Employing technical analysis in every trade is a great way to better anticipate market movement. With the availability and use of a vast selection of indicators, there really is no way for a trader to say his/her loss is due to lack of resources; it all falls on their approach to trading; in essence, their psychology, trading strategy, etc.
Indicators are, ultimately, a valuable asset for traders. They’re never wrong in providing supplemental data for traders to help them in every aspect of their trading framework. However, most traders nowadays have fallen under the false assumption that these indicators make them money! In fact, they seem to be so caught up with this idea that most, if not all, blame their losses in indicators.
In this video, we will tackle why technical analysis indicators are never wrong and how to utilize them to greatly improve your trades.
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Technical Analysis Tutorial
Welcome, my friend to this technical analysis tutorial with the very controversial title of ‘indicators are never wrong’. That is a strong statement. In technical analysis, indicators are never wrong, let’s just be very literal about what indicators are, they are mathematical formulas. They’re not magical, but they are mathematical. What happens when we talk about this in most traders mind? Well, they start to think of people who say ‘I don’t trade with any indicators, I don’t need any stinking indicators because they are all lagging’, things like that. And let’s deep dive into that a little bit.
There’s a lot of truth to that, but it isn’t the truth, the whole truth and nothing but the truth. When we talk about indicators being lagging, it is an issue of yes, I acknowledge what people are saying that in the sense that the market, in this case, whatever market we’re looking at the stock market today, by the way, no particular reason that I’m looking at the stock market, but whether it’s futures, Forex, etc., you’ve got people who say ‘I just look at price bars’.
Think of price bars, are they leading? Know that the price bar there is also lagging, and so is every other price bar on the chart in the sense that it’s already posted data. The data is done, the buying and the selling are done when that bar is closed and, therefore, after that bar is closed, it’s not telling you anything about the future necessarily.
Stock Market Technical Analysis Tutorial
Now, some people might disagree with that, with price patterns and so forth. And, perhaps, we’ll get into that in a future video because then you get into the whole issue of our price patterns leading, and there’s been a lot of studies done on that. But, today, we want to just focus on the issue that price bar is just as lagging as an indicator is and the sense of here we have MFI, as you can see, it’s just taking the data from whatever market you’re trading relative to whatever time interval you’re trading. It is taking that data, putting it into the left side of a math equation, and then that indicator’s equation crunches the numbers and spits out a value out the right side. That’s the value at this snapshot in time.
So really the indicator isn’t leading or lagging price, it’s giving you the same or it’s giving you the information at the exact same time which is in real time. So that is the first thing to say. Now, why do I say indicators are never wrong? Because math is never wrong. Math is just it, it is always what it is. So you can’t really say that indicators are wrong. I find that people get sloppy about their language because they imply things from that language and then they use that language in their self-talk. Then it messes them up psychologically when they come to trading because they’re not being accurate enough in their understandings and definitions of things. Therefore, what we need to be looking at here is the fact that indicators by themselves, price bars by themselves, nothing by itself makes us money.
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So normally when people say ‘indicators are wrong’, they’re talking in the context of making money, right? So that’s going beyond the next step of what I’m talking about here, which is just being very literal. Now, to make money in the market, we cannot rely on any one thing. There are no certainties in the market. There’s no one magic holy grail indicator. There’s no one magic holy grail, candlestick pattern or multi-buyer pattern. We’re moving average or anything like that. The way that I make money in the market is by putting together five non-correlated variables and when they all agree, they’re all bullish or bearish, because they’re non-correlated. It gives me a probability scenario. Still does not give me a certainty; there is no certainty and trading. In fact, I don’t even like calling trading, trading. I’m a little old-fashioned.
I’m born in 1959. So back in the days of Yore, we didn’t have computers. We had a black and white TV. I’m an oldster and back then, back to the days of Jesse Livermore, thinking about that, if you’ve ever read the classic books about him and so forth, they called it speculation back in those days. I actually like that term better because that’s really what we’re doing. And again, the self-talk, if I call it speculation, then it reminds me, it keeps it in the forefront of my mind that what I’m doing is risky and that what we’re doing is managing risk and there no certainties. Still, call me old fashioned fine, but I think it helps me psychologically actually. I know it helps me psychologically and that’s up to you whether you want to adopt that term, that ancient term or not.
Technical Analysis
So, getting back to how can these things be helpful in actually making money, since there’s no one thing, what I look for are five energies in the market and I’m looking for them at the moment of taking the trade. Those five energies are numbered and I treated them where I look at them in this order. Number one is the trend, the direction of the market; not only the direction but am I early in a new trend?
That’s a good place to start, tells you, which side of the market you want to be on. Also, the trend is your friend until the end, so we don’t want to trade a trend late. We want to trade it early, so timing and the trend are critical. Number two is momentum. That determines what the strength of that trend is. Is it a strong trend or a weak trend, do I have to trade in the direction of the trend or not?
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Because there are weak trends and a weak trend, even if you trade in the direction of it, you will get stopped out. Number three are cycles, and that’s about timing your entry – when to get in and out, when you’re going to get a final swing, high or final swing low, so that after you get in, you don’t get stopped out.
