Table of Contents
Part 1: Market Internal Indicators 1. Advance-‐Decline Line ............................................................................................................................... 6 Conceptual Insight.................................................................................................................... 6 Applicability/Characteristics .................................................................................................... 6 Technical Significance ............................................................................................................. 7 2. Advance-‐Decline Percent ......................................................................................................................... 9 Conceptual Insight.................................................................................................................... 9 Applicability/Characteristics .................................................................................................... 9 Technical Significance ........................................................................................................... 10 3. Advance-‐Decline Volume Line................................................................................................................ 12 Conceptual Insight.................................................................................................................. 12 Applicability/Characteristics .................................................................................................. 12 Technical Significance ........................................................................................................... 13 4. Arms Index (TRIN) .................................................................................................................................. 15 Conceptual Insight.................................................................................................................. 15 Applicability/Characteristics .................................................................................................. 15 Technical Significance ........................................................................................................... 17 5. Bullish Percent Index.............................................................................................................................. 18 Conceptual Insight.................................................................................................................. 18 Applicability/Characteristics .................................................................................................. 18 Technical Significance ........................................................................................................... 19 6. The High-‐Low Index................................................................................................................................ 21 Conceptual Insight.................................................................................................................. 21 Applicability/Characteristics .................................................................................................. 21 Technical Significance ........................................................................................................... 22
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7. McClellan Oscillator ............................................................................................................................... 23 Conceptual Insight.................................................................................................................. 23 Applicability/Characteristics .................................................................................................. 23 Technical Significance ........................................................................................................... 24 8. Net New Highs........................................................................................................................................ 25 Conceptual Insight.................................................................................................................. 25 Applicability/Characteristics .................................................................................................. 25 Technical Significance ........................................................................................................... 26 9. Percent Above Moving Average............................................................................................................. 27 Conceptual Insight.................................................................................................................. 27 Applicability/Characteristics .................................................................................................. 27 Technical Significance ........................................................................................................... 29
Part 2: Technical Indicators 1. Bollinger Bands (Standard Deviations)................................................................................................... 31 Conceptual Insight.................................................................................................................. 31 Applicability/Characteristics .................................................................................................. 31 Technical Significance ........................................................................................................... 32 2. Moving Average (Simple) ....................................................................................................................... 34 Conceptual Insight.................................................................................................................. 34 Applicability/Characteristics .................................................................................................. 34 Technical Significance ........................................................................................................... 35 3. Moving Average (Exponential) ............................................................................................................... 37 Conceptual Insight.................................................................................................................. 37 Applicability/Characteristics .................................................................................................. 37 Technical Significance ........................................................................................................... 38
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4. Pivot Points ............................................................................................................................................ 40 Conceptual Insight.................................................................................................................. 40 Applicability/Characteristics .................................................................................................. 40 Technical Significance ........................................................................................................... 41 5. MACD (Moving Average CovergEnce-‐Divergence)................................................................................. 43 Conceptual Insight.................................................................................................................. 43 Applicability/Characteristics .................................................................................................. 43 Technical Significance ........................................................................................................... 44 6. Relative Strength Index (RSI).................................................................................................................. 45 Conceptual Insight.................................................................................................................. 45 Applicability/Characteristics .................................................................................................. 45 Technical Significance ........................................................................................................... 47 7. Stochastic Oscillator ............................................................................................................................... 48 Conceptual Insight.................................................................................................................. 48 Applicability/Characteristics .................................................................................................. 48 Technical Significance ........................................................................................................... 51 8. Volume-‐Weighted Average Price (VWAP).............................................................................................. 53 Conceptual Insight.................................................................................................................. 53 Applicability/Characteristics .................................................................................................. 53 Technical Significance ........................................................................................................... 54 9. Accumulation Distribution Line.............................................................................................................. 56 Conceptual Insight.................................................................................................................. 56 Applicability/Characteristics .................................................................................................. 56 Technical Significance ........................................................................................................... 57 10. Average Directional Index (ADX) .......................................................................................................... 59 Conceptual Insight.................................................................................................................. 59 Applicability/Characteristics .................................................................................................. 59 Technical Significance ........................................................................................................... 60 11. Commodity Channel Index (CCI) .......................................................................................................... 61 Conceptual Insight.................................................................................................................. 61
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Applicability/Characteristics .................................................................................................. 61 Technical Significance ........................................................................................................... 62 12. Keltner Channels .................................................................................................................................. 64 Conceptual Insight.................................................................................................................. 64 Applicability/Characteristics .................................................................................................. 64 Technical Significance ........................................................................................................... 66 13. Money Flow Index (MFI) ...................................................................................................................... 67 Conceptual Insight.................................................................................................................. 67 Applicability/Characteristics .................................................................................................. 67 Technical Significance ........................................................................................................... 68 14. On Balance Volume (OBV).................................................................................................................... 70 Conceptual Insight.................................................................................................................. 70 Applicability/Characteristics .................................................................................................. 70 Technical Significance ........................................................................................................... 72 15. Ultimate Oscillator ............................................................................................................................... 74 Conceptual Insight.................................................................................................................. 74 Applicability/Characteristics .................................................................................................. 74 Technical Significance ........................................................................................................... 76 16. William’S %R ........................................................................................................................................ 78 Conceptual Insight.................................................................................................................. 78 Applicability/Characteristics .................................................................................................. 78 Technical Significance ........................................................................................................... 79 References ............................................................................................................................................... 81
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PART 1
MARKET INTERNALS INDICATORS “Indicators” are statistical summaries of data used to help analyze the data. Market internals indicators, or simply market internals, are statistics of the overall stock market. For this reason some common market internals are listed here before listing price and volume indicators used with individual price charts. Market Internals are used to gauge overall market strength or weakness, as well as what moves other investors and traders are making.
