Trading Kindergarten Lesson 2 – Full Lesson List:
In trading kindergarten lesson 2 we will look at the power of charts in greater detail, using ‘indicators’.
We will cover 4 very common, basic indicators. There are many more. These are a good place to start:
(There is a blue line and an orange line on the chart above. The blue line is the fast moving average. The orange line is the slow moving average).
Moving Averages smooth-out price fluctuations, over time. They take the average closing price over a certain period. This period is changeable.
This is a lot smoother usually. Price moves are less dramatic, as it is an average. So it can show more clearly what the price is doing over a period. This can better indicate the potential direction of the market.
Normally when using MA there are 2 more lines. Each of these lines has different parameters for the price average. Without going into too much detail, basically, when the two lines cross most traders sell / buy, depending on the trend.
MACD will tell you if a trend is starting, well before the moving average. Note that simply because the MACD moves, it doesn’t mean the price is moving.
MACD indicator contains within it 3 key indicators:
These are the the moving averages discusses previously. However, they almost always move faster.
(The blue and orange moving average lines, again)
The histogram will show you the difference between the two moving averages. A histogram trending down would generally indicate a price that is also trending down. And vice-versa. This is only a general guide of course. Sometimes the opposite is true.
So it’s very important you pay close attention here.
Note that when these two moving averages converge (cross), the histogram will necessarily be at zero (center of the line).
(The yellow pointers mark the SAR indicators)
The SAR is arguably the simplest indicator to understand and use. As the name suggests, it means the current trend has stopped and is now reversing.
This is a kindergarten class. So we’re going to make it as simple as possible for our students. Dots below the candlesticks? Buy! Dots above the candlesticks? Sell. That’s it.
The one drawback of SAR analysis, it is terrible for a market going sideways (flat candlesticks). And you will only lose money here, in that case, for sure.
RSI would indicate if the market is either overbought or oversold.
Operating on a scale of 0 – 100, a line below 30, would indicate too many traders have sold. The price should then start to rise. A line above 70 and too many traders have bought. You can expect the price to come down.
The indicator can’t indicate how much the price will move. What it can do is give you early warning of a trend. An RSI line below the center: 50 for a period indicates with high probability that the price will begin an upwards trend.