Entries & Exits
Picking the Next Direction
Even though we know we can never consistently pick the next direction of an underlying stock's movement, we can use some basic technical analysis to help figure out where the stock may NOT go in the future, which is sometimes more important than figuring out where the stock MIGHT go. In today's video tutorial I’ll show you my 3 favorite technical analysis indicators: MACD, RSI Stochastics, and CCI. Plus, I'll show you how I have customized each to fit our personal trading philosophy. Beware though, technical analysis can lead you down the path of "analysis paralysis" if you use too many indicators. I always suggest that you focus on learning 2-4 indicators and sticking with those for the long-haul.
In this video tutorial, what I want to do is help you guys where a stock may or may not go in the future. I think as we start to talk a little bit more about technical analysis, it's important to realize that it's not the end all too.
Even in my progression of trading, I used to use technical analysis a lot more than I do now. It still serves a really good purpose because you can get some insight into where the stock, again, may or may not go in the future.
I think if you have technical analysis set up the right way on your charts, it's very easy to, again, just use it as a little bit of an edge.
One quick comment on setting up too many technical indicators. I often find that when I coach people, they have 45 different technical indicators that they're looking at.
You get into this mode of analysis paralysis. Where you just are looking at this indicator and that indicator and whatever.
I'm a fan of setting about three or five technical indicators that you like to use, that you've found to be successful and sticking with those longterm and getting to know how they work and how they move and what kind of signals they give.
That's my suggestion on the types of trades that you should be making and how you should be using technical analysis. Now what we're going to do today is, we're going to show you how to set up three of the different technical indicators that I use including MACD, CCI, and RSI.
I'll show you how to set them up and think or swim and obviously, your broker, if you're using somebody different might have a different setup. It's all basically about the same.
The first thing that we're going to do is we're going to start with this base chart. Today we're just looking at IWM. We're just looking at one of the major market index ETFs.
You can see, we've got pretty much nothing on this chart that gives us an idea where this stock may or may not go. We can draw lines and all that stuff, but no real technical indicators.
What I want to do first is I want to go up to here where it says "Studies." I want to edit studies. You can see there are no studies on here right now, but I'm going to add a study.
On the left, I'm just going to search for the first one which is MACD. I want to use MACD two lines. There's a bunch of different ones that you can use.
Histogram, crossover, two lines, just regular MACD, but I like to use two lines. Then inside MACD, you can see that there's' a couple of different settings.
The first setting that I want to do is I want to change the fast length, which is this one right here. The fast length which is currently at 12. I want to change that to 15.
That's the first change I'm going to make, and then I'll explain what these different lengths mean. Then the slow length is currently at 26. I'm just going to even that out just a little bit more to about 30. Here's what they mean.
With MACD basically what you're looking at is two different moving averages. You're using a faster-moving average which in this case is about 15 days and a slower moving average which is 30 days.
What we want to see with these two moving averages is this convergence and divergence in them. Meaning is the momentum in the security the shorter term momentum about the longer slower term momentum.
Is that increasing or expanding against itself? Right? Is momentum coming into the security or is momentum coming out of the security? Once we put those on our charts, you can see all I do is hit apply.
And go here and hit apply. You can see that MACD is now on the bottom side of our screen. Once we have these on these charts, you can see that the green line, which moves a little bit faster and is a little bit edgier, it moves quicker with the market cause it's a faster-moving average.
It's only 15 days. This one is going to move much quicker with the market as opposed to this purple line, which is our slower moving average at about 30 days.
You can see, they both move in the same cycle, but there are periods in which we see a cross of the slower term moving average, which is green, that crosses above or below the purple line.
Now in our case, we are looking for specifically that cross in the moving average. In this case, the one that I'm pointing to right now on the screen, this is the moving average that has now crossed the purple line.
That gives us a very clear sell signal. When we see that shorter term indicator, or moving average, that green line cross under or below the purple line, which is our longer term moving average.
