The New Trading For A Living Part 1 ch 5 Computerized Analysis
We talked about individual, psychology how, it's. All about self-control, and, keeping. Crackers and having, written trading, plants all of which we will discuss we, talked about mass psychology, how how, the crowd success, in or, tries, to suck us in and how we need to isolate ourselves from it making. Key decisions in, solitude, and not. Checking on the website what other people are saying. We. Talked about classical. Charting, the. The problem with which is that it's very subjective and. And. I strip down classical. Charging, to just very, lot. Very few logical and clear elements. Support/resistance. Breakouts. And. Breakouts. Can be regular, breakouts or kangaroo tails when I began, I. Had. A. Graph. Paper you bought graph paper from several companies that sold it and sharp. Pencils. And. Then I remember, buying my first electronic. Calculator. To. Calculate indicate. To calculate moving averages, then. I got myself a programmable, calculator. Which. Had a little magnetic strip, that went through the calculator, now I could calculate more complicated, indicators, and then, I got my first computer which was Apple, 2 plus. And. A first program, for computerized, charting. Well. Fast, forward to the present day and, and. What we have is an. Embarrassment. Of riches. We. Have just too, many indicators. Available. To us a person, can just go and look. At 50 indicators, or, try to see, what their combined, message, is or if, he doesn't like an indicator, a you can go and look at indicator, B, I. Often, say to. To students, if. You give me a stock and tell, me whether you want to buy or sell and five, minutes with, my program, I will prove that you're all right. There is a wonderful book by the way highly recommended, the paradox, of choice the. Guy who wrote is a professor, in, Pennsylvania. And. Basically. He says if, people have no choices they are happy, you. Give them a choice they feel happier to give them more choices they, become even more happy you give them having more choices they, become less happy, because. If. You have to choose between too. Many choices. You, always feel like you're missing something, so. Same thing was trading let's, keep it simple less. Less, clutter more. Clarity. My. Rule is five. Bullets, to a clip a technical. Trader is allowed five indicators, and. If you are really desperate you're, gonna have six but. Seven you have a problem. Wi-Fi. Well, because. Open. High/low close and. End volume, I mean there. Is not a lot of data you're looking into and massaging. The data ten different ways doesn't. Really help I will be throwing to my indicators, and this, is what I use I use a pair. Of moving, averages, I use. Envelopes. MACD. And force index I use. Four and that's enough for me now. You don't have to use the same indicators and you're very welcome to use different ones but, my point here is don't overdo. It choose, a few and stick. To them. So. What. We will do in the next few minutes I will review my favorite indicators. With you please. Keep in mind these, are, building. Blocks from. Which we will build a trading system, none, of these indicators, is a trading, system, you. Cannot win. In the markets with one indicator, cannot, I. Said, to earlier, that every, single dot. Every. Single price dot on this chart is a. Snapshot a photograph. Consensus. Consensus, consensus and that consensus, keeps changing and of, course a price bar. Connects. The high of the time. Period, with the low of the time period, opening. Price closing. Price if, you like candlesticks. Candles. Are fatter than bar charts and the. Area of the area between the open and the close is, fat and it's going to be white if it closed up and a black, of it closed below where it opened, so. In any case here's the history of this wonderful Google, stock and.
Here. Is a moving average. What's. The moving average well a moving average is like a composite, photograph. We. Take a picture, of mr., Google. Every. Day at the, close and. We. Take last 22, pictures the photo lab. Telescope. Them into one, photo and now, we have a composite photo, mr., Google now. Every, day we're going to be updating that photo and as. We updated, the. The moving average line emerges, so, a moving, average line, is a composite, photograph of the market if, it's a short moving average, it's, a short-term. Composite. If it's a long-term moving, average it's a longer-term, composite. This, moving average gives, us two key, messages. Message. One was it what's the slope, you. Know this this eternal. Dilemma what they do the right edge of the screen is the, trend still up or, is the trend now down and I'll. Say well. Here. Mr. Google was getting more depressed, and here. Mr. Google becomes, happier. So. The trend of the, moving average is up and that's. That's what they used to identify the trend of the market by. The way I use all the exponential, moving averages, because. Simple, moving average, response, to each price twice when. Price comes in and when it's dropped off at the tail end and. Exponential. Moving average, only reacts to incoming prices. Now. If, you're using a, 200-day. Moving average. It doesn't really matter one. But but if you're using a ten, period 20-period. Moving average exponential. It has to be so. That's message one mr., Google is getting happy so we're gonna have to look at this market for buying opportunities. Message. Number two the. Distance, from, price to the AMA. You. Can see how prices, run away from the EMA and come back run away come back run away come back run away come back run, away and coming, back here so. Where do you think is it better to buy when, they are far away from, from. The moving average or near, the moving average or below the moving average, now, we have two moving averages here, and, here. Comes the key on which. Meant, I approach to trading is based whether. It's long term trading. Or. Short. Term day trading all. My training is based on the thing. We. Have two moving averages one. Is fast one. Is slow I. Call. The, area. Between those, two moving averages the, value zone. There. Is a difference, between, price, and value. You. Decide to buy a shirt you, wait until you get a circular, from a department, store which, says the. Shirts that look very nice to you have 40% off and so you go and you buy them because you figure that, the price of the shirt is below, value. Option. B, you're. Going you're, going to this workshop. To this conference and. You. Stop by for a little breakfast, and. You spill, a. Container. Of. Cranberry. Juice on yourself. And you. Really don't want to go to the workshop just like that and plus it's wet and it feels uncomfortable you. Walk into the store to buy a shirt. The, only shorts takeoff or a $75. Shirt well you buy it right because. You have no flexibility, you're not you know you need it now so. What, is the value of the shirt is it, $75. Is it's $40. Is it $60. So. A, fundamental, analyst. Will. We'll. Look at the company, and analyze. Its balance, sheet and earnings, and inventory. And cetera et cetera et cetera and the technical, analysts who look at the chart and say well, this. Is what all the buying and selling is, being done this. Purple line is short term consensus. This, orange line is a long term consensus, of value. And so. Value, lives somewhere. In the zone between, those two moving averages and, now, you.
