Trading Stocks w/ the Rate of Change Indicator | Technically Speaking: Advanced Charting Techniques

Trading Stocks w/ the Rate of Change Indicator | Technically Speaking: Advanced Charting Techniques

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foreign [Music] good afternoon and welcome everyone my name is Cameron May it's two o'clock Eastern Standard Time on a Friday afternoon that means that it's time for the ongoing weekly series of discussions called technically speaking Advanced charting techniques I'm filling in for Pat Maloney but we're going to be spending about 30 to 45 minutes talking about charting and specifically we're going to be talking about planning a stock trade using an indicator known as the rate of change oscillator I'd be interested to know for those that are in the audience today how many have actually used the rate of change also known as The ROC or The Rock go ahead and give me your your input I'd like to see that but uh we're going to be setting a more precise agenda for how we're going to tackle that discussion in just a moment before we do that though first of all let me say hello to everybody chatting in from all around YouTube land hello there Wayne and Chase Michael who else is here Rebecca Brad Michelle uh Esteban says Merry Christmas Merry Christmas right back to you Esteban uh thanks for joining us week after week we definitely appreciate your attendance your contributions to these discussions if you're here for the very first time though well I do want to welcome you as well if you'd like to chat in let me know this is your first time in one of my live streams I do like see who my new audience members are and if you're watching uh on YouTube through the archives or the recordings after the fact we'll enjoy the presentation but be aware that you're invited to join us in the live discussion this one kicks off two o'clock Eastern Standard Time on Fridays typically runs about 40 to 45 minutes and yes it's typically taught by Pat Molly he decided to get his holiday started early so I took that as an opportunity to step in help out love teaching the topic so glad to be here and uh as a final heads up we have my very good friend Michael Keely is going to be hanging out in the chats with you answering any questions that I can't address thanks for having me back my back there Michael but let's go right to it the very first thing that I want to do is issue an invitation if you're not following Michael or me on Twitter please please do that's a great resource not everybody in this audience today is taking advantage of that resource Michael's Twitter handle is at M Keely that's k-e-a-l-y underscore TDA mine is at CMA underscore tdas you're seeing right there on your screen and that really is the very best place to connect with me in between webcasts and have that more personal interaction on a daily basis if you reply to me I try to reply right back to you Twitter's a great resource all right another thing that we need to do is bear in mind the risk associated with investing the content we're about to provide is intended for education or informational purposes only any investment decision you you make in your self-directed account is solely your responsibility having success with your paper money account is not a guarantee that you're going to have success with your real funds as market conditions do change and they can change rapidly transaction costs are important factors it should be considered when evaluating any trade while this webcast discusses technical analysis other approaches including fundamental analysis May assert very different views and finally all investing involves risks including the risk of loss right so let's set let's set that agenda three items on the agenda three things that I want to talk about um number one I want to talk about just exactly what the rate of change indicator is I want to I want to show you how it's constructed now sometimes it takes me a little while to show how some of these more complicated indicators are built explore the algorithms that generate the the numbers that create the the indicator that's not true of the rate of change fairly fairly straightforward won't take us very long that's going to give us more time to talk about how the rate of change might be used in the planning of a stock trade and then to really drum in that the learning and the understanding of this new indicator I suspect it's going to be new to almost everybody out there we're going to get some repetition with it so we're going to be looking at multiple charts and multiple examples so that's it how is it built how is it used and let's get some application right so let's do it let's go right to think or swim and I'm going to come over here and let's just uh let's lay out the the precise calculation calculating rate of change also known as Roc or rock as I've said there we go and it all really does boil down to one algorithm starts with the closing price for a day now if we're looking at an hour we can talk about the closing price of an hour or so on a week and closing price for the week but we we take the closing price on a stock or an index and we subscribe we subtract the close from a certain number of days ago so we'll call that close n for a number of days ago right and once we've uh once we've calculated that difference between closed now and closed from some time ago we divide divide that by that previous close okay and now finally we multiply that value by 100. that's it now for those who are more familiar with math if you if you take price right down subtract price from a certain number of days ago and it gives you a number and then you divide that by the price from a certain number of days ago and multiply it by 100 what that's actually done is just told you the percentage that the price has changed over the selected time frame that is the rate of change in a nutshell so let's get some application here I'm going to come up here to the little Beaker icon I'm going to click on this oh and by the way as we bring this up quick sidebar I'm going to I'm going