Top 3 Technical Analysis Indicators (Ultimate Guide)

Top 3 Technical Analysis Indicators (Ultimate Guide)

Hey everyone, this is Kirk, here again from optionalpha.com. And in this video tutorial, what I want to do is help you guys figure out where a stock may or may not go in the future. And 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(?) tool. And even in my own progression of trading, I used to use technical analysis a lot more than I do now. But it still serves a really good purpose because you can get some insight into where a stock again, may or may not go in the future, and 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. Now, one quick comment on setting up too many technical indicators: I often find that when I coach people that they have 45 different technical indicators they're looking at, and you get into this mode of analysis paralysis where you're just looking at this indicator and that indicator and whatever.

So, I'm definitely a fan of setting about three to five technical indicators that you like to use, that you found to be successful, and sticking with those long-term, and getting to know how they work and how they move, and what kind of signals they give. So, 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 actually going to show you how to set up three of the different technical indicators that I use, including MACD, CCI, and RSI. And I'll show you how to set them up in . And obviously, you're a broker if you're using some way different, might have a different set up. But it's all basically about the same. So, the first thing that we're going to do is we're going to start with this base chart. And today, we're just looking at IWM. So, we're just looking at one of the major market index ETF's.

And you can see we've got pretty much nothing on this chart. That gives us an idea of where the stock may or may not go, we can draw lines and all that stuff, but no real technical indicators. So, what I want to do first is I want to go up to here where to studies. And I want to edit studies. And so, you can see, there's no studies on here right now, but I'm going to add a study. So, on the left, I'm just going to search for the first one which is MACD. So, I want to use MACDTwoLines. And there's a bunch of different ones you can use � Histogram, Crossover, TwoLines, just regular MACD. But I like to use TwoLines. And then, inside MACD, you can see that there's a couple of different settings. So, the first setting that I want to do is I want to change the fast length which is this one right here.

Fast length which is currently at 12. I want to change that to 15. So, that's the first change I'm going to make, and then I'll explain what these different lengths mean. And then, the slow length is currently at 26. I'm just going to even that out just a little bit more to about 30. So, here's what they mean. With MACD, basically, what you're looking at is two different moving averages, and you're using a faster moving average which in this case is about 15 days, and a slower moving average which is 30 days. And what we want to see with these two moving averages is this convergence and divergence in them, meaning is the momentum and the security. Does shorter term momentum relative to the longer or slower term momentum? Is that increasing or expanding against itself? All right, so is it momentum coming into the security or is momentum coming out of the security? And so, once we actually put those on our charts, you'll see all I do is hit apply.

And go here and hit apply. And you can see that now MACD is on the bottom side of our screen. Now, once we have these on these charts, you can see that the green line which moves a little bit faster and is kind of a little more edgy, it moves quicker with the market because 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. And you can see, they generally both move in the same cycle, but there's 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. So in this case, the one that I'm pointing to right now on the screen, this is the moving average that has now crossed under the purple line, and that gives us a very clear sell signal. So, when we see that shorter term 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 relative to long term momentum, and therefore, we should be out of the security or at least be weary of a selloff. Now, in this case, that ended up being a pretty good signal, right? And we look back historically with IWM, and that signal really carried us until the next buy signal that we had down here in August.

So, you can see now we got a new signal where that shorter term moving average, the green one, crosses above the purple line which is our longer term moving average. And that right there gives us a very clear cut buy signal. And you can see that again, that was a very good signal because that buy signal here carried us through to the next sell signal, and so on and so on. So, 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. So, there's obviously flaws to technical analysis, and this really kind of drive some of the point here that these signals weren't 100% clear at this time. You can see we had a couple of different crosses as MACD was continuing to move lower. But as that happen, the stocks just basically stayed sideways. There's a lot of volatility in there, but the stock really stayed sideways, heading towards the future. And so, it's important here to just 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 overbought or oversold it is. So, if you start to see MACD really, really starting to extend like this and just run for a month in a half, it might be best to start again, pairing down your positions or at least getting a little bit bearish in some of your trades.

So, that's the way that I use it. And again, it's pretty reliable on those stocks, but you'll have to go back through and back test a lot of those. So, as we go through here, let's add a different study. So, 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, and that is CCI. So, CCI is a little bit different. We're going to change this one as well. The length of CCI's is similar to MACD, and then it judges timeframes in the past. It's currently set at 14, and we're going to widen this out to 31.

