How to Use Stochastic for Short-Term Trades | Cameron May | 8-21-19 | All About Stocks Series


Good evening and
welcome, everyone. My name is Cameron May. And I want to welcome you
to this evening’s discussion in our All About
Stock series, where we set aside up to an hour
every Wednesday evening just to discuss all sorts of
things stocks related. And over the course
of the last month, we’ve dedicated the
month of August, to examining oscillators,
or the usage of charts for the planning of
short-term trades. Now, the first week of August
we talked about MACD oscillator. Second week we talked about RSI. And today we’re talking about
the stochastic oscillator and how it might be used
to plan a short-term trade. So I’m looking forward to it. We’ll wrap up August
next week with CCI. We have a specific agenda
here, three items on the agenda that I want to cover
in just a moment. But let me say hello, all of you
returning veterans, including, yes, you, Rich. Thank you for joining
us this evening. And if you happen to be here
for the very first time, I want to welcome you as well. I always consider this
to be a great privilege, and I think it’s time
well spent every week. And if you’re
listening in on YouTube after the fact on
the archive, welcome. Enjoy the archive. If you’d like to
join us live, we kick off this discussion every
Wednesday 8 o’clock Eastern Standard Time, if you want to
join us on Wednesday evenings. But the very first thing
that we always need to do is consider the risks
associated with our investing. And as we do that, let me
give you a quick invitation. If you’re not yet
following me on Twitter, I’d really invite
you to do that. I like that more
personal-feeling connection. @CMay_TDA is my Twitter handle. Or you can just find me. Just search for me on Twitter,
Cameron May TD Ameritrade. You’ll find me. Hello there, Guillermo. Good to see you. But first the risk discussion,
important information. Any investment decision you make
in your self-directed account is solely your responsibility. Past performance of any
security or strategy does not guarantee future
results or success. While this webcast discusses
technical analysis, other approaches, including
fundamental analysis, may assert very different views. Any investing involves risks,
including risks of loss. And we are going to be using
real examples in today’s discussion. Please don’t take that as a
recommendation or endorsement of any particular
security or strategy. So let’s go set our agenda,
just three items on the agenda. We want to talk about MACD, what
is it, how is it constructed. Pardon me, MACD, look at this. I’m using my agenda
from last week. Let’s get this updated,
stochastic construction. And then we’re going to
discuss using the stochastic for short-term trades. And then we’re going to
place an example trade. So by accomplishing
those three things, you’ll understand
what the stochastic is, how it’s constructed,
then how it might be used. And we’ll see it
being used in action. So completing the
circuit, right? Now, what I want you
to walk away with is how might the stochastic
be used for short-term trades. Hey, there, Ricardo. Thank you. Thanks for joining us. So I’m going to kick things off. If you would, get your fingers
hovering over your keyboard because I have a
quick quiz for you. I know you didn’t expect a math
exam when you started this off. But I have a question for you. Here’s an example scenario. And it’s pretty simple
one, but let’s see if you can calculate this. Let’s say that over
the last 10 days a stock has ranged from
a high price of $50 to a low price of $40. And let’s say right now
it’s currently at $48. Here’s the math equation that
I want you to perform for me. The stock has ranged between $40
and $50 for the last 10 days. If we’re right now at
$48, what percentile would we say today’s
price is when compared to that 10-day range? See if you can answer
that one for me. What percentile is today’s price
compared to the 10-day range? What is that? Well I think some of you
probably already typed this in. I know there’s a
little bit of delay from the time I pose a
question to the time it comes through to me. But, yeah, we’re at the
80th percentile, right? If we’re at $48, and the
range is a $10 range, well, we’re falling at
the 80th percentile. Well, congratulations. If you understand that, if you
were able to calculate that– Ricardo, exactly
right– then you just calculated a stochastic value. Let me show you what just went
on in our heads as we did that. This is the equation for
calculating a stochastic value. You take the current
or the closing price. I’m going to
abbreviate that to C. And you subtract the low