By the way, I do have an amazing timing indicator that I actually give away for free on a Webinar that I offer absolutely free. Feel free to send me an email at support@topdogtrading.com to get access to that and it works on any trading platform, any market. And that’s a Freebie that I gave out. I’ll give you a free tutorial with it as well. Those are the first three energies: trend, momentum, support and resistance levels. And number five is then the fractal energy where I’m looking for the dominant energy of the next higher timeframe.
Technical Analysis of Stock Trends
And that’s it, those five non-correlated energies; when they’re bullish, I go along, when they’re old bearish, I go short, and I put in hard stops. I hedge my position to manage the risk, and that’s trading in a nutshell. So let’s look at a couple of things here real quick and I’ll show you why they work sometimes, why they give us a high probability scenario. So first of all, let’s get this stuff off here and draw in a couple of new lines.
First of all, for trend, as you can see here using the 50-period simple moving average, why is there any magic to it? Nope, but on a daily chart, a lot of people look at it. So, one of the reasons why certain things in technical analysis work is that it has a self-fulfilling prophecy to it. Nothing magical. It’s just purely that you got a lot of people looking at it and at times you have a lot of people looking at something, then the mass psychology kicks in and people respond to it.
Technical Analysis of Stocks
Especially on a daily chart, a lot of people look at a 50-period, simple moving average. You see it provides resistance here. Again, nothing magical. It’s just mass psychology. So the same principle applies to support resistance. Nothing magical about them, but if you have certain levels that everybody’s looking at 52-week highs and lows would be a good example of that, then the market’s going to respond to it in some way and you should include it as part of your trading methodology. Keep your eye and knowing that everybody’s watching that level. Okay? Again, can’t read it alone. It’s one piece of evidence now. So that’s one category of technical analysis indicators which, again, is things that a lot of people are looking at and that’s the reason that they work or at least give you a probability scenario as part of an overall method.
RSI Technical Analysis Tutorial
The other thing that we’ll talk about today is momentum. So momentum is the second thing that I look at after trend here. We have the MFI – Money flow indicator. It’s money flow index actually, and it is a volume-weighted RSI, so it’s similar to the RSI but incorporates volume, which is what makes it actually a more literal momentum indicator. By the way, RSI is not a momentum indicator; that’s the ‘Big scandal’. Might as well throw another heresy out there. Classically, we identify it as a momentum indicator. But really it’s a rate of change indicator because it doesn’t incorporate weight. And in physics, momentum is volume times mass, so mass equates to volume in the market. So, if your indicator doesn’t incorporate volume, it technically is not a literal momentum indicator.
Let’s talk about something practical here in trading. Those are again, I am a pretty literal guy, that’s why I bring those things up. If you’re going to trade something like you know, you’re looking at a downtrend here, right? And then we’re going to look for connecting these two lows and trade a breakout. Now, a great fail goes back up. What would then give us an indication that that might fail, that that breakout might fail? Just a very simple example here is the momentum is up. So, therefore, this is a weak trend. Well, momentum is moving up, therefore, I would not want to sell bearish into bullish momentum. And therefore, again, the trend is your friend until the end. We’ve already been in this trend for a little while and when you get a momentum shift now, it’s like we’re going down here a little bit.
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We break that little trend line. That’s a common trading method that a lot of people use. Not a bad method, but I wouldn’t trade the price pattern alone. I want to know is if the market moving down on strength or weakness. Here, it’s moving down on weakness. We have conflicting energies, in other words, so I’m looking for the confluence of those five energies. We don’t have it, we have the energies fighting each other. Here, the trend is down, and momentum is up.
Let me show you a different example of the opposite of that. Here, we now have, if we were to draw a line across these highs and use that same technique, then we would again look at momentum. In this case, the MFI and it is moving up. Therefore, as we break this trendline, we have upward momentum. 50 MA is up. It’s early, again, early in a new trend and trend being defined by getting above the 50 MA, the 50 MA angling up so we’re early in the new trend, not late in an old trend.
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Now the trend is our friend, but that’s just direction. We need strength behind it and in this case, momentum does confirm it so we have an alignment and therefore when it breaks the trend line, it actually follows through. That’s the type of way that we combine indicators which mathematically measure the energies, these energies of the market, the underlying energy of the auction place, if you will, to give us a probability scenario. And, obviously, we always manage our risk in the process, but by having these non-correlated energies align, it gives us a much higher probability of success because the indicators are mathematical and, therefore, they’re never literally wrong. We can use them to create a rule-based method. We’re actually measuring the flow of money by the way, bar by bar, so I’m not necessarily looking for anything to be a long-term leading indicator.
Again, I don’t believe anything like that does exist. Nothing magical here, but we look for this kind of stuff at the moment we enter. So at that moment, that’s what I’m interested in. In fact, if you look, we’ve even got a trend line break here, right? So it’s at the moment I enter that, I’m interested in all this stuff and that’s the only moment. And then from there, I trade bar by bar and I continue to watch the money flow, the energy of the market because the market can do anything at any time. It can change at any time. And this is why nobody can predict the long-term moves of the market. So we use our trailing stops and our targets and things like that to help us to become successful traders.
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