3 powerful indicators for trading

Hi, welcome to this new video. The topic today is indicators. So what are indicators? Indicators are some kind of functions that are derived from the price or sometimes the volume. And they are used usually to help identify situations where the price is more likely to go up or go down. Now, many people don't like indicators because they say they are lagging, meaning that they are derived from past prices. And it's true, in my opinion, indicators are good, not as signal to enter or exit, but rather as filters. So we can at least remove some of the situation where we are really not so confident about the movement or of the price. And of course, we need to combine indicators with other entry and exit signals, for example, the moving averages that I described in another video. So today I want to show you three indicators that I use when I do trend following. And let's start with the first one. Here you see the chart? I'm using the Tinkerswin platform to show you these three indicators. But you can find them in basically every platform you want. If you want, you can also find them for free on tradingviews. The first one is called parabolic sharp parabolic stop and reversal. And this basically these yellow dots here, this is the parabolic sar. Now in this video, I don't want to give you the details about how these indicators are computed because in my opinion, it may be interesting to know, but it's not the main point. The main point is to understand how to use them. So for more details about the three indicators that I will show you today, I will put the link in the description. Okay, first one, as I said, parabolic stopper reversal. What is the idea? The idea here is very easy. When you see the dot below the price, below the candle, it means bullish signal. When you see the dot above it means bearish. Okay, so for example, let's take our. White here, for example, you can see that the dots are below the candles, right? And also here, here, here, this area, they are below the candle, right? So it means that parabolic stop and reversal is telling us that the price action is bullish. But for example, if you look at here, you see that the dots are above the price. You see the price is here and the dots are above. So in this situation, the parabolic SAR is telling us that bearish momentum. So let's write this down. So eventually we will have a recap. So number one is. Let me take this again. So the number one is parabolic stop and reversal. So what do we have to do? If the dot is below the candle, then this is A bullish indication. Okay, if it is above, then as we said, that's a bearish indication. And that's all. You don't need to know more about the parabolic stop and reversals. Some people use that also as a stop loss signal. What do I mean by that? Well, I assume you know what is a stop loss, otherwise I made a video about that. But the idea is that when you enter, for example, let's say here, okay, and then you buy and then you put your stop loss below. You can put your stop loss here, where you see the parabolic stop and reversal. And as the price goes up, you can raise your stop loss according to the parabolic stop and reversal. So when you are here, for example, your stop loss will be here, where you have the point. And then you keep raising your stop loss according to the parabolic stop and reversal. I know some people do that. I don't. You can try if you think it's interesting, you can paper trade this technique. But to me again, indicators are not used to tell me what to do in terms of when to buy, when to sell, but rather to filter out and to be like a support for other techniques that I use. Let's move to the second one, force index. So force index is here. And as you can see, we have a red line that is called reference line. So this the reference line. Okay? And then the force index is this yellow line. Again, the colors really depends on your settings. So it can be green and black, whatever. Now what is the idea of force index? Again, very easy. When the false index is negative, meaning that the yellow line is below the horizontal line. Then is a bearish signal. And when the force index is bullish is when it is above the red line. So you can see here, for example, that the force index, you can see the number here. Okay, so here we are below, you see negative number. And when we go above is positive. Now you may be wondering what is that number? As I said, I don't want to give you too many details about that, but above force index is quite interesting to expl. The idea of force index is to combine both price and volume. And volume is a very important indicator, especially when we are dealing with breakout and breakdown. Okay, so force index. So how is it computed? Well, the idea is this, the force index, let's call it one and later I tell you what is this number is the close price of today minus the close price of yesterday times the volume. Okay? So when you see for example, that the closing price above the closing price of yesterday, that Means that the Force Index 1 is positive. And then the magnitude is also depending on the volume. And The Force Index 13, that is what we usually use as default is basically the exponential moving average of the force index one. Okay, so what you see here on the graph is basically the Force Index 13. You can see here the setting is Force Index 13. And what you see here is exactly what I explained. The exponential Moving average of 13 periods 13 days. Because here we are using daily candles, the force index one that is again the difference between the current and the previous closed times the volume. So this indicator differently from the parabolic chart and the next one we will see that is the MACD is also using the volume in the computation. And why is it important for breakout? Because when you have a breakout, breakout, remember is this situation where the price is testing a resistance and then eventually is breaking out. When you see this breakout here, you want ideally to see a positive force index. Why? Because you want to see a breakout supported by a large volume. So if you see a positive force index and even better if you see the positive the force index increasing, that's a very strong sign that the breakout is valid. And similarly when you have a breakdown, so price testing support and then eventually going down here you want to see a big negative force index. Why? Because it means that there is a big volume. Of course you can have a big jump in force index when you have that gap as well. You can see this is Facebook an