price for the range of days that we’re discussing. So in our example, that would
be the low of the last 10 days. And then you divide that by the
high price of the last 10 days minus the low price
of the last 10 days. And again, the number
of days can change. But that is the equation. Oh, and then, of course,
multiply that by 100. So what did we do
in our example here? Well, we took the current
price, $48, and subtracted $40. So we know that we’re
$8 from the low. And if we compare
that to the range, high price of $50
minus low price of $40, there was a $10 range. Well, 8 divided by 10 is 0.8. And if we multiply 0.8
by 100, that gives us 80. And that is a stochastic value. So then let me propose
another scenario for you. Let’s say that the
current price now shifts. So it was 48. Then it goes up to $49. What percentile do we have now? Well, now we’re at
the 90th percentile. So we’ve gone from
the 80th to the 90th. And if we’re to
connect a dot, if we’re to connect those
two dots, we would see that our percentile
ranking has increased. And that connecting the
dots extended over time generates a line. So let’s see that
line on a chart. I’ll just use SPX
as our example. Now, if you don’t know, if you
weren’t able to quite follow that, that’s OK. The reason I get into the
specific construction of some of these indicators is
that’s an appeal to those who really like to
understand the inner workings of an indicator. While others are going
to say, Cameron, I don’t care how the
indicator’s built. I just want to
know how it’s used. That’s OK. We’ll talk about that too. But I’m going to come up here
to our Edit Studies icon. And let’s add a stochastic. It’s not called a– what have I heard
it called over time? Scholastics, stochimetrics. Yeah, stoch– S-T-O-C-H– we’ll just type that in. And it starts to give us the
different stochastics that are available. And I’m going to start with– and again this is
appealing to those of you who really like
to understand how these things are built before
we talk about how to use them. I’m going to start with what’s
called a fast stochastic. So I’m going to add that. And I’m going to click Apply. And what you’ll see is
right down below the chart, we wind up with two lines. I’m going to hide one of
the lines temporarily. So I’m going to come up here
to where it says Stochastic Fast, click on the Edit icon. And then I’m going to click
on this Fast D. That’s OK. Don’t worry about what
that is for the moment. I’m just going to hide that. Where it says Show Plot,
that’s a hide function. Click OK. Click Apply. But what we’re left with
now is just this red line. And this red line
is this equation over here just
expressed over time. As that the percentile
ranking within a certain frame shifts up and down, that’s
exactly what we’re seeing. So this red line is that
percentile ranking changing. Now, notice in our equation,
can we ever go below zero? No, we can’t go below the lowest
price of the last 10 days. Why not? Well, because if you go lower
than the last price of the 10 days, that changes the lowest
price of the last 10 days. It becomes the lowest
price of the last 10 days. So you can’t ever get below
zero in a stochastic oscillator. So you’ll notice that
we’re range bound here, a minimum of zero. You also can’t get above 100
because you can’t go above, necessarily, the last 10
days’ high because this day is included the last 10 days,
and that’s just essentially resetting the range. I hope that makes sense. Just be aware that
with the stochastic you can’t go below 0,
can’t go above 100. But you can go pretty
much anywhere in between. And that line is
just being generated using this equation,
this little simple math that we just did, 80% to
90%, maybe back down to 70%. Now, another thing that
you see on the chart here are two horizontal lines. Now, we talked
about we’ve talked about overbought and oversold
areas in previous discussions. If you want to go
back and check out those archives from previous
weeks, go look for those. But for a stochastic,
the overbought is considered to be 80% or
higher, or just 80 or higher. And 20 or lower is
the oversold area. Let me put that into
some real terms. Let’s say that you were
about to buy a stock. And then you discovered
that you were paying in the top 20% of all
trades over the last 10 days. What might that
cause you to think? A trader might say, well, I
might be overpaying for this. Now, whether it turns out that
they’re overpaying or not, only time will tell
because a stock that’s at a higher price compared to
where it was doesn’t mean it can’t go higher, right? However, this is just the
basis for the construction of this indicator. So we have overbought above 80. We have oversold below 20. And then we have what we call
