomed out
and have reversed since.
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So, don't use it as the extreme.
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You want to use it kind of right along this
zero barrier.
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Now, what's really cool about CCI is that
if you go back in time, and especially with
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SPX - So, let's look over at S&P 500.
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What's really cool again, about CCI is that
it's a trend indicator.
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So, on the left hand screen, you see here
we have CCI that's over here.
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That cross above that zero barrier gave us
a buy signal.
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It never gave us a sell signal until we got
to the point of August when stocks actually
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did decline.
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So, even though it had all of this overbought,
oversold that was moving all over the place,
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it still remained the entire time above that
zero barrier which just means that we're in
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a bullish or upper trending market.
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And it wasn't until we got into August that
we got that sell signal which was pretty defined,
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not only on the charts, but also in the indicators
that told us to get out of stocks temporarily.
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So, a really good indicator.
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I love using CCI as well.
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There are my top two.
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All right, let's add one more to the charts
here, so let's go here and go to the studies.
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And we're going to go to edit studies and
we're going to add RSI.
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And we're going to add RSI right to the chart.
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So, we can just leave RSI exactly as it is.
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And now, we have RSI down below.
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So, I'm just going to try to minimize these
two here, so you can see RSI down below.
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Now, RSI is a little bit different.
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RSI is a judge of relative strength in the
index or the stock that you're looking at,
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and you are with RSI looking for these overbought
and oversold ranges.
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So, you can see here that the overbought range
is about 70 reading on RSI and the oversold
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range is about 30.
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Everything in between is relatively useless
because you are really looking for those extreme
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points at which stocks become overbought or
oversold.
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Now, when we look back in time again, with
CCI and MACD � And let me just kind of try
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that, swoosh this down just a little bit.
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Here's the look at the S&P 500.
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You can see that we did get a reading all
the way down here on RSI below 30 which ended
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up being almost a perfect buy on the market
because stocks really bottomed out from that
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point and continued to move higher.
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Likewise, as the market was moving higher,
we got an oversold reading towards the end
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of November, beginning of December, and that
ended up being a pretty good signal to get
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all the stocks because they did experience
a nice little decline afterwards.
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So again, with RSI, you're looking at the
extremes and only trying to trade the extremes
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in this security and ETM indicator.
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Now as always, every indicator has its flaws.
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Here are a couple of times in June and July
where it signaled a bunch of market extremes,
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and we didn't see that at all.
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In fact, we saw stocks over that time period
start to increase a little bit more.
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And eventually, they did fall off, but it
wasn't quite as pronounced as some of the
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other indicators that we've seen here before
with the market bottom here and the market
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top here.
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So as always, these indicators have flaws.
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It's important to kind of use them in conjunction
with one another.
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So, as we go back to IWM, I wanted to show
you just how I would use indicators and how
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I do use indicators and technical's with my
trading.
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And it's this idea that they all have to be
in some sort of agreement, okay?
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And so, I think that's the key here.
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It's that if you look at all three of these
indicators, they all are moving in about the
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same ebb and flow.
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And it's just incredible how these markets
move in the same kind of flow and cyclicality.
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And you can see, all three of these indicators
are moving in about the same ebb and flow.
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So, it's just important when you look at something
that you kind of draw a line in the center
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and say, �Okay, relatively speaking, where
are all of these things pointing?
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Are they all relatively high?
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Are they all relatively low?
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What does that mean for my trade?
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Do I go bullish?
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Do I go bearish?
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Whatever the case is�� But again, don't
get caught up in analysis paralysis.
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Just look at the general picture, dissect
each individual, one of these by themselves.
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But then, kind of gleam some inside into the
fact that they are all pointing in one direction
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or another direction or whatever the case
is.
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As we look at the markets today to kind of
wrap up this video, you can see that we've
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definitely reached high and we're kind of
coming off of that high on the market.
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MACD is continuing to point down because we
don't have a buy signal.
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CCI has just crossed back under that zero
barrier, so we definitely have a bearish market
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that we might be heading into.
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And RSI is definitely not oversold and it's
not overbought either, and it's definitely
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pointing towards the downside.
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So, at least at this point, without knowing
exactly where the market is going, we're going
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to air on the side of caution that stocks
may continue to fall here until we see something
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that tells us that they might turn around.
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So, I hope you guys really enjoyed this video.
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This was a lot of information.
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It took a long time to get through, but this
is really all what technical analysis is about.
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It's about adding a couple of different indicators
to your charts, making sure that they're customized
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to fit your trading timeline.
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In our case, we like to have a longer timeframe
in most of the indicators just so that it
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smoothes out a lot of the data that we see.
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But then, also using a couple of these to
make sure that they're kind of in agreement
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or congruence with each other as we look to
find out where a stock may or may not go in
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the future.
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So, if you have any questions or comments,
please add them right below this video lesson.
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And I'll make sure I get back to all of those
in a timely manner to get your questions answered.
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Until next time.
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Happy trading!
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