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1. ADVANCE-DECLINE LINE Conceptual Insight The Advance/Decline Line (“A/D”) is one of the most widely used indicator of market breadth. It is a cumulative total of the Advancing-Declining Issues Indicator, which shows the difference between stocks listed on the NYSE that advanced in price minus those declined. Compare to market index, it is most effective estimate of the stock market’s strength.
Applicability/Characteristics The trend of A/D line should be analyzed carefully with which we can get an idea about whether the market is moving upwards, downwards or following the current trend and how long the current trend will persist.
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Chart 1. The DOW Jones Industrial Average and A/D Line
The DJIA was making new highs during the 12 months leading up to the 1987 crash. During this same period, the A/D Line was failing to reach new highs.
Technical Significance The calculation of A/D line is simple. For each individual day, subtract the number of stocks that has declined in price from the number of stocks whose prices have risen. This gives you the Advance-Decline (A-D). The A/D line is the cumulative sum of the A-D over time:
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Table 1.Calculation of A/D Line
Date
Advancing
Declining
A-D
A/D Line
2/15/2012
1,198
882
316
316
2/16/2012
1,183
965
218
534
2/17/2012
882
1,251
(369)
165
2/18/2012
706
1,411
(705)
(540)
2/22/2012
1,139
1,003
136
(404)
Because the A/D Line always starts at zero, the numeric value of the A/D Line is of little importance. What is important is the slope and pattern of the A/D Line.
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2. ADVANCE-DECLINE PERCENT Conceptual Insight The Advance/Decline PO (Percentage Oscillator) is an advanced version of the A/D Ratio. The A/D PO (the same as the A/D Ratio) enables us to measure and analyze advancing stocks in relation to declining stocks. Sometimes advance/decline numbers are reported as a ratio and it could be reported in a percentage as well.
Applicability/Characteristics The Advance Decline Percent could be interpreted in the same way as Advance Decline Ratio. It is based on AD ratio values but explains them in a percentage terms. The percentage scale is between -100% to +100%. AD percent shows the amount of participation by the stocks in an index, as it is a breadth indicator. When an AD percent exceeds 70%, it shows widespread strength in an index because the majority of stocks are contributing to advances in the index. On the other hand, there is widespread weakness when AD percent falls below -70%. The data fluctuates with up and down days, and creates a rather volatile chart. We can compare the positive and negative days to assess the ongoing degree of participation. Simple or exponential moving average could be used to create a PO (Percentage Oscillator).
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Chart 2.XLK Technology Advance/Decline Percent
Source: StockCharts.Com. For Educational Purposes Only.
Technical Significance The formula for calculating the A/D issues ratio is: A/D Ratio = Number of Advancing Stocks / Number of Declining Stocks The negative aspect of this formula is that the Advance Decline Ratio has a logarithmic scaling from zero (when advances = 0) to infinity with the centre line at 1 (when advances = declines). To avoid a situation in which the Advance Decline Ratio tends towards infinity, Advance/Decline Percentage Oscillator (A/D PO) has developed. The above formula creates values that cannot be less than zero because it is a fraction (or ratio). A value of 3 means that three times as many stocks advanced as declined.
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Any value less than 1 means more stocks declined than advanced. Because of the nature of fractions, the chart is more legible using a logarithmic scale.
