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And this lecture, we're going to be talking about Bollinger bands, so what are Wallinger events?
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Bollinger bands are going to be the first technical indicator we look at now.
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What are technical indicators?
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They are things that are drawn on top of chart or beneath charts that are computed using the prices
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and or volume on the charts that are going to highlight something for us trying to tell us if something
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might go down or might go up.
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OK.
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So if you go on treating you and you click here on Indicator's, these are where you're going to find
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the technical indicators.
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You're going to see there's a bunch of them.
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Most of them are really bad.
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And anybody can create their own indicator.
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You can create one tomorrow and add it here.
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Right now, Bollinger bands this one, which you can click on it and it'll look like this is one of
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the most popular technical indicators out there.
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And, you know, for people who know me or have seen my other courses, this is the one that I use the
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most.
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This is the one that across all firms that I've worked at, that is the most used by professional traders.
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And there's a reason for that because it really makes a lot of sense for certain strategies to use that
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indicator.
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Now, like with all other indicators, you could get away with, not even using it because you're not
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to draw any indicator, what you're actually doing is you're taking prices and volume and you're creating
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that indicator based on a formula that you have.
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Well, if you only need prices and volume, then why not just look at the prices on volume yourself?
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Why do you actually need to draw the indicator?
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The only thing that the indicator does is just highlight something that's already that you can already
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deduct by yourself.
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But, you know, it's important because you want these things highlighted for you.
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That's the purpose of it.
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So it just makes your life easier.
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So what makes this indicator really good?
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Let's explain what it is.
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OK, and to do that, let's explain it.
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True, an example.
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Let's say this, let's say you are in math class and you just received your grades, your grades.
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This.
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Seventy percent.
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Or let's say 60 percent, actually, let's say six.
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And well, you know what?
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No, let's say 7:00.
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We'll go with some sun is going to be the.
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Let's say you have 70 percent and then your friend, who's in the same school as you, is doing the
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same math class, but with a different teacher.
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He comes up to you and he's like, yo, I got 80 percent.
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And you know that you're smarter than your friend, you know?
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So you're like, how come, you know, is this guy smarter than me?
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What do you guys think?
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Do you think that because this person has a higher grade that he's smarter than you in that subject?
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It's math in math.
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Or is he better than you in this class?
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Well, not necessarily because his teacher might be easier.
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Teacher, your teacher might be really hard, way more strict gives you harder, you know, exam questions
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or whatever, or his teaching style is worse and he doesn't teach well.
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So that's not fair.
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So what you're going to have to do is you're going to have to look at something else.
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You're going to have to look at the average.
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Or you can you can call it to the average of your class, so let's say, for example, you're the average
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in your class is 60 percent.
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You might say, well, that means I'm good, I have 10 percent over, you know, the group, what is
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the average in his class is maybe 50 percent.
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So, you know, you have 10 percent over your class, but he has 30 percent over his class average.
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Now, does that mean he's better than you?
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What do you think?
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Again, this is not enough information to know you need another you need something else because you
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don't know how you know how dispersed the grids are in this class.
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You know, maybe in his class, in your friends class, you know, you have students that have zero
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percent and students will have one hundred percent.
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So there's a very high dispersion amongst the Greeks.
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Which means that your friend isn't an outlier in this class, he's just another guy who has 80 percent,
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maybe there's a few others.
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A lot of other people have 80 percent of nineteen ninety five and a bunch of zero percent.
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So he's not really an outlier.
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And maybe in your class, everybody's clustered around the average of 60 percent.
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People have fifty eight percent.
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Sixty two.
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Sixty one.
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Everybody's clustered there and you have 70 percent.
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So you're an outlier compared to your group.
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And that would mean you're better.
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So how would we be able to compute that?
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What would need is we need to look at the dispersion of the grades, how far they are from the mean.
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And to do that, we can use what we call the standard deviation.
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And I'm not going to go into the maths of that.
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But you can Google it at the center of deviation is going to tell you how dispersed the grades are.
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Now, let's say in your class, the standard deviation is five percent.
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And in your friend's class, the standard deviation is 30 percent.
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Well, now we have enough information to know who's better.
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OK, why?
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Because now we can draw what we call the bell curve, a normal distribution which will look like this,
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a normal distribution.
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This is something that's used a lot in statistics.
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And it looks like a bell curve and in the middle here, we are going to put the mean, which is you
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and the mean is going to be, in our case, 60 percent of the average in the class.
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And what is the normal distribution we see is that you are going to have 68 percent of people.
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So here, about 68 percent.
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Of people that are going to be one standard deviation around.
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One standard deviation around the mean.