our stochastic line moving back and forth. Well, if you observe
something about the nature of that stochastic line, you’ll
notice how jagged it is, right? It moves around quite a bit. For some traders
that’s too much noise. That might be generating
buy and sell signals. We’ll talk about how those
might be determined in a minute. But that might be just
a little bit too much. So there’s a smoothing element
added to the indicator. That was that other line
that I already deleted. Let’s go back and
add that back in. So I’m going to go back up
here to our Edit Studies icon. I’m then going to edit this
study, the fast stochastic, and we’re going to add
that Fast D back in Click the Show Plot icon. Click OK. Click Apply. And there is that other line. So we now know what
the red line is. That’s our stochastic line. What is this purple line? Well, the purple line,
if you’ll notice here, look up here in the upper left. We have an 80, that’s
making reference to this horizontal line,
the 20, making reference to this horizontal line. The 10 is the number
of days or the number of periods that was used to
generate this stochastic line. And then finally
we have a three. What is that three? Well it’s a three-day
or a three-period moving average of that stochastic. So just like when we use a
moving average on a price chart, it has a
smoothing effect. It slows down reversals. Now, that doesn’t
necessarily mean that’s a good thing
for every trader. But it slows things down. And so it’s that line
actually in combination. Now, there are some names
given to these lines. I think it might be
easier just to think about the red line
as a stochastic line, and the purple line is what
you might call the signal line. It’s frequently
called a signal line. But if we want to get more– OK, Francisco says,
why fast versus slow? Good question, Francisco. I’m going to get to that. Good question. But, yeah, you’ll sometimes
hear this purple line referred to as the signal line. The red line is a
stochastic line. What other titles
do we give them? If you are a mathematician,
these have a different name. The red line? Percent K. You’ll sometimes
hear it called that. The purple line? Percent D. That, to me,
is not nearly as memorable as the stochastic line
and the signal line. So I’m going to stick with
stochastic and signal. I just want you to be aware that
yes, I know one is percent K, and the other one’s
percent D. But I’m not going to be using
that terminology for the rest of our discussion
because I think it’s confusing. In any case, what
some traders will do is they will look for the
behavior between these two lines. And if they have, let’s say, the
red stochastic line rising up through– and maybe
what I’ll do is I’ll zoom in here a
little more closely. Let’s just look at just the
last couple of weeks of trading on SPX. When the red stochastic
line rises up and through the
purple signal line– it’s called the signal
line for a reason. For some traders it’s a signal
that there may be short-term– short term is the key here– bullishness for the stock. Or in this case, it’s
the S&P 500, the index. Now, can there be false signals? Yes, look at what just
happened recently. If the red cross is back
down through the signal line, then that might imply
short-term weakness. In this case, the weakness
didn’t quite pan out, and we got a quick
reversal of that. Now, it’s that quickness– so this is getting to
Francisco’s question. That quickness can still be
an issue for some traders. So this is known as
a fast stochastic. I’m going to switch over
to a slow stochastic because you will see both of
these available in the menu. And if you were to go out
and just read about this, you’ll see, yeah, you have
fast and slow stochastic. So I’m going to come up
to our Edit Studies icon. Let’s go back to our menu. And I’m going to look
for our slow stochastic. Let’s Add Selected
and just click Apply. Now what you’ll see is a
very similar indicator. Let me zoom back out again. So you see A, a purple
line, a red line, two green horizontal lines. But you see down here
for the slow stochastic, it seems to be much less
jagged in its presentation or its appearance. So what in the world is this? Well, what it is, is we’ve
taken the fast stochastic, that three-day moving average. Look at this purple line here. And if you look at the red
line on the slow stochastic, do you notice that the
purple line on the fast is exactly the same as
the red line on the slow? So we’ve taken that three-day
or that three-period moving average, and we’re using that
now as our stochastic line and then going one
step further and using a moving average of that moving
