What Indicators Should You Use In Your Trading | Podcast Episode #21

0:00
Hey, everybody. This is Ryan Mallory with shareplannner.com, and I’m doing a new podcast here for you, and we’re gonna be talking about indicators and what role do they play in your trading strategy? And should they play a strategy at all? Do the most successful traders, what indicator do they use?

0:18
Is there a holy grail indicator that will allow us to find consistent, reliable, and constant success in the stock market? And, and When we’re looking for indicators to incorporate into our trading strategy, what is it exactly that we should be looking for?

0:34
And so, in this podcast, I wanna address all those with you and try to make my opinion and how I incorporate them into My swing trading as clearly understandable as possible. So, let’s get right into it then.

0:51
What are indicators? And if you really boil it down, indicators. All come down to price and volume, at least on the technical side of things. I know on the fundamental, people can like chart out earnings per share, they can chart out PE ratios, but we’re talking about technical analysis.

1:08
That’s, that’s what I do primarily. I really don’t care about the. The PE ratios or the book value ratios of the stocks I trade. It’s important if you’re a fundamental investor or a trader, but if you’re a swing trader that focuses primarily on technicals or a day trader, that is not something that you really take much into consideration.

1:27
So, let’s stick with the technicals. And so your technical indicators, they are all going to be a subset of price and volume. They’re a derivative of price and volume. And so, Don’t, don’t get hung up on indicators as being the, the telltale sign of whether or not you should buy, sell, short, cover stock.

1:46
I don’t let them do that. They play a very minimal role in my trading. My primary goal is to look at price and volume. That is what I care about the most. I do not care about what the indicators say. Sometimes I’ll glance at them and I’ll try to get a gauge on the health of stocks.

2:02
So for instance, I, I do keep stochastics on my. On my charts, and I really don’t use them that much, but I’ve had it there for, goodness, 10 or 15 years, and I’ve, I’ve kept it on there simply because it just kind of gives me a sense of the euphoria behind the stock.

2:20
I mean, if I’m getting like a sarcastic reading of 98 or 99, I’m like, uh, might be time for a little bit of a pullback, but if it’s over 80, that doesn’t bother me at all. Especially It has a history of trending above 80, and it doesn’t really get too bogged down. But a lot of people will tell you about sarcastics, 80 is overbought, below 20 is oversold.

2:40
Yeah, that doesn’t matter. It really doesn’t. Stocks can stay below 20 far longer than you would ever expect, and they, Can the stochastics on stocks can stay above 80 far longer than you would expect. It just does not matter that that it reaches overbought or oversold levels.

2:56
It depends on the momentum of the stock, the volume, uh, you know, incorporated with the price action. So if you have volume and price action continuing to push the stock higher, I care less what the stochastics say. So.

3:13
While I’ll glance at the stochastics, I really don’t pay much attention to it. And if the market’s like over 90 stochastics, I could care less if the stock that I’m getting ready to trade is over 90 stochastics. But when it gets to like 98, 99, you start to think, OK, and if I see that the price is extremely stretched.

3:31
There’s probably not gonna be a trade opportunity there at that point, but that doesn’t mean I go shorting it either. It just, I move on to the next trade.

3:51
So, indicators, they’re all a part of price and volume. They’re a subset, derivative of that. And so, the better that you get with just reading price and volume outright, the better of a job that you’re going to be or a better trader that you’re going to become.

4:13
Um, and less reliant on, on the indicators. So, the better you are with price and volume, the less reliant you will be on indicators. It’s simple as that. I mean, I, I really don’t use them that much.

4:34
Now, I am a top-down trader, so I take into strong consideration the action over the, of the overall market before I actually get into a trade.

4:49
And If the market’s bad, I’m not really looking to get long, and if it’s really good, I’ll look to, to add more exposure to my portfolio. So, one of the things that I like to do is try to get a, a feel on any divergences that might be happening in the market with the stocks that are lying, that represent the market.

5:19
So, my favorite one is the T2108. And what the T2108 does is it measures. The percentage of stocks that are trading above their 40-day moving average. The reason why I like this is because it’ll help me to know what is driving the market up.

5:36
Are all the stocks really pushing this market up, or is it just like a select few like Apple, Facebook, Google, Amazon, Netflix? Or is it a broad-based rally?