Ask Yourself this question am. I going to be a. Valued, trader or, a momentum. Trader, if. You're a momentum, trader you're going to be buying these things when. They explode in a rally if. Your, value, trader. You say well price, the trend is up moving, averages rising, let, me buy it when, it pulls back into, the value zone. This. Is the key this is the principle I want to buy at, or, below value, so. This, is my first tool a pair of moving averages, define the value zone it, really creates a whole new sense of structure, for the charts you can look at any chart and ask, yourself, is it trading above or below value, we, were looking, at at, the. DAX so. Where's, the dax trading, now is it above or below value. It's. Clearly above value, its way above value, and it's. About as high above value. As it ever gets. Tells. You something, right not, to get too happy and too excited, Dax, is over 10,000. That's. A psychologically. Important number what. About during this kangaroo tail was. Dax above, or below value. Was. Way below value. We go to the chart of. S&P. Look. At this wonderful bull, market, over the last couple of years now this is a weekly chart so everybody, presents one week and you. Can see how every few weeks there is a panic, attack and. When. People panic, they sell off S&P, value. Value. Value value. Value. Kangaroo. Tail by the way value. Another kangaroo tail value. Value. Big, panic, way below value. But. You see this pattern right when. I see something like this for me it provides a sense of certain peacefulness, I know, that, I don't have to be anxious about missing, the train this. Train make stops every few months. So. This is the concept, of a, pair of moving, averages. Identifying. The values alone. Tool. Number two envelopes. There. Was a mathematician, Benoit. Mandelbrot he. Died, a few years ago he was one of the more, prominent, mathematicians. Of the century, he. Was hired at one point by. The Egyptian, government to. Model. Prices, of cotton, so. Professor Mandelbrot, studied, them for the longest time wrote. A paper which earned him all kinds of academic awards, and the. Conclusion, was this hold. On to shares. Prices. Oscillate. Above and below value. There. Are very few facts, in financial, markets that I think, so maybe make. Sense to me but, this is a fact, prices, oscillate, above, and below value, well, if prices oscillate, above and below value, and we, can define value I think. We did, now. We need to define the. The, swing. Of those oscillations and, if. We can define if we can figure out how far they swing from. Value, we, can trade against, deviations, and for return to normalcy I do it with, envelopes, or channels, I draw. My channels, parallel. To the slow, moving. Average and. I. Draw them in such a way. That they contain, approximately, 95%. Of, all prices so. Basically two standard, deviations, in. Tradestation, I have a tool called auto envelope. In. Stock. Charts, you can use Keltner, channels they work very well and it doesn't really matter exactly what you're using as long as you're consistent with that the. Difficult, one is EMA, envelopes, because, they, use certain percentage, of price for the envelope and that, percentage, changes, for example from weekly charts you need double the percentage than, for dailies so, you're constantly going to be typing numbers but Keltner channels will do the job, so say think an envelope is like trying on a shirt you want a shirt that goes from button, to button without letter O and that, only, your wrists on your neck stick out and so, good envelope, hugs prices, Warren.