average as the signal line. So Francisco, and for
everybody else, what purpose might that serve? Well, that slows the
signal down even more. Now, I want to point
something out here. The defaults on
thinkorswim, and what you may if you were to
go out on google this, you start to read
about the construction of a fast stochastic
and slow stochastic, there are different
ways to do this. You can customize
these indicators. And what you might notice
is that the most common construction of a
stochastic indicator is probably a 14-period
stochastic line with a 3-day or a 3-period moving average. But if you look at our slow
stochastic, we have our 80. That’s our overbought. Our 20, that’s our oversold. But a 10, what is that? That means that
we’re using 10 days. And then we did a
10-period moving average of that 10-day time frame. So for the rest of
this discussion, I’m actually going to
reset these defaults to be probably more in
keeping with what might be a more common
construction of a stochastic. So let me show you
how to do that. I’m going to pop back up
here to our beaker icon. I’m now going to remove the fast
stochastic from the discussion. It doesn’t mean it’s bad. It just means it’s fast. Francisco, to address
your question, what are the pros and
cons of fast versus slow? Well, literally one is
faster than the other one. One generates signals, buy
and sell, more rapidly. [CLEARS THROAT] Pardon me. [CLEARS THROAT]
Boy, there we go. But fast doesn’t necessarily
mean better or worse. Slow doesn’t necessarily
mean better or worse. It just means faster or slower. Faster might theoretically get
us in sooner and out sooner. But have you ever gotten
into a trade too soon or out of a trade too soon? That’s a possibility. Have you ever gotten in
too late and out too late? That’s also a possibility. But with a faster
construction, a trader should expect there,
just by nature, will be more what we
call whipsaw events. Doesn’t mean they can’t
happen with a slow, though. So I’m going to delete the
fast, now that we understand that it’s essentially
the foundation of the slow stochastic. And then I’m going to
customize the slow. I’m going to click on
a little gear icon. And we’re going to
look at a 14-day range. So we’re going to change
this from 10 to 14. And then we’re going to
take a three-period moving average of that range. Click OK. Click Apply. Click OK again. So that completes
my discussion of how this thing is constructed. [LAUGHS] Ricardo, I’m not
going to comment on that. Anyway, if that was
helpful for you, fantastic. I know for some people they’re
going to go, yes, Cameron, I finally understand
how that thing is built. And that was important to them. Others are going to say,
I’m glad we got that out of the way. Now let’s get into
the use of it. So let’s talk about that. We talked about
stochastic construction. Let’s talk about
using stochastic for short-term trades. Well, this is an oscillator. Just like we discussed, it
bears a strong resemblance to the earlier
discussions we’ve had. And actually the
application of it theoretically is quite similar. Linda, that’s interesting. So Linda just
chatted and then said the first known use of
stochastic was in 1934. I don’t know was that
the first known use of a stochastic on a chart? Because stochastic actually
has mathematical application. I would imagine that
that predates charting by a couple of decades. But I believe this was
constructed in the 1950s. I might be wrong
though, could be wrong. Yep. It’s all history anyway. Application is what we’re
going to focus on right now. So how might a trader use
this for short-term trades? Well, one potential
application is very similar to what
we’ve discussed before, where we looked at the
overbought and oversold areas. So if we look at the S&P 500 as
our recent example, look where those lines– and I’m specifically going
to zero in on the red line for right now. The red line, coming down,
gets into the oversold area. And notice what that coincides
with right about here. You get a crossover down
below in the oversold area of the red, slipping back
up above the purple, so more specifically, the
stochastic line popping up above the signal line while
it’s in the oversold area. And that was pretty close to
signaling a low on the S&P 500. That’s because prices had been
coming down and down and down. So that’s why we’re
dropping further and further in our percentile range. But then the percentile
started to rise up, and they crossed up through the
three-period moving average. So there might be a little
bit of a strengthening of the prices in
that short term. So that might signal a
short-term low point. And in this case,