5:53
And so sometimes when I see the stock market, and we saw this back in January of 2018 here, so just a few months ago, where the market was rallying higher and it was rallying really fast, but The T2108 was really diverging to the downside and eventually, we saw the big sell-off that happened towards the end of that month and into the beginning of February.

6:12
And that’s, that’s what you’re looking for. That’s what you want to make sure that. You’re not on the wrong, wrong end of that market.

6:29
It was diverging very strongly against the market when the market kept climbing higher and was just rallying day after day. The T2108 uh indicator showed that the percentage of stocks trading above their 40-day moving average wasn’t increasing as well.

6:57
That’s another indicator that I use. You can look at the VIX index, and that’s more of an index versus an indicator, but still you can get. A good reading on volatility in the market. You can use, and I do encourage you to use some indicators, but it takes me on to my next point, and that is the indicators should be a complement to your trading strategy.

7:16
So, as a top-down trader, things like the T2108 is going to give me a good feel for the market. It’ll help me to understand. The underlying conditions that are driving the market, are stocks participating? Are they not? Is it really just a handful of stocks that are driving the market higher?

7:32
And that does happen a lot, especially with the Dow. The Dow is so manipulated by the larger priced stocks or the higher priced stocks that A move in Boeing or a move in a stock that’s over $200 a share like Goldman Sachs can really carry, especially during the earnings season, if they move up 4 or 5%, that can really lift the Dow even if 20 of the stocks are trading lower that day out of the 30 that are represented in the Dow Jones Industrial Average.

7:50
So. Yes, the big stocks can do that. So if you’re looking at the S&P 500, you might see that some of the bigger market cap stocks are really the ones that are pushing the, the stocks higher like Apple and Google or Facebook, and a lot of the smaller cap stocks are in the S&P 500 are really lagging.

8:02
And so it may not be uncommon for 300 out of the 500 stocks on the S&P 500, 500 to be trading lower. And so, Like with the T2108, that is the same thing. It helps you to see, is this a broad-based rally?

8:30
Are the stocks participating in it? And as a result, that complements my top-down trading strategy that I incorporate into my everyday decision making.

8:45
Another indicator that, that can be of good use is the Bollinger bands and What they do is that they, they provide you some standard deviations on overall price action.

9:05
So if this, you basically get these bands on each side of the 20-day moving average, and if you want two standard deviations, which is the common setting for Bollinger bands, and if you start seeing price moving two standard deviations outside of the 20-day moving average, there’s a good chance that you may see a retraction there, particularly if you look at the price history of the Bollinger bands, and you can tell where there have been repeated. retractions or pullbacks every time that event takes place.

9:30
And another, if you want to, you can even go 3 standard deviations. It’s just really, what is it that complements your trading strategy.

9:51
And so, sometimes I’ll use the Bollinger bands. I’ve, I’ve used them less over the years because I trust myself more with price and volume. Um, as I can continue to trade price and volume, I consider myself pretty good with that since I’ve been doing it for ages now, but, but nonetheless, I, I, I truly believe that, um, indicators can complement it, but the more that you become proficient in reading price and volume on the charts, the less dependent that you will be upon these indicators specifically as they pertain to stock prices and stock action themselves and, and the traits that you’re looking to take.

10:30
The final question is, is there a holy grail stock for or an indicator, and for a lot of you guys, you know, the, the answer to that, of course, that’s no. There’s no indicator that’s foolproof.

10:50
If it was. Everybody would be using it and then it’d be rendered useless because everybody is using it. So, there’s no holy grail indicator.

11:05
There’s nothing that’s going to make you great. I know, I don’t know if they still have these or not, but I remember seeing them on television where you’d get these people selling you these programs where it says, buy when it says green and sell when it says, when the red, when the light says red.

11:25
And so for on the charts, they would have this little like stoplight icon and And if it was showing you a green light, you would go buy it.

11:45
And if it was a red light, you would sell it, right? And, and people really bought into that, I think, cause I mean, I would, I would, I would hear people tell me how they had tried the program and they failed miserably at it.

12:00
And then, of course, when they fail at it, then the people are that are selling them that product, if they have to, to talk or interface with that person, they’ll tell them, well, You weren’t doing it right.

12:10
I appreciate you guys listening. If you guys have any questions, always feel free to email me and I hope you guys have a, a great rest of the week.