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3. ADVANCE-DECLINE VOLUME LINE Conceptual Insight The Advance Decline Volume Line is a type of market breadth indicator. In other words, breadth indicators help answer the question “how many stocks are actually contributing to a move (up or dow)?” There are two types of volumes, namely advancing volume and declining volume. When advancing volume is more than the declining volume, it is called net advancing volume. The Advance Decline Volume line turns up when there is a presence of excess net advancing volume and falls when net declining volume is more. (Wall Street Courier: Advance Decline Volume Line)
Applicability/Characteristics The AD Volume Line captures the buying and selling pressure.
•
If the line rises and post new highs in conjunction with the underlying index price, it is an indication of intense buying pressure (Bullish).
•
Buying pressure is described by the volume behind advancing stocks and for selling pressure, volume lies behind the declining stocks.
•
The weakness in buying pressure is reflected when the AD volume line is unable to form new highs and cannot keep pace with underlying index price. It shows market strength is weakening and is known as a bearish divergence.
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•
Strong selling pressure has occurred when the AD volume line forms new lows along with the underlying index price. The market is considered to be weak.
•
When the AD volume line cannot form a lower low when the underlying index price does, it is an emergence of bullish divergence. This also indicates that the selling pressure is waning and the price decline in the index may be over soon.
Chart 3. Upper chart: Nasdaq Composite price chart. Lower chart: Nasdaq Composite Advance/Decline Volume.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The advance/decline volume line is constructed as the cumulative difference between advancing and declining volumes:
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A/D Volume Ratio = Σ [(Advancing Volume) - (Declining Volume)] There very few circumstances where we use advance/decline volume line because of its cumulative feature, making it harder interpret this indicator to at overbought/oversold areas. In technical analysis its usage is limited as far as ratios and oscillators are concerned, even though this could be utilized to understand the stream of money flow in the stock market.
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4. ARMS INDEX (TRIN) Conceptual Insight The Arms indicator is a market indicator which shows the relationship between the numbers of stocks increases or decreases in price (advancing/declining issues) and the volume associated with those stocks which have shown an increase or decrease in price (advancing/declining volume). The Arms Index was developed by Richard Arms in 1967. It is also known as TRIN (an acronym for Trading Index).
Applicability/Characteristics The TRIN is mostly used as a short term trading tool. The index shows whether volume is flowing into advancing or declining stocks. The index is less than 1 if more volume is associated with advancing stocks than the declining stocks. The index is greater than 1 when the case is vice versa. It is considered bullish when the index is below 1.0 and bearish when it is above 1.0. The index is normally smoothed by incorporating a 4-day moving average for short-term analysis, a 21-day moving average for intermediate-term, and a 55-day moving average for longer-term analysis.
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The Index works most effectively as an overbought/oversold indicator. When the indicator drops to extremely overbought levels, it indicates a possible selling opportunity. When it rises to extremely oversold levels, a buying opportunity is said to occur. What constitutes an "extremely" overbought or oversold level depends on the length of the moving average used to smooth the indicator and on market conditions. Table 3.Overbought/ Oversold Levels Moving Average
Overbought
Oversold
4-day
0.70
1.25
21-day
0.85
1.10
55-day
0.90
1.05
Chart 4. 4-day Moving Average (yellow) of TRIN and the S&P 500 Index ETF (SPY) price chart above.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
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Technical Significance There is a three steps calculation for Arms Index: 1. Divide the number of stocks advanced in price by the number of stocks declined in price to arrive at Advance/Decline Ratio. 2. The volume of advancing stocks should be divided by the volume of declining stocks in order to calculate Upside/Downside Ratio. 3. Lastly, the Arms Index is computed by dividing Advance/Decline Ratio by Upside/Downside Ratio. Arms Index =
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5. BULLISH PERCENT INDEX Conceptual Insight The indicator is one of the breadth indicators and devised by Abe Cohen in 1950. The value of this indicator depends on the number of stocks on Point & Figures buy signals in an index. The moment a stock appears on P&F chart, it would be either on a P&F buy or sell signal without any confusion.
Applicability/Characteristics The Bullish Percent Index (BPI) fluctuates between 0% and 100%. It can be calculated for a number of sectors, industry groups and indices. The indicator's range and volatility largely depends on the number of stocks in the underlying index. BPI values above 50% indicates a bullish trend and values below 50% indicates a bearish trend. Bulls dominate when more than 50% of the stocks in an index plots on a P&F buy signal. Overbought: when BPI readings are above 70% Oversold: when BPI readings are below 30% Fundamental elements of the signal:
•
Bull Alert: BPI is below 30% and then forms a new column of X's (rises)
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•
Bear Alert: BPI is above 70% and then forms a new column of O's that decline below
70%. •
Bull Confirmed: BPI is on a P&F buy signal and in a column of X's (rising).