to use this as an opportunity to do a couple things number one I just saw a survey pop into the chat window so if you would do me this favor right now click on that survey link that'll have it ready for you to fill out after we're done with the webcast you can give me some honest feedback I always promise if you take the time to fill out that tiny little survey it's just a couple multiple choice questions in a comic spots comments box but I will read your comments and I get that data it helps me with my webcast so always appreciate it and that information always goes right to who to where you would hope it would go goes to me but number two couple of heads up we need to know this with the holidays coming up number one no webcast next week all right matter of fact I think there's this one then there's one more somebody asked earlier I saw it in the chats is there a market we can review this week not this week nope it's been canceled no webcast next week to accommodate the holidays and the um the investor insights channel is being essentially merged with the trader talks Channel not exactly merged but what we're doing is we're taking our investor insights webcasts and having those live streams delivered through the trader talks Channel now so all of our webcasts are all going to be on one channel you'll have to figure out which one they're always is Cameron's webcast on this channel on this day or is it on a different channel the other it's always going to be on Trader talks we are going to keep the investor insights Channel just as a home for all the archives that have been generated from all the previous webcasts so you can still find those okay there we go so that's it that's what I wanted to do let's go back here finish our or get deeper into our discussion of the rate of change so we're going to come over here to our list of potential studies and I don't need to do this one more time just so we can connect all the dots okay let's click on the little uh Beaker icon this gives us our list of potential studies or technical indicators that it can be added to our chart and I'm just going to type in rate for rate of change and you'll find that right there at the top of the list and then I'm just going to click um add selected and before we apply it to the Chart pardon me for this moment yeah well actually says merging is a good thing I absolutely agree yeah nothing's going away all the webcasts are still going to be there we're just put them all on one channel in any case um let's quickly note some important elements of this indicator right now notice it says 14 14 and close the 14 I'll explain in just a moment and close we've already discussed okay we take closing prices this is not an indicator that uses like average prices or something like that we use closing prices so let's click apply and click OK actually pardon me let me do one more thing Let me let me edit something I'm actually going to make this a little bit thicker so click on the little gear icon we're going to change the width to um three click OK here and then click apply there we go just a little bit thicker line that we can deal with so this is our rate of change oscillator and you'll notice it said 14 Guess which guess which uh what number of days we're using taking the closing price today and subtracting the close from 14 days ago right there's actually some logic in doing that some technicians have observed that in the near-term in in the near term or to the intermediate term over the course of weeks to months we tend to have cycles and on average those Cycles might last four to six four to eight weeks well if you kind of split that in half if it takes us let's say three or four weeks up and three or four weeks down that gives us one completed cycle it might be theoretically important for a Trader to identify well are we closer to a cyclical low or closer to a cyclical high and if it takes you know let's say three weeks on average to travel from high to low and back or to travel from high to low or from low to high low to high maybe we construct our indicator over a three week time frame 14 days pretty close to three weeks if you include the occasional holiday there we go your land says you'll really miss the webcast for a week right the webcast if you wanted to watch some in the meantime you can always catch some some uh recordings okay so let's see if we can replicate this indicator really what's Happening Here on a daily basis is this algorithm is being employed and so for example let's zoom in let's get a little bit closer view so we can see this a little bit better we have our line down here and each day that line is just generating a new number and we're connecting a dots between new numbers each day so if we were to look at today's value for this indicator I can actually Point not actually let's not do today markets are still open today is going to still be moving let's go to yesterday what was the value for this indicator down here yesterday well if I point at it you can see this number over here in anywhere from yellow to Orange you see that number right there that I'm pointing at if we pointed yesterday you can see that number is negative 83 23. that was the value of our rate of change oscillator yesterday and each day it changes a little bit sometimes it goes up sometimes it goes down but as of yesterday it was 83 23 remember that number let's see if we can calculate it where did that number come from well it comes from this equation so if the equation starts with the close of our selected date what was the close from yesterday yesterday's close if we look up here at the C right yesterday's close was 57 19. so let's put that here 57 19. and then we subtract from that the close from a certain number of days ago how many days ago what we saw from our from our indicator when we added it to our chart 14 days ago so I'm going to come from today and then start counting back there's one day ago two three four five six seven eight nine ten eleven twelve thirteen fourteen days ago what was the close 14 days ago it was a 57-67. pardon me 57 67.