And what that does by widening it out to 31 is just takes in more data, and gives us a smoother transition. So, 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. And sorry if you're heating a bunch of those alerts. That's just trades that are going off as I'm doing this video. So again, with a shorter term indicator of 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 less signals, but more defined signals. So, the way that I use CCI is for basically, trend analysis, judging to see where the market is relative to an overall trend. So, what I'm going to do here is I'm just going to take the oversold and the overbought. I want CCI to be in blue. So, I just want it to be a little bit more defined here. Okay, so here we are with CCI. What's important to notice about CCI is that the most important line on this chart is actually the zero line.

Now, on here, I do have the 100 and the -100 because that's what defaults in the indicators. On my particular charts, I like to take those off if I can because I'm not looking at that line. I really want to be focused on kind of this zero line, and that's where we get our buy signal or sell signal. So with CCI's, basically an indication of continuing momentum in the security, and so, what we want to see is we want to see a cross of the indicator above or below that zero line. And that gives us an idea of where a stock might go in the future.

So, you can see, we got a cross back here in - This is in October, if you can't see the date here. And you can see that that cross in CCI did lead to some nice rallying in the stock as we kind of headed towards the end of the year. And it's not all about being overbought or oversold. So, just because CCI gets to extremes does not mean that that creates an opportunity necessarily to buy our sells. So, that's one difference with CCI's opposed to some other indicators, it's that it's not about being overbought or oversold, it's about crossing that zero barrier. And here on the charts, you can see that we had a CCI kind of cross or go to an extreme here back in December, and it dropped low to an extreme. And 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. So, don't use it as the extreme. You want to use it kind of right along this zero barrier.

Now, what's really cool about CCI is that if you go back in time, and especially with SPX - So, let's look over at S&P 500. What's really cool again, about CCI is that it's a trend indicator. So, on the left hand screen, you see here we have CCI that's over here. That cross above that zero barrier gave us a buy signal. It never gave us a sell signal until we got to the point of August when stocks actually did decline. So, even though it had all of this overbought, oversold that was moving all over the place, it still remained the entire time above that zero barrier which just means that we're in a bullish or upper trending market. And 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 indicators that told us to get out of stocks temporarily. So, a really good indicator. I love using CCI as well.

There are my top two. All right, let's add one more to the charts here, so let's go here and go to the studies. And we're going to go to edit studies and we're going to add RSI. And we're going to add RSI right to the chart. So, we can just leave RSI exactly as it is. And now, we have RSI down below. So, I'm just going to try to minimize these two here, so you can see RSI down below. Now, RSI is a little bit different. RSI is a judge of relative strength in the index or the stock that you're looking at, and you are with RSI looking for these overbought and oversold ranges. So, you can see here that the overbought range is about 70 reading on RSI and the oversold range is about 30. Everything in between is relatively useless because you are really looking for those extreme points at which stocks become overbought or oversold. Now, when we look back in time again, with CCI and MACD � And let me just kind of try that, swoosh this 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 really 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, and that ended up being a pretty good signal to get all the stocks because they did experience a nice little decline afterwards. So again, with RSI, you're looking at the extremes and only trying to trade the extremes in this security and ETM indicator. Now as always, every indicator has its flaws.

Here are a couple of times in June and July where it signaled a bunch of market extremes, and we didn't see that at all. In fact, we saw stocks over that time period start to increase a little bit more. And 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. So as always, these indicators have flaws. It's important to kind of use them in conjunction with one another. So, as we go back to IWM, I wanted to show you just how I would use indicators and how I do use indicators and technical's with my trading. And it's this idea that they all have to be in some sort of agreement, okay? And so, I think that's the key here. It's that if you look at all three of these indicators, they all are moving in about the same ebb and flow. And it's just incredible how these markets move in the same kind of flow and cyclicality. And you can see, all three of these indicators are moving in about the same ebb and flow.

So, it's just important when you look at something that you kind of draw a line in the center 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 individual, one of these by themselves. But then, kind of gleam some inside into the fact that they are 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 definitely reached high and we're kind of coming off of that high on the market. MACD is continuing to point down because we don't have a buy signal.

CCI has just crossed back under that zero barrier, so we definitely have a bearish market that we might be heading into. And RSI is definitely not oversold and it's not overbought either, and it's definitely pointing towards the downside. So, at least at this point, without knowing exactly where the market is going, we're going to air on the side of caution that stocks may continue to fall here until we see something that tells us that they might turn around. So, I hope you guys really enjoyed this video. This was a lot of information. It took a long time to get through, but this is really all what 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 smoothes out a lot of the data that we see. But 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.

So, if you have any questions or comments, please add them right below this video lesson. And I'll make sure I get back to all of those in a timely manner to get your questions answered. Until next time. Happy trading! .

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