it was on an index. But we might apply that same
logic for an individual stock. Now, some traders might act on
just that information alone. Others might wait for what they
consider a confirmation, which is where that red line pops
up out of the oversold area. That might be
additional confirmation that prices have
strengthened enough to drive that percentile back up. That stochastic is starting
to signal a stronger bottom. Now, if we flip that
logic on its head, though, what about when a stock
or an index has gotten up into overbought territory? Well, if a trader’s looking
for a, quote unquote, “optimized entry,”
maybe that ship has sailed theoretically, or
at least conceptually, right? When we’re up in this
overbought range, that might mean there might
not be as much upside potential left in the short term. Although, as you see in
our example right here, that stochastic can hang
out in that overbought area for quite some time. So it doesn’t necessarily
mean that we’re flipping to bearish right
straight out of the gates. And as a matter of fact,
for some technicians, in an effort to a avoid
a misinterpretation of the indicator, or maybe
just over-weighting the value of the indicator versus
what’s happening on the chart, they may choose to combine
price action with the indicator. In other words, seeing
an oversold signal in an upward trend,
OK, that might mean that there’s
a buy opportunity in that upward trend. But seeing an overbought
signal in an upward trend, does that mean that
the trend has peaked, and that it’s going to reverse? No. This is actually very commonly
seen as a momentum indicator. It shares a lot of similarities
with our discussion of the MACD. It shows short-term
peaks and troughs in momentum in an
otherwise trending stock. It doesn’t actually give
a lot of insight, at least not conceptually
a lot of insight, into the trend of this
stock, just where the peaks and valleys might be. Yeah, Linda, I’m
not sure either. I’d have to do more
research on that to know. 1934 is awfully
early for charting. That’s just what I know. There just weren’t a lot of
charts available back then. People were still
doing their trading looking up at a board of numbers
that were just being placed up on the board, trading in what
they call the bucket shops. But how about we go to
an individual security. Let’s go have a look
at something like INTU. Here’s INTU. And this where I want to
talk about combining price activity with the indicator. Look at INTU. What would you say the current
trend of that stock is? It looks like, at least
for the last three months or so, been making higher
highs and higher lows. That might be a little
bit suspect more recently, but generally, moving left to
right, moving higher, right? So in that scenario,
a trader might look for a situation
like this, where we get into an oversold area. And if it confirms, popping
up out of that oversold area might signal an entry
opportunity in the short term. So that’s a potential
entry signal. Now, what’s another
potential entry signal? Ricardo? OK. All right. But that one’s more of
a sidebar observation. I’m not going to
read that one out loud for the purposes
of the archive. But crossing up out
of the oversold area is one potential bullish signal. What about just when
you’re between the oversold and overbought? Well, if we have an
established upward trend, some traders will just
look for the red line, that stochastic line, to cross
up and through the signal line as the signal of technical
short-term strength. So in this case, that
means very recently we received exactly that
sort of a signal on Intuit, on right around the 19th. 19th of August, the red crossed
up and through the purple while we’re between
20 and 80, and that would have generated an
entry signal right about– let me put the oval on the
chart so we have a reference point there. Right there is a
potential entry signal. But first trend was confirmed. Now, does that mean this can’t
be applied in other trends? It might be difficult in
a downward trend, where we have a short-term momentum
indicator essentially fighting against longer-term
bearish bias, at least on the part of the
shareholders up to that point. And it may not be enough
to overcome that bias. What about sideways? Could this be used sideways? Yes, either of these two
signals could conceptually be used if we’re down near a
support area within a sideways trending stock or
index, and we get an oversold condition
or a crossover between the 20 and the 80. So those are potential
bullish entries. There’s one other. Hey, thank you, Bill. So Bill’s saying in
his humble opinion, this works great with a MACD. Yeah, it’s a discussion that