That means that short term momentum is getting sucked out of the security about long term momentum. Therefor we should be out of the security or at least be wary of a sell-off.
In this case, that ended up being a pretty good signal. Right? We look back historically with IWM, and that signal carried us until the next buy signal that we had down here in August.
You can see now we got a new signal where that shorter term moving average, the green one crosses the purple line which is our longer term moving average, and that right there gives us a very clear cut buy signal.
You can see that again was a very good signal because that buy signal here carried us through to the next sell signal and so on and so on.
MACD is one of my favorite ones to use because it is just a little bit more reliable in just judging where a stock may or may not go in the future.
Now as I say that, I'll point out and even on this chart right now with where stocks are trading right now, we had a point in time where the signals weren't that clear. There's obvious flaws to technical analysis this really kind of drives homes the point here.
That these signals weren't 100% clear at this time. You can see that we had a couple of different crosses as MACD was continuing to move lower, but as that happened the stock just basically stayed sideways. There's a lot of volatility in there, but the stock stayed sideways heading towards the future.
It's important here, as always, take this with a grain of salt. What's really important with technical analysis is just where a stock may or may not go and how relatively over bought or over sold it is.
If you start to see, you know, MACD starting to extend like this and just run for a month and a half, it might be best to start, again, paring down you positions or at least getting a little bit bearish in some of your trades.
That's the way that I use it. Again, it's pretty reliable for most stocks, but you'll have to, you know, go back through and back test a lot of those. As we go through here, let's add a different study. We're going to keep this one up here, and we're just going to add another study to it which is my second favorite.
That is CCI. CCI's a little bit different. We're going to change this one as well. The length of CCI is similar to MACD in that it judges time frames in the past. It's currently set at 14. We're going to widen this out to 31.
What that does by widening that out to 31 is just takes in more data and gives us a smoother transition. If you have a 14 day setting on your CCI, you're going to get a lot of signals because it's based on data going back and forth about 14 days.
I'm sorry if you hear a bunch of those alerts. It just trades that are going off as I'm doing this video. Again, with the shorter term indicator, 14 days, you're going to get a lot of signals back and forth.
Moving out to 31 days and changing that timeline just gives you a lot more smooth data and a lot fewer signals, but more defined signals. The way that I use CCI is basically for trend analysis, judging to see where the market is an overall trend.
What I'm going to do is I'm just taking the oversold and the overbought. I want CCI to be in blue. I just want it to be a little bit more defined here. Okay. Here we are with CCI.
What's important to notice about CCI is that the most important line on this chart is the zero line. On here, I do have the 100 and the -100, cause that's what defaults on the indicators.
On my particular charts, I like to take those off if I can because I'm not looking at that line. I want to be focused on this zero line. That's where we get our buy signal or sell signal.
With CCI, it's an indication of continued momentum in the security. What we want to see is we want to see a cross of the indicator above or below that zero line. That gives us an idea of where a stock might go in the future.
You can see, we got a cross back here this is in October if you can't see the date here. You can see that that cross in CCI did lead to some nice rallying in the stock as we headed towards the end of the year. It's not all about being overbought or oversold.
Just because CCI gets to extremes does not mean that that creates an opportunity necessarily to buy or sell. That's one difference with CCI as opposed to some indicators is that it's not about being overbought or oversold. It's about crossing that zero barriers.
Here on the charts, you can see that we had a CCI kind of cross or go to an extreme here back in December. It dropped low to an extreme.
Although it was a slight little buying opportunity, it wasn't some huge bottom because the stocks, obviously, haven't bottomed out and have reversed since. Don't use it as the extreme.
You want to use it kind of right along this zero barrier. Now what's cool about CCI is if you go back in time, especially with SPX, let's look over at S & P 500. What's cool, again, about CCI is that it's a trend indicator.