Buffett Is fond of saying that. When. You buy a stock you become a partner, with the manic-depressive fellow. He calls mr. market she. Says the only goods think about mr. market she wants to buy you out every, day and also, he wants to sell you his shares and he says most of the time you should ignore him because he is crazy by definition but. Every once in a while says Buffett mr.. Market becomes so depressed, that he offers, you his share for a song and that's. When you should buy at, other. Times mr., market becomes soul manic. That, he offers the crazy price for your shares and that's what you should sell how they identify. Depressed. Or manic well. I do I do it with channels. Here. Mr. market becomes manic. And here. Mr. market becomes, depressed, you. Know they say a new, righted bills castles, on the clouds as, psychotic. Lives, in those castles, and the, psychiatrist, is the fellow who collects the rent. Let's. Wink to our charts for, a minute here's, the chart of the S&P, what's. The state of mr. market according to this chart. So. Right. Now mr., market is way, outside of the envelope he is high, as a kite flying. Bulls. Are in charge up to, zap. Prices. Above, upper. Channel line this. Is a dangerous, state of mania, a question. That often comes up what about Bollinger, Bands well. Bollinger, Bands are good for only one type of trading options, because. Bollinger, Bands as you can see on this chart it Amendola, volatile, to go far away from, from. The moving average, and far below and. Far above a, volatility. Deterrence, option pricing, and so, that's what Bollinger Bands make sense for the options but not with stocks not with futures not with in Jesus. Okay. Tool number three this, gentleman, Gerald Appel, invented. An indicator, called MACD. Moving, average Convergence divergence, years. Ago he invented, this indicator, MACD. Lines. MACD. Is a combination, of three moving averages, but, they have two lines a fast, line and a slow line and. Appell, was looking for their crossovers. But that that's ancient history. In, the 1970s. When the first technical analysis software became, available, they. Began calculating. The difference between. A Mesa do lines and. And. At, that point, developed. An indicator, called MACD, histogram and. MACD. Histogram is. The difference, between the two MACD, lines, so. The first line, represents. Short-term, market consensus, long, term line long, term market consensus, when, the fast. Line rises, above the slow line it shows, that the market, is more bullish, in the short term and, it's been and so. Amazingly, histogram, Rises. Because. It constantly, measures, the spread, between short, term and long term consensus. I say. It measures, the power of bulls and bears here. Bulls are coming in. Both. Retreated, bears came back in and here. Bulls come back and you, can see how this, google. Is making higher and higher highs. And bulls. A becoming weaker and weaker, and weaker. To. Me this is like taking, an x-ray. Of. Of. The structure, of the markets below, the surface so. Rising, capacity, histogram, Bulls. In charge, falling, capacity, histogram, bears. In charge the, slope of MACD, histogram is. Sort of a garden-variety, signal. You, you. Can take the like for example here, the end mr. bear's getting stronger this. Is a garden-variety, signal. That occurs at every bar but. A really major. Signal, occurs not not often, quite and frequently, and that, signal is this. Divergence. Here. Is a chart a bullish. Trend and, the. Power of bulls. Bears. Come, in and break. Through, the zero line the. Stock rallies. To a new record high and this. Is the power of Bulls I. Mean. This is what I trade this is what I look for in. Terms of trading first. Look at this new high in price and the. Pattern of amazingly histogram, here this. Comcast. Drops. To. Amazingly, histogram, establishes, a new low maximum. Power of bears this. Is still. Part of the same law it's not a divergence, because, there was never any crossover, to the upside, here's. A crossover to the upside, I call. It breaking the back of the bear and now, amazingly, histogram, sinks again. Mr.. Bear here, and mr. bear here lower. Prices, more, shallow button, bullish.
Divergence Buy. Buy buy buy. Zero. Line must be crossed between two top so no diversions, this, is not a divergence, a. But. ABC, is the diversions, and. Here's. Something that came from Kerala, born from a partner in spike trade, he. Calls he for. Years he's been calling, himself a data junkie which. His, he. Did, extensive. Research and he. Showed that the, distance, between the two tops or bottoms. Should be 2250, bars and the. Smaller gist the better in. Other words, here. The bottom ends 1, 2 3 4 5 6 7 8 9 10, 11 very. Short distance very powerful, stuff. With. The distance here, the. Short of the distance between two tops and bottoms the, more powerful the diversions, if you have a one tap here the other tap in the middle of the chart it's, forget. About it. So. 2250. Is the distance and also, the second, top or bottom has. To be less than half the, height of the first one the, histogram, has to be half the height at the. Second time per second button. Half. The height of the depth, yes. Absolutely. The, bigger the time frame the more meaningful it is. The. Versions on a weekly time frame is much, more meaningful than in a daily time frame is. Much more meaningful than an hourly time frame is hugely. More meaningful, than on a 10 minute time frame the, bigger, the time frames are more important, tool. Number four is volume. Drug. Rangel famously, said. Volume. Is the scheme that, makes the choo-choo go. When. I look at volume. Here. On this chart it, doesn't speak to me. Volume. Was high here, it declined, going into the bottom. Supposedly. A good saying but. You know I'm looking at this bars and, and. I start squinting. The. The, volume bars alone don't speak to me so, I, invented, an indicator, from, measuring volume and we'll, deal with this in a few minutes, so. These are the four tools they use moving. Averages envelopes. MACD. And the, fourth one force, index, we'll, deal with it in a second.