we had a couple of weeks ago, right? Now, how do you develop
an opinion on any of this? Well, you open up
your paper money, load it up, and
start to trade it. So that’s what I’m
going to encourage you to do at the end
of this discussion, get some repetition with it
in your paper money accounts. But here on Intuit, we
actually have three examples of the three potential
bullish entry signals. In our discussion of
MACD, we talked about, and we talked
about this with RSI as well, you can
get a divergence. And a divergence– oh,
actually, sorry, this is not an example
of a divergence. I do have– let’s see, I think
I saw one on, was it CCI? That’s interesting. We’re going to be talking about
CCI the indicator next week. But I’m going to talk about
CCI the stock right now. So here’s Crown Castle. You can see here’s
our slow stochastic. It’s been customized to a
14 and a 3 construction. But look at this period
right here on CCI. Let me switch my drawing tool. And I’m going to delete
these old drawings. These don’t have
any application. Let’s clear the drawing set. There we go. But you’ll notice
that right about here we hit a low, right there. Now, I could have drawn the low
at the bottom of this candle. I’m just going to draw
it across those candles to give me a few
more touch points. But my point would still hold
if I’d drawn the low down here. So we hit a cyclical low, a
short-term cyclical low right there, and then a second
short-term cyclical low right about here. What do you notice
about those lows? The lows are going lower. But if we look at
our oscillator, we had a stochastic
low right there and a subsequent stochastic low. These are matching
those time frames. But we had a higher low. So what does that mean
about the momentum of the first drop on the
stock versus the momentum on the second drop of
the stock, at least through the lens
of this indicator? This is what we call
a divergence, where price is going one direction. It has one technical expression. Whereas, the oscillator is
going the other direction. That’s known as a divergence,
and it may signal– in this case, it signaled– this is going to sound weird– but weakness in a bearish trend. In other words, there might
be some hidden strength there. Ah Linda, OK. So that sounds
like– so, Linda’s just providing some
clarification there. She says, according to Merriam
Webster, the first known use, it’s the earliest recorded
use in English as far as it could be determined. So that’s probably
just the usage of the term stochastic, right? But the phrase stochastic
has been applied to charting. But it actually has its
foundation in mathematics. So that does make sense. Yeah, that would
pre-date the introduction of the stochastic indicator,
which was in 1952 or something like that. You can check that for me. But, yeah, a couple of decades
of mathematical application before that,
totally makes sense. Yeah. So this is what we call
a bullish divergence. And for some traders,
they will look for just this sort
of behavior to signal it might be time
to start getting bullish on the stock, when it’s
otherwise not very obvious, because at this
time we’re looking at lower highs and lower
lows for price activity. It didn’t actually
make a lot of sense maybe for a technician to be
looking for bullishness there. But that stochastic
was dropping hints. It doesn’t always work. But this is just one example
of a bullish divergence. So we’ve learned
several different ways a stochastic might be used to
start to plan a bullish trade. So whichever one we’re using,
if we spot a divergence, if we’re seeing a crossover
between 20 and 80, or if we’re just
seeing an oversold scenario in an upward
trending stock, those might signal
entry opportunities. When might a trader
exit those trades? Well, just going back to
our previous discussions again, if we’re in at
lows, we might just look to get out at peaks. So in other words, a trader
might just do their best to identify a resistance level,
a previous price ceiling, and establish that as a target. Now, conceptually,
they could look for something like an
overbought condition or seeing stochastic
hitting a peak and rolling down
versus the signal line. That’s also a possible scenario. But let’s talk about
bearish applications, right? Boy, we’re covering a lot of
territory in this discussion. I believe, was at Clorox– let’s see. Yeah, so here’s Clorox. If you’ll notice, Clorox
has been primarily just working its way sideways
through most of the year, sometimes making higher
highs and higher lows, other times making lower
highs and lower lows. If you look at this
recent peak at $166.90, and you compare that with
whether we draw a peak here or we draw a peak across