On the left-hand screen, you see here. We have CCI that's over here that crossed above that zero barriers, gave us a buy signal. It never gave us a sell signal until we got to the point of August when stocks did decline.
Even though it had all of this overbought, oversold and was moving all over the place, it remained the entire time above that zero barrier which just means that we're in a bullish or upward trending market.
It wasn't until we got into August that we got that sell signal which was pretty defined, not only on the charts but also in the indicator that told us to get out of stocks temporarily. Good indicator. I love using CCI as well. These are my top two.
All right. Let's add one more to the charts here. Let's go here and go to the studies, and we're going to go to Edit studies. We're going to add RSI. We're going to add RSI right to the chart. We can just leave RSI exactly as it is.
Now we have RSI down below. I'm just going to try to minimize these two here so you can see RSI down below. Now RSI's a little bit different. RSI is a judge of relative strength in the index or at the stock that you're looking at.
You are, with RSI, looking for these overbought and oversold ranges. You can see here that the overbought range is about 70 reading on RSI.
The oversold is about 30. Everything in between is relatively useless because you are looking for those extreme points at which stocks become overbought or oversold.
Now when we look back in time again with CCI and MACD, let me just kind of try to smoosh these down just a little bit. Here's the look at the S & P 500.
You can see that we did get a reading all the way down here on RSI below 30 which ended up being almost a perfect buy on the market because stocks bottomed out from that point and continued to move higher.
Likewise as the market was moving higher, we got an oversold reading towards the end of November, beginning of December. That ended up being a pretty good signal to get out of stocks because the did experience a nice little decline afterward.
Again, with RSI, you're looking at the extremes and only trying to trade the extremes in this security and ETN indicator. As always, every indicator has it's flaws.
Here are a couple of times in June and July when it signaled a bunch of market extremes and we didn't see that at all. In fact, we saw stocks over that period start to increase a little bit more.
Eventually, they did fall off, but it wasn't quite as pronounced as some of the other indicators that we've seen here. Before with the market bottom here and the market top here. As always, these indicators have flaws.
It's important to use them in conjunction with one another. As we go back to IWM, I wanted to show you just how I would use indicators and how I do use indicators and technicals with my trading.
It's this idea that they all have to be in some agreement. Okay? I think that's the key here is that if you look at all three of these indicators, they all are moving in about the same ebb and flow.
It's just an incredible how these markets move in the same kind of flow and cyclicality. You can see all three of these indicators are moving in about the same ebb and flow.
It's just important when you look at something, that you kind of draw a line in the sand here and say, "Okay, relatively speaking, where are all of these things pointing? Are they all relatively high? Are they all relatively low? What does that mean for my trade? Do I go bullish? Do I go bearish?"
Whatever the case is. But again, don't get caught up in analysis paralysis. Just look at the general picture. Dissect each one of these by themselves, but then kind of glean some insight to the fact that they're all pointing in one direction or another direction or whatever the case is.
As we look at the markets today to kind of wrap up this video, you can see that we've reached a high and we're coming off of that high in the market. MACD is continuing to point because we don't have a buy signal.
CCI has just crossed back under that zero barrier. We have a bearish market that we might be heading into. RSI is not oversold, and it's not overbought either. It's pointing towards the downside.
At least at this point, without knowing exactly where the market's going, we're going to err on the side of caution that stocks may continue to fall here until we see something that tells us that they might turn around.
I hope you guys enjoy this video. This was a lot of information. It took a long time to get through, but this is all that technical analysis is about.
It's about adding a couple of different indicators to your charts, making sure that they're customized to fit your trading timeline. In our case, we like to have a longer timeframe in most of the indicators just so that it smooths out a lot of the data that we see.
Then also, using a couple of these to make sure that they're kind of in agreement or congruence with each other as we look to find out where a stock may or may not go in the future.
If you have any questions or comments, please add them right below this video lesson. I'll make sure I get back to all of those promptly to get your questions answered. Until next time, happy trading.
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