[Music] hi guys my name is pritik singh and in this video we're going to learn about indicators [Music] indicators are probably the most popular tool amongst the trading community and people like it for two reasons one is that it's quantitative which means you can actually see a number on your screen and based off of that take a trading decision and second it's very easy to plot i think after the advent of the internet calculating these indicators is done by the charting platform so you can focus on analysis so i think it's ease of use anyway an indicator basically is a calculation that derives itself from price so basically there will be some hypothesis on the price itself and based on that an indicator is drawn which helps you understand if maybe the market is overbought or oversold less in momentum or more in momentum near its average or away from its average so on and so forth now visually when you look at a price chart you will see two types of indicators one indicator which is an overlay indicator which is plotted right on the price chart itself for example the bollinger bands and the moving average are plotted on the price itself another type is the underlay indicator so that is a separate pane right under the price like an rsi or a macd these are different indicators we learn in this video and that is on a separate pane itself and i'll show you what that looks like on a chart too now whenever you're looking at things like the rsi and the macd they have a range they start from 0 and n at 100 and they oscillate from 0 to 100 and that's why they're called oscillators as well because they oscillate between two minimum and maximum numbers 100 and 0. also there is an overbought and oversold area for all of these oscillators usually so for example when price moves up a lot and we reach an overbought area it means that many people have bought and momentum will likely die now and it's become overbought and market is likely to retrace a little bit and when markets move down or very large sell-off when markets fall it is said to be oversold at a certain level on the indicator meaning that there will be some retracement now because it's been oversold but anyway i think now it's time to actually see an indicator in action and we're going to start with the moving average so let's start with the moving average before we actually look at a price chart let's understand moving average through an analogy a moving average remember is nothing but a running average for a period of time but like i said before we do stocks let's talk about cricket let's imagine there are two batsmen there is batsman a and there is batsman b now let's imagine both of them play five matches each so i'll just draw five circles to represent this so now let's imagine what each of these circles represent they represent a match played by player a and a match played by player b five matches each let's see what number of runs they have so bassman a does 76 runs 20 runs 65 runs 72 runs and 17 runs this brings us to an average of 50. so batsman is first five matches gives him an average score of 50. batsman b on the other side is at 96 98 99 87 and 120 his average on the other hand is 100. so what we have over here is sort of like a five match average so i'll just write it here five match average now i have a space over here i'll tell you why i've done that what if we have a sixth match well since we're only doing five matches instead of seeing the first five we will drop the first for both the matches and we'll only take the second match till the sixth match and we'll have a five match this time the average for batsman a is 40 and average for batsman b is 94. therefore this is a five match moving average now of course these batsmen are not going to stop right here and we have to continuously calculate their five match moving average and the word here is moving the concept you have to understand is that we are finding the average for a period and dropping the last number and adding the next number and we keep moving that's why it's called a moving average the same concept is applied to stocks but you just take the closing prices for every day and decide the period it could be a five day average a ten day average a 200 day average and that keeps moving hence giving us a moving average of the price stock so let's see what this looks like on a chart and it's actually pretty simple i'll first open a daily chart let's say hindustan unilever and i'll go to indicators i'll search for moving average and i'll be able to set settings to say 50 and look at this source source means the close which means the data that we're plotting for this line chart is a single data point on a daily basis and that's the close of the day and we will see here that we have this moving average of hindustan unilever you'll notice that the line is continuous it is calculating the last 50 days as we add a new day it will drop the first day here add the new day and the average will keep moving ahead now for a trader why is this important well the first most obvious thing is that it gives you a baseline or an average all the noise of prices into just a single line so if i zoom out you can see that most of the time the price is always around the average right if you've studied statistics people talk about the tendency of mean or the tendency of how numbers tend to revolve around the mean which basically means that price tends to be near its long term average and in this case it's actually very near its average sometimes it moves on one extreme then comes back to the average moves on the other extreme and then goes back to the average so and so forth i can also change the period from 50 to say 100 and this time i get a more smoother line so as you increase the period the smoother the line becomes because more data points represent one point on the moving average and it just becomes smoother so what i'll do is i'll add another moving average and i'll give it a color of yellow and i'll give it a length of 200. and you can now see the difference between 100 and 200 that the 100 has a little more detail it moves up a little bit more the 200 moves a little less and is a lot more smoother because it's a longer term moving average so now that you've understood moving averages let's talk about an exponential moving average i'll keep it simple basically when you're looking at this batting example we talked about the latest match has more relevance than five matches ago so how this batsman performed in the last match is more relevant to predict the next match's outcome versus what he did five matches ago or if this was a longer term average then i would say the last match has more relevant than 50 matches ago the same applies for stock as well because stocks can move very quickly the latest data points have more weightage or more relevance than 50 days ago or whatever your period of moving average calculation so what we can actually do is we can give more weightage to the recent price movement [Music] so when you give weightage to recent data that kind of moving average is called an exponential moving average let me show this to you on a chart so the same chart we just saw we now have hindustan unilever we've already drawn the 100-day moving average i will simply add an ema of 100 in orange and you'll notice both of these moving averages are 100 but if you look a little closer let me zoom in look at this fall we can see markets went up the moving averages were sort of still sideways then when markets fell the white line or the normal simple moving average which does not have any weights continued to move up because it is averaging the last data but the orange line actually moved down quicker can you see that because it was reacting to the latest data more therefore a lot of traders use exponential moving average because it gives you best of both worlds it gives you a running moving average you get a great idea but it also reacts to the latest price data faster