all right so what is 5719 minus 57.67. well that's right about um it's just a little bit over what 40 it's about 48 cents right if I mess this up correct me but I believe that's 48 cents as a matter of fact it is minus 48 cents so we're going to take that minus 48 cents now and continue with our calculation we're going to divide that by the closing price from 14 days ago now let me just restate what does this really mean well it tells us over the last 14 days price has fallen 14 cents maybe it'll help me even if to help you visualize this let's go to 14 days ago and which one was this one I'm gonna have to count again one two three four five six seven eight nine ten eleven twelve thirteen fourteen was this one there's our closing value from 14 days ago there's our closing value from yesterday so you can see we went down 48 cents and now we're just going to divide that by the closing value from 57 days ago 14 days ago 57 67 and that's going to tell us it's going to give us a number 0.48 times not times pardon me 0.48 divided by

57.67 is .008323 well this number should already be looking kind of familiar if we look down here if we point at our number from yesterday what was it minus 0.8323 yep so that tells us 0.88323 times 100 gives us a final value of minus zero point eight three two three and that is exactly this rate of change value literally means that from the close just 14 days ago we're down about eight tenths of one percent that's really what this indicator is so if we if we put this in a nutshell when we're above zero that just is telling us current price the current close is up from the close 14 days ago when we're below zero the current close is down from 14 days ago right and we also see this color scheme well let me let me mention one other thing with this uh with this oscillator some people you know they Wonder well how high can it go and how low can it go with a lot of our with a lot of the more commonly used oscillators there are certain ranges you know maybe it can only go up to 100 and down to 100 sometimes they can they travel between zero and one hundred with this one how far can a stock go down over 14 days well theoretically it could go down a hundred percent so the lowest part of this range is minus 100. there is no top side of the range for the rate of change because a stock over 14 days can go up any amount they can go up an unlimited amount so that's our range all right so now we can focus our attention now that we understand how the oscillator is constructed and we understand its range we can talk about this color scheme that you can see all right you'll see that we're ranging anywhere from a dark orange to a bright yellow and the bright yellow is generated every time we hit a new high where we have the the greatest increase of uh or the greatest rate of change over any 14-day period over the last 14 days if that makes sense that gives us a brighter yellow on the other hand if we have the deepest negative change compared to any other change over the last 14 days we get a bright orange okay Morrow says where am I showing that orange yellow graphic model so again this is called the rate of change indicator I don't know if you saw the opening of this webcast but you just go choose rate of change from your list right here rate of change okay you can also see the title right there rate of change all right so um I think when if you now that you're familiar with the construction of the indicator you can almost start to Envision how it might be employed imagine if you've been following this rate of change and you'll notice boy it was deeply in the orange and now it's starting to work its way toward yellow or it was well below zero and meaning the price has been falling compared to where they'd been a few weeks ago this might mean that we're at or near one of those hypothetical intermediate cyclical lows so when that when that color scheme starts to change to some traders that actually is enough to be a tradable event others actually wait for it to strengthen and go all the way up to the zero line and that would mean that uh that price is right now are starting to be better than they were 14 days ago okay so there are actually a couple of potential signals number one would be if we get what we call a crossover so this zero line is seen by some Traders as a signal line and in this case it looks like that event happened right here and for those Traders they might be expecting an advance in price from there it just is it's it's a sign that we might be near one of those intermediate cyclical lows all right now uh for others though they're more aggressive than that instead of waiting for that signal let me just remove actually let me just clear the whole drawing set that's okay if they see price just starting to strengthen from Orange if we see a deep dark orange and it just starts to go to a lighter orange or in other words if the rate of change line is below the zero line and it's starting to move up toward that zero line they might see that as enough of a sign that price is strengthening that that could be an entry signal and in this case you might see that that turned out to be a pretty solid signal right it doesn't happen that way every time sometimes you get what are called whip saw events but let's look at some of those some of these other examples here we see um the price is going from a bright yellow but not the prices but the color scheme going from bright yellow down down down slips below the zero line and starts to get toward that darker orange and then we get a turn back up toward that zero line again for some this might be a signal right here that we have some some pending strength in the stock and you can see in this case it looks like that happens it happened right in this area all right let's see if we have another this is a recent example here's an example of how it didn't exactly mail it it was it was actually maybe a little bit maybe a day or so early here we're below the zero line we're getting a darker orange and then we start to move back up well price actually still went down for about another 24 hours here we got a darker orange still and then price started to re and then the the color scheme started to change and that might have generated a potential entry signal right here so this would be a typical application of the rate of change so I think it might be interesting if you haven't ever used this indicator before we bring this up in your paper money portfolio and run it through some stocks and uh for the first application what you might look for let me Zoom back out is when we get a deep drop on the indicator that has gone into a solid deep orange and you can see that darker orange here and then we start to rise all right now you might say well what about Cameron what about these uh what about yellow does that mean it's time to exit actually yes for some technicians when they see that we're solidly above the zero line and we're getting that bright bright yellow and it starts to transition to a darker yellow for some that could be a sign time to take some profits out of any current trades all right so there's an example of going to bright yellow to darker yellow here's an example of going bright