example. Why? Because if you remember the definition, the force index also depends on the closing price difference. And when you have a gap you have a big difference in closing price. Okay, so let's write this down, how to use that. So this is the definition and how to use the force index. If the force index is positive, is bullish. If force index is negative, that is bearish equal to zero is very rare. But in case it is equal to zero, you can consider either bullish or bearish. Now what is the last indicator we want to discuss? Here is the macd that is a quite popular indicator and you can see it here. Now again I use the default setting that is 12, 26 9. And again I will not explain how this MACD is derived, but it's basically combination of exponential moving averages. The idea is how to use it, how to identify bearish or bullish from the macd. So here you can see an histogram that is this set of bars, the green and red bars. And also you have two lines. Now if you notice every time the yellow line is going above the Gray line, then also this histogram is becoming green. Okay, so if you see here, here the green, the yellow line is going above the gray one and also the histogram is going from red to, to green. And the same happens when for example the yellow is going below, then the green is going to red. So basically the histogram and these lines are showing a similar thing, but I prefer the histogram. So one way to use the MACD is this. Whenever you see the histogram green or basically the yellow line above the gray and again these lines color can be different depending on your setting, then this is a bullish indication. And when the histogram is red or is equivalent to the yellow line below the gray line then is a bearish indication. Some people also use the crossing of the yellow line with this reference line. So this is the reference line, right? For example, you can see that here the yellow line was below this reference point, then it crosses above. So some people use this as a bullish indication. And this when the yellow line is going from above to below the reference line as a bearish indication. I don't use that. Why? Because if you look how the MACD is computed, you will realize that this is basically a MACD crossover. And in the strategy that I use, I, I am already using moving averages to check if the faster moving average is above a slower one. So you can use both. But personally what I use that is also easier to see from the histogram is when the histogram is green, bullish histogram is red, bearish. Okay, so let's write down this. Okay, macd if histogram is I write green, but you understand green means is above the reference line, then it's bullish. And if the histogram is red, That's bearish. And this is equivalent to the, in my setting at least the yellow line above the gray line and this is yellow line below gray line. And the second way to use it, okay, we can write it here again is. But this one again I'm not using is. The yellow line above zero, 0 is the reference line, the horizontal line below 0. So this is bullish and this is bearish. Okay, so this is the idea. Parabolic stop and reversal. If the dot is below the candle is bullish. Actually I want to use, maybe it's easier. Let's use the green for bullish. So parabolic stop reversal dot below the candle bullish. False index, false index, positive bullish macd. If the histogram is green, that means the yellow line above the gray line is bullish. What about bearish parabolic stop or reversal? If the dot is above the price, bearish. For the force index, if the force index is negative, bearish. And for the macd, if the histogram is red, that means the yellow line is below the gray line, that is bearish. Okay, great. Now we have three indicators. The question is how do we need, how can we use the indicators for trading? Okay, now the idea is this. When you look at stocks and you want to screen out, so to reduce the number of stocks or ETFs that you want to consider, because there are thousands of them and you want to do that using the indicators. What I suggest you is to use them to get a kind of agreement. What do I mean by that? We have three indicators. Okay? So if. Two or more indicators are bullish, then I can check for long setups. Okay, so if the majority of the indicators are telling me that we have a bullish momentum, then look for long setup. If two or more indicators are bearish, then what do we do? That's right. We check for short setup. And then there is a special case, the breakout. So for breakout, same rule applied, but we also want. For syntax positive and for breakdown. We want the force index negative. So this is additional condition for breakout. Okay, and breakdown. On top of these two, we also need to check this. So in other words, we need to have for a breakout, force index positive and either MACD or parabolic stop and reversal positive. If all of them are, sorry, bullish. If all of them are bullish, even better. But the thing is that we want to have an agreement, so the majority must be telling us bullish. If we see some kind of price action that is really strong, this may replace sometimes one of the indicators, but this is more advanced. So for now, the way to use indicators again that I suggest you to do for trend following setups is to use this idea. We have three indicators and then we check if two out of three are bullish. Like here, for example, let's see where you see here. Here we have parabolic stopper reversals. Reversal is bullish, Force index bullish, and MACD is bullish. So here we have three out of three bullish. Here, for example, what do we have? We have bearish, bearish and red bearish. So three out of three bearish. Here, three out of three bullish. So here for example, we could check for short setups and maybe there is one. Maybe, if you look at the moving averages, probably is going down like that. So you make short when the price is near a moving average and here we can look for long setup. Again, I don't suggest you to use them alone, but rather as a support tool that can help you screen out many situation. Because if you think about that using this rule, every time you have zero or one indicator either bearish or bullish, you basically don't do anything. Okay, so that's all for this video. Thank you for watching. I hope you find it useful. If you have question, you can let me know with a comment and I will also, as I said, put some links below where you can find more information about these indicators, how they are computed and so on. So with that, thank you for watching and see you next time.