the bodies of the candles– let me just remove that one. What do we have there? There’s is a pretty
prominent lower high. At least it appears
that way to me. So if we have weakness on
that chart and a crossover, as we have right here, we
have the red stochastic line crossing down through the
purple signal line, that may be a signal to a trader time
to get into something bearish. Short the stock and into
some other bearish strategy. Or if the stock has just been
generally going sideways, and we get into
that overbought area and then crawl down out of
that, that may be a signal. So there are a number
of examples there. Let’s quickly look at those. So we have the stochastic
line coming down out of the overbought here. It’s coming down out
of the overbought here, coming down out right
there and right there and right here and
even again right there. This one was certainly
a little bit later. But if we look at where those
actions, where they coincide with price, I think
that makes the point that this may be signaling
forthcoming weakness in the stock. So I think you’re
starting to see the potential for application
of this oscillator, along with the rest
that we’ve covered, the MACD and there RSI. So should we place a trade here? Yeah, there you go, Ricardo. Yep. I knew that. So stochastic, it goes
all the way back to– didn’t know about
the Greeks or the– what do they call that
when you’re talking about the genesis of the word? Boy, I have that word
at the back of my mind. I just can’t quite
come up with it. In any case, which
one should we go for? Should we go back to Intuit? We’re getting that relatively
recent crossover of the red up through the signal line. We’re in an upward
trending stock. If we were to get
into this right now, where might we plan an exit? Well, a trader might just
look at previous resistance, at previous price ceilings. Let’s switch our drawing tool. And let’s say our price ceiling
is right up there about $285. We’ve had a couple
of touch points. You can see quite a bit
of hesitation right there. Actually for a few weeks,
stock just hovering right below that price ceiling
and then falling down from that level. So etymology, yes! Yep. That’s right. Thank you, Linda. But let’s place a trade. How would we set
up a trade here? Well, I’m going to
set up the trade. I’m going to enter
a target price. I’m not going to enter on
this example a stock price. Now, a trader could use a stop. A stop is just a sell
order to get out. In the case of a long stock
position, using a stop, is a seller to get out
if the price happens to fall to a certain level. In this case, I’m just
going to put in the target. But a trader might also
decide they might just have we might call a
mental stop, a plan that if the price
falls a certain amount, we just get out at that point. In this case, it might
be because the red cross is backed down
through the purple before getting to
the price target. But let’s go to our Trade tab. Remembering $285 as our
target, type in INTU. This a $276 stock. 10 shares would–
pardon, 100 shares would be at $27,624
paper money obligation. I’m just going to go for
10 shares for this example. I’m going to come
to the ask price, and I’m going to
right click on it. And I want to put in a
custom buy order with a stop. However, I’m going to
customize that stop. But first thing I’m
going to do, let’s link these two orders together. You notice if I click
on this little icon, it’s a broken chain link, and
now it’s a repaired chain link. I’m going to change
that to just 10 shares. And then as soon as
I make that change, it changes my sell order. I just need to make
sure that those match. Last price was $276.24. What if we were to put
in a limit price of $277? What we’re telling
the system here is we’re willing to pay
up to $277 per share to enter the trade. We don’t want to pay
any more than that. That’s the limit. Now, anytime we put
in a limit order, we’re running the risk
that that price might not be available during
the day tomorrow. If it doesn’t, the whole
thing just gets canceled. But now I’m going to change
my stop to a limit order. This is a sell limit. And this, we’re going to
put in a price of $285. Now, in my observation, this
is probably the most common trading mistake. And I’ve done trades for tens
of thousands of investors. I’ve been in the room
when other traders are placing their trades. And this one gets
messed up quite a bit, and that is just the difference
being a stop and a limit. I think it’s very common
for someone to be thinking, OK, so I want to sell when
the stock price goes up to this level. And they’re thinking
limit, but they leave stop as the order type. If we were to do that,