so the most common way of using a moving average is to know whether the stock is in an uptrend or a downtrend i know you can visually see it on a chart but to have a quantified version of it which is the advantage of an indicator is a moving average so if the price is generally above a moving average it is generally thought that it is a bullish market if you're under the moving average it is thought that we're generally in a bearish market now two points to note here you want the moving average to be a little long you don't want to be doing this with a five period moving average or the trend will keep changing for you so try a 100 moving average or a 50 or a 200 moving average and also use this on something like a daily chart and above whether the market is in an uptrend or whether the market is in a downtrend the next indicator is the moving average convergence divergence now actually this indicator is really old it was started in the late 70s by gerald apple it's considered to be one of the most reliable momentum indicators by the trading community so let's understand how it works two exponential moving averages that's the 12-day ema and the 26-day ema are subtracted to get a value now this value if if it's negative you'll get an macd line that's below zero if that value is positive you'll get an macd line that's above zero now people use an macd line or you can use a histogram which is slightly easier to see as the macd moves above zero and below zero now apart from the macd line that we just talked about there is also a nine ema line that will run throughout the chart you can see that right here now since this is a momentum indicator it's giving you indication of momentum and direction so you can see here that the trend moved from down to up now you can see here that hindustan unilever has been falling continuously and the macd histogram this is actually below zero in negative territory right around this area the histogram turns above 100 and starts giving you four five six seven numbers and that's when the trend has turned upwards and the market has also moved upwards um you can see right after that the reverse happens when this bar falls down we can see that the histogram is now below zero and the momentum is now downwards and surely enough the market actually falls from there so on and so forth so you can use this as a way to understand direction as well as strength of momentum when the stock is in a trend another way to use the macd indicator is to just look at the two lines that you see here and if they cross like this under that means the trend is going to move downwards but if it crosses like this towards an uptrend it shows that the market is likely to move upwards so simple example is right here we can see that the white line was slanting downwards and the yellow then converges downwards as well and after that we can see that the market broke down and we fell from there and then the opposite happens both lines converge upwards and we can see that there's a breakout and the market moves upwards now just like everything in technical analysis every time there's a convergence divergence or every time the histogram moves above zero or or turns below zero it doesn't mean that the trend will change all of these are probabilities and it is completely probabilistic in nature that the market is likely to so i hope that makes sense and that is what the macd indicator is the next indicator we're going to talk about is the rsi or the relative strength index now this word can be a little misleading it doesn't compare to stocks rather it compares the stock itself and it tells us relative to itself whether the trend is strong or not it was developed by an engineer called j wells wilder the rsi is a leading indicator so it's not a lagging indicator it's considered to be a leading indicator momentum in nature and that's what it measures so let's see how this works it's very simple if you want to understand the calculation behind the rsi i'd suggest you read the varsity post which explains this really well i'll give you an overview and focus more on the price action on the chart so the rsi will basically count each game day so as you have bullish days into points and will also count the loss days and convert them to points and based on these numbers it'll actually draw an oscillator it'll draw a line which oscillates between zero and hundred now the reason why it oscillates like i said before it shows overbought and oversold zones the usual period calculation for rsi or the number of days that it calculates to actually draw the rsi line is 14 and the 14 period rsi is actually standard throughout the industry so let's see what this looks like on a chart so i'm going to continue with our hindustan unilever example since we've been leading with that for the last few indicators so you'll notice we have a line over here that's the rsi line it's oscillating between a maximum of 100 and a minimum of zero and we also have a range over here of 70 to 30. so basically these numbers are standard in nature the 14 period rsi now we've also marked 70 and 30 as upper and lower limits or upper and lower bands so 70 is considered to be overbought and anything below 30 is considered to be oversold so when markets touch the oversold area that's around 30 we expect a bounce back up and when we see markets going up to 70 we expect it to fall or retrace from that point so let's see an example i can see that hindustan unilever right here was falling this red bar actually dipped below 30 then it was sideways for a period of time before it bounced back up [Music] here's another example the market was falling and we can see this rsi over here this bar right here this red bar went below 30 and then after that the market actually bounced back up now there's one disadvantage of an rsi and i will talk about that as i show you the opposite example that's the overbought example so that's right here this is a good example so we can see that hindustan unilever was moving up and right about here this green bar is when the market went above 70 that means it it's become overbought and the market has actually fallen after that and we've seen the market to fall now the disadvantage i was talking about is called stickiness so sometimes the market can go up and continue to move up and the rsi just sticks on the top of 100 and becomes a flat line until it falls which means that sometimes this pattern does fail sometimes this indicator does fail and one example of that is here the market gapped up it went way above 80 and it just stuck to 80 75 range for a really long period of time before falling actually almost a month and this is what i meant by just sticking on the top and staying there for a long period of time and not actually retracing uh this is true for both bullish and bearish markets so i have another example for you and over here it's reliance we can see that the market has been falling and you have this huge gap down at this point the bears are in control and the market has really been sold into for the last few days and so much so especially on this day that's 24th august now the rsi at this point curiously falls below the 30 mark actually it's around 22 which means we're below and now it's oversold oversold basically means at some point there will be some retracement because there's been too much selling at this point and we can see that the market was actually sideways after that for some time before moving up so that's an example of an oversold example using rsi so i hope you learned a lot we talked about different kinds of indicators there are actually many many indicators to learn from if you don't want to stop your momentum and learn a few more indicators i suggest you go to the corresponding varsity post see the bollinger bands and see the atr indicator and you can continue our discussion right there and learn a little bit more about these volatility bands key takeaways from this video are [Music] you