yellow to darker yellow it looked like that one happened about right here so if we're in a bullish trade and we're looking to maybe start taking some profits yeah the indicator is saying might might maybe take some of the profits off could scale out or maybe dial that position back but it's also quite common to combine this indicator with our other technical knowledge so if we got for example the bright yellow transitioning to a darker yellow and what else was going on at that same time but we're kind of bumping our heads against the potential price ceiling right yeah we have we now have um we have uh more technical evidence being brought to bear to signal that this might be time to start exiting a potential trade all right so we've actually looked at this through the lens of a stock Trader but somebody out there in the audience we have 95 people watching they might be saying well camera can this indicator be used to maybe look for Market reversals in the in the short to near term actually conceptually yes let's go look at the S P 500 and we're just going to apply this in the same fashion let's look to see do we have any uh deep drops on the oscillator where we get solidly orange and then we start to talk to turn toward a brighter orange or a lighter orange yeah we have a pretty good example right here there was actually a little bit right here where we might have signaled here the oscillator is below zero it goes to a pretty dark orange and then starts tipping up that was a sign right about here that maybe some Traders might want to take some profits but then we dropped a little bit lower bearish Traders taking some profits might have been a little bit too soon no indicator is perfect on the next go around though we only dropped a couple days deeper started to rise again and in this case proved to be a more effective signal now one other thing is if we're bringing our other technical tools into this discussion what has been the trend of the S P 500 pretty much all year it's been coming down so really a Trader during this time frame may actually be putting a greater emphasis on bearish Entry opportunities where we're getting up into the bright yellow and starting to transition back to the orange pretty good example let's look at the examples on the S P 500 of that looks like we had yeah this one was orange-ish this this is still oranges it hadn't gotten quite to bright yellow here we got a nice bright yellow signaling if we're gonna start taking bearish trades maybe we do that here oh and by the way Connor Thank you again good to see you again there Connor yeah Connor just filled out the survey very much appreciate that if you weren't here for the reminder earlier we do have a survey for this webcast so if you would do me this favor and just click on that survey link fill out the survey after the webcast is over I'll be sure to read your survey comments all right there's actually a pretty good example we got uh we got a light yellow here where we started to transition to Orange and we got a little bit of a pullback out of that in that case it didn't turn out to be much of a profitable signal if any at all we got another one right here bright yellow transition into dark orange and it kind of petered out for a few days before continuing to advance so not much benefit from that signal it was the third one really where we went bright yellow transitioning in a dark orange that did that did the best job of anticipating that top and what might have helped us with telling a difference between this signal or this signal and the one that actually carried the best weight it was bringing some more evidence to the equation right it was looking at the previous highs and if we have an area of resistance combined with a signal on our indicator that might carry some more weight for some Traders so we might apply that same knowledge here we got yellow here that might be a premature signal still worked for a bit for a couple of weeks we got another signal here that one wasn't bad and then finally a third signal here and that one was right on our trend line and that one seemed to be uh the one that was strongest right okay so guys we've actually accomplished everything that I set out to do today this is I told you this is one of those signals one of those indicators that's not really as complicated as some calculation pretty straightforward the interpretation pretty straightforward it is going to be one that you might want to practice with so what I would encourage you to do as we move into this long holiday weekend we're going dark after one more webcast so go enjoy that one but it'll give you plenty of time to to bring some of this new knowledge into practice and you can decide whether it's going to be appropriate for you or not this is not a sales pitch for a specific strategy it never is when with my webcast I try to introduce you to a range of potential tools make you aware of what's available out there and then you can pick the ones that you might use if you choose to use any of them all right but um yeah again no webcast next week the the uh investor insights webcasts are coming over to Trader talks next week so all of our webcasts are going to be on this channel so do yourself a favor if you have not yet subscribed to Trader talks come right down here and click on the little subscribe button and you can now find the full range of our webcast offerings right here on the channel I think that's fantastic uh Michelle hey you're welcome yeah Michelle says you put a great deal of attention put on this rate of change indicator I really like my I really like my audience to understand the indicator so we talk about how it's built before we even get into how it might be used so I hope you appreciated that if you like this kind of thing you may want to join me on my uh in my Wednesday apartment my Monday uh morning discussions called getting started with technical analysis we do that every Monday morning 11 o'clock Eastern Standard Time about 45 minutes 30 to 45 minutes on topics like these also follow me and Michael on Twitter at M Keeley underscore TDA and at CME underscore TDA all right there's over 100 of you out there already see over 30 people who have dropped a like on this discussion thank you I appreciate that that to me is like giving me the final Applause before you head out the door if you want to drop me a like that's fabulous but everybody time for me to let you go um when we uh when we kick this off we just wanted to introduce the indicator talk about how it might be used get some application we've done that but as you go just remember that risk is real we did use real examples in today's discussion it's not a recommendation or endorsement of those Securities or those strategies everybody have a fabulous holiday um I will see you again after the holiday Monday the 2nd is the market holiday for the new year so it's actually Tuesday the third when we're going to be back online so we'll see you then I'll look for you on Twitter in in the meantime but Hey whenever I see you again until that moment arrives I want to wish you the very best of luck happy trading bye-bye [Music]

2022-12-29 08:23

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