if we left this at stop, and we put our price at $285,
what we’re telling the system is sell this if the
price falls below $285. It’s already below $285. That order would be
triggered like that, right, with very rare exceptions. So we need to make
sure that we put this in as a limit order, which means
sell at this price or better. In the case with
selling order, that means this price or higher. So I’m going to change that
to a Good Till Canceled Order, so that remains in effect
until either I cancel it– well, I cancel it, the order
fills, or six months goes by. And then Ricardo says you think
Intuit earnings are this week? Ah, yeah. So for some investors that can
be an important consideration. Obviously we’re not making
trade recommendations here. I’m just teaching a concept. But, yeah, for
some investors they don’t like to buy
right before earnings. That’s OK. That’s their decision. I’m going to click
Confirm and Send here. We’re buying 10 shares of
Intuit, $277 or better, selling 10 shares of
Intuit, $285 or better. That’s our target price. And that’s it. So here I would
just send this off. I’m not going to send
the order of today. I just wanted to
show you the process. But this is how this
indicator might be used for planning short-term trades. And you can see
this is not a trade where we’re planning to be in
it for a terribly long time. You can also see
when you’re only using 14 days of trading data,
that this generates entry and potentially exit
signals quite frequently. Now, if a trader– here’s a closing thought. If a trader wanted to
slow down the signals, what might they do
with the numbers used in the construction
of the indicator? And I just customized
it to 14 and 3. If we were to increase
those numbers, let’s say go to 14
and 10 or 20 and 10, any time we increase
those numbers, it slows the oscillator
down, slows it down and generates
fewer entry signals and also, at least conceptually,
fewer exit signals. That’s it. Well, we’ve accomplished
what we set out to do, went through stochastic
construction, I think, in heavy detail. Hope that was helpful for you. We then discussed
using stochastic for short-term
trades, and we used it to plan an example trade. Close the loop. What I want you to
walk away with here, obviously, is how might
this stochastic be used to plan short-term trades? It takes some application. It takes some repetition. What I would suggest
you do at this point is go to your
paper money account while this knowledge
is fresh and load up the stochastic oscillator
on your paper money charts, and then use it to
plan a few trades. And if you’re feeling
particularly ambitious, customize it. Change the construction. What if it’s not just
the default 10 period? What if we change that to 14? What if we change it to 20? See how that
changes the signals. But I always appreciate
your attendance. We have one more short-term
oscillator to cover. Next week we’re going
to be talking about CCI, yeah, not the stock, That’s
a stock we looked at today. We’re looking at
the indicator CCI. All right, everybody. Thanks for joining me today. Quick invitation again, if you’d
like to follow me on Twitter, my handle is @CMay_TDA. I post every day that I can. I’ve already
tweeted twice today. One was a little personal
thing, and one was an invitation to join this session. So hopefully somebody
was able to join us because of my tweeting. But I do like that more
personal interaction that we can have there. Thank you, Sandy. I appreciate that. We’re going to wrap up
the education webcast day. But I want to invite you also to
join me again tomorrow morning. I kick things off at 9:30
Eastern Standard Time with my Thursday morning
discussion of Selecting an Option Strategy. If you like these sorts
of technical indicators, and you want to explore
them in greater detail, you might want to check out Pat
Mullaly’s class on Fridays 2 o’clock Eastern Standard Time. It’s called Advanced
Charting Techniques. Grace, thank you. Guillermo, thanks
for stopping by. Everybody, I’ll look
forward to talking with you again next week. Quick reminder of the risks
associated through investing. Risks are real. We used real examples
in today’s discussions. It’s not a recommendation
or endorsement of a particular
security or strategy. The usage of stop orders
is not a guarantee that you’ll buy or sell
at a specific price. Let’s talk CCI next week. I’ll look for you in
tomorrow’s class as well, or in any of my regularly
scheduled sessions between now and then. But whenever I see you again,
until that moment arrives, I want to wish you
the very best of luck. Happy investing. Bye-bye. [MUSIC PLAYING]

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