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So in this case, one standard deviation, which is five percent above 60 percent, is going to be 65
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percent and one standard deviation below 60 percent, which is going to be 55 percent.
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So in this class, we know that about 68 percent of students should have agreed between 55 and 65 percent.
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Now, if you want to look at two standard deviations around the mean.
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So two standard deviations.
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Around Amien.
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Minus two standard deviations.
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Well, another standard deviation is another five percent would be 70 percent and here would be 50 percent.
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And here we're going to have, I think, about thirteen point something percent, let's say thirteen
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point five, thirteen point five percent, and here's thirteen point five percent.
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So in this whole.
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S. here you're going to have about 96 percent of students, so if you have 70 percent of the grade,
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you know, and here there's going to be like another two percent and another two percent here.
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So if you have a 70 percent grade, you know that you're better than about, you know, all of these
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people, which is like 98 percent of people.
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That's a great, great.
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It means you're an outlier.
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Really good.
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But in this case, this guy here is only one standard deviation above the mean.
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And if you have one standard deviation above the mean, while you have sixty eight percent here and
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13 percent and then two percent, or you're about 80 to eighty four percent better than everybody else,
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you know.
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So you're better than eighty four percent of people.
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But this guy is better than 98 percent of people.
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So he, he's better.
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And this way of computing, if somebody is an outlier or how far this person is, is used, let's say
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for example, here in CEGEP, in college in Montreal, this is what they use to grade students and give
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them an R score, OK, that's what they do.
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So they use that for in a lot of places because it's a fair model.
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OK, and in statistics, it's used in F in everywhere.
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For example, if you're looking at it, I can see the average height of a man is one point seven meters,
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and then I can look at the dispersion of the volatility between men of their heights.
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And then I can say, well, if you're one point eight meters, then you're taller than, you know,
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whatever percentage of the population you can use it for, which you can use it for whatever.
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If you go on Google here and I'm going to put the normal distribution, standard deviation.
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So just normal distribution, standard deviation.
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And you can go on images and you'll see it's.
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Here, right, so you have the normal distribution and you have 68 percent of the population is going
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to be within one definition of the mean, ninety five point four percent will be within two standard
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deviation and ninety nine point seven percent will be within three standard deviations of the mean.
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OK.
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Now, you might be wondering, why is this guy talking about this, how am I going to be using it to
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treat cryptocurrency?
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Well, because imagine this.
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Imagine I take a chart of prices.
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Now, have, you know, the price of a cryptocurrency going up, going down and, you know, fluctuating
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and then.
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I look at it and I say, OK, well, you know what, what is the meaning of this process?
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And I use something like a moving average, a 20 day moving average or a 20 period.
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So I look at the last 20 periods and I do their average and I say, well, the average is going to be
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the mean.
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So in this case, maybe the average price of the last 20 periods here was one hundred.
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That's the average.
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Right, and then I look at the volatility of the scandals of the last 20 periods and I see that the
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volatility is maybe five dollars.
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And I say, OK, well, look, the volatility is five, I want to draw two lines.
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Well, first, I want to draw the moving average in the middle here, which is going to be the dimin.
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And I want to draw two lines and one line is going to be two standard deviations below and one line
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is going to be two standard deviations above.
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Right.
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So basically what I'm doing is I'm drawing a bell curve here around the chart.
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Let me just raise this here, give a the more space I'm drawing a bell curve.
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Here.
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And I'm saying, look at two standard deviations above, I want to draw a line here.
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And the two standard deviations below, I want to draw another line, and this is going to tell me that
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there is a ninety six percent chance of prices remaining within this range.
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And then if prices are way outside of the range here, I know that this is very unlikely and prices
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reconversion or come back.
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That's what it told me.
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OK, so for example, if I go back on trading view here and you can put any chart, I can choose any
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coin and you can actually you can do it on any time frame.
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So I can select one hour.
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And, you know, I'm looking at this and I add indicator.
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I go here and I click Beebee for Bullivant.
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It pops up here.
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It is what this would tell me.
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And if I double click on it, you see that they used a twenty period moving average for this middle
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line, which is going to give us the average.
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And they're using a two standard deviation to draw these lines, just like we've seen.
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And what this tells me here, if I'm looking now, tells me while the average of the last 20 days is
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this price, the last 20 periods, which I'm using one hour Candleshoe, the last 20 hours is this price.
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And then based on the volatility of these last twenty candles, I am ninety five.
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There is ninety five percent probability that the prices will remain within this range.
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OK, so basically for you, as a trader, you might use this like this, you might be like, oh well,
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look, prices here are way outside of the strange let me so let me not just keep holding it and you
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might sell your position and, you know.
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Right.
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Enough prices will go down.
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And if you want to buy them, you can be like, oh, well, this is way further from the mean, the
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average, it's way lower.
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So maybe I should buy it now because it shouldn't be that low and you might buy it.
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And then here you might sell it again.
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And when it's low you might buy it again and sell it and buy it and sell it by then and sell it and
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here buy again.
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So basically you can use this, you know, to tell you where prices are versus the average.
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OK, now you can use a different standard deviations if you want to be ninety nine point seven percent
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sure that prices are going to be within this range.
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You can use a three standard deviation, which is going to be wider.
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Right.
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So the band's got wider.
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So you're going to have less trades.
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But I guess better ones in a way, not necessarily better, but more confident ones.
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OK, now the thing with this and you'll see that the standard deviation also changes because you see
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when prices were very volatile, well, the volatility, the standard deviation got bigger.
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And three standard deviation was this big.
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Right.
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This was three standard deviations.
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This big, because these scandals are big, so the volatility is high.
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Right, but now if you look here, look at the standard deviation, how small it is.
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Here.
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Now, it's only this big three standardizations, why?
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Because the candles are so small now that, you know, three standard deviations is not that far away,
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so you'll see that the bands themselves, they widen as the the security that you're treating, the
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cryptocurrency that you're creating is more volatile and it will narrow as it's less volatile.
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So for different crypto currencies, if one is more volatile, the bands will be wider.
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If one is less volatile, they'll be tighter.
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And if that same cryptocurrency becomes more wider, it'll widen up and narrow.
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Now, this is the percentage that I give.
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You aren't actually going to work in cryptocurrency or in any financial market.
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Why?
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Because in the financial markets, we don't actually have a regular distribution like this.
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We don't have a regular bilker.
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What we do have is something that's called a fat tailed distribution.
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OK, and I'll explain this here.
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So a regular bell curve is going to look like this.
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This irregular bell curve is going to look like this.
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OK.
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Just like we've seen now, a fat tailed distribution is going to look more like.
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I'm sorry for my drawing here, it's not the best drawing.
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Actually, this is awful.
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It'll look like this.
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This is a little better.
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I think Google would be a better frontier.
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Now, what is the difference between these two?
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The difference is the things that are way more common to happen.
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Are going to happen even more more often, and the things that are very unlikely to happen like this
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very, you know, outlier or, you know, Six Sigma events or things that are very not common in the
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financial market, they're actually way, way more common than you would think.
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So even things that you would think would never happen, like prices soaring up a lot or crashing a
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lot.
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They do happen in the financial markets.
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So we have a failed curve.
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So you have to you know, you have to know this because things that you think are unlikely, basically
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you get a price higher and you're like, well, in the next hour, because I'm looking at another chart,
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the likelihood that we get here is less than one percent.
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Well, not.
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It's not because the fact because of the fact of distribution, they are likely so this can really go
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down or really go up outside the bounds.
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So you have to be careful where you use an indicator like this.
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OK, this indicator, you're going to want to use it when you think that something is mean, reverting.
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Right, because you have things that are in momentum and things that are minority.
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These are two types of strategies.
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You know, momentum is when something is going in a direction and you think it's going to keep going
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in that same direction.
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You're running a momentum strategy.
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You don't want to use this indicator when running a momentum strategy, because this is an indicator
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that tells you when something is away from it's mean.
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If you don't think that something is coming back to its mean anyways, why use an indicator for that?
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If something is really in momentum, there's an event.
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Don't use this indicator.
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You're going to want to use this when you're looking at something that when it deviates from its mean,
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it has high likelihood to come down something something that isn't in momentum.
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OK, there's not an upcoming event or news or hype behind it.
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So this is when you would want to use that.
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And to be honest, one of the reasons why this is a very popular indicator and I hate to use it, is
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because the market is usually in mean reversion.
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So 80 percent of the time things are just going up and then back down and up and down, up and down.
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And nothing is really happening.
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It's only 20 percent of the time that something is really skyrocketing in a direction.
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OK, so as a trader or an active trader, interrupting strategies are very good because they make you
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a bit of money all the time instead of just banking on 20 percent times where something is really going.
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So you're making money off of all these little movement that the market makes.
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Now, that being said, we aren't going to use the Bohlinger brands in the simple way.
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And the strategies that I'm going to show you in this course, we are going to use Bohlinger bands in
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a more advanced way by combining different cryptocurrency.
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You'll see you love the way that we use it and you really understand why an indicator like this is extremely
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helpful won't be using it just by putting it on one cryptocurrency like that and just buying and selling.
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It'll be a more advanced way of using it.
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And you're only going to like it, I think.
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So you're going to be excited when you look at the strategies.
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That being said, this is Bohlinger bands and I'll see you guys in the next lecture.
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