•
Bear Confirmed: BPI is on a P&F sell signal and in a column of O's (falling).
•
Bull Correction: BPI is on a P&F buy signal, but currently falling (column of O's.
•
Bear Correction: BPI is on a P&F sell signal, but currently rising (column of X's).
Chart 5.DJIA Bullish Percent Index
Source: StockCharts.Com. For Educational Purposes Only.
Technical Significance The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group.
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“X” in the above illustration represents advancing columns and “O” represents declining volume. As prices change and forms a reverse trend, the P&F columns interchanged. “P&F buy” signal could be derived, when a column X’s surpass the earlier columns of X’s and there would be “P&F sell” indication, when a column of O’s exceed the column of O’s.
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6. THE HIGH-LOW INDEX Conceptual Insight The high low index reveals the strength or weakness of the underlying index. It is also a breadth indicator. The index compares the number of stocks making new 52-week (1-year) highs to the number of stocks making new 52-week lows.
Applicability/Characteristics The High-Low Index is simply a 10-day SMA of the Record High Percent Index. A stock index is considered strong (bullish) when the High-Low Index is above 50, which means new highs have outnumbered new lows for several days. Conversely, a stock index is weak (bearish) when the High-Low Index is below 50, which means new lows have outnumbered new highs for several days. The strong uptrend or downtrend in an underlying index forces this indicator to move to its extremes and remain at those levels. Strong uptrend in a normal circumstance coincides with readings consistently above 70 and consistent reading below 30 paralleled with strong downtrend.
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Chart 6. High/Low Index (Weekly)
Source: Wall Street Courier. For Educational Purposes Only.
Technical Significance The index is calculated by dividing the number of new highs by the number of new highs plus new lows. Record High Percent = (New Highs / (New Highs + New Lows)) x 100
High-Low Index = 10-day SMA of the Record High Percent
The High-Low Index smoothes the Record High Percent Index with a 10-day SMA.
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7. MCCLELLAN OSCILLATOR Conceptual Insight The McClellan Oscillator is a market breadth indicator which is based on the smoothed difference between the number of advancing and declining issues on the New York Stock Exchange. Indicators which use advancing and declining issues to determine the amount of participation in the movement of the stock market are called "breadth" indicators. It was developed by Sherman and Marian McClellan.
Applicability/Characteristics The signals could be generated after identifying the overbought and oversold regions. When the McClellan Oscillator lies into the oversold area (-70 to -100) and turns up, it is buy signal and sell signal occurred when the oscillator rises into the overbought region and then turns down. The oscillator’s readings above +100 or below -100 indicate extremely overbought or oversold areas. Normally, it is a sign of a continuation of the current trend.
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Chart 7. S&P 500 Index ETF (SPY) price chart with McClellan Oscillator trading zones below.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The McClellan Oscillator is the difference between 10% (approximately 19-day) and 5% (approximately 39-day) exponential moving average of advancing minus declining issues.
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8. NET NEW HIGHS Conceptual Insight Net New Highs is a simple breadth indicator derived by subtracting the new lows from new highs. "New lows" is the number of stocks recording new 52-week lows. "New highs" is the number of stock making new 52-week highs. This indicator provides an immediate score for internal strength or weakness in the market
Applicability/Characteristics The interpretation of Net New Highs indicator is as follows: •
A stock index is considered (bullish) when Net New Highs is positive, which means new highs exceed new lows. Conversely, a stock index is weak (bearish) when Net New Highs is negative, which means new lows exceed new highs.
•
The level of Net New Highs represents a magnitude of bullish or bearishness in an index and its value largely depends on how many stocks are accommodated in the index. Strong uptrend prevails when the net new highs are continuously above +100 and strong downturn occurs when the net new highs are below -100.
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Chart 8. Upper chart: Nasdaq Composite Index price chart. Lower chart: Nasdaq Composite Index Net New Highs.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The procedure to calculate Net New Highs and Cumulative Net New Highs is described below:
Net New Highs = New Highs - New Lows Cumulative Net New Highs = Prior Cumulative Net New Highs + Current Net New Highs Net new highs can be computed by subtracting new lows from new highs. As the name indicates cumulative net new highs are the addition of prior cumulative net new highs and current net new highs. These additions go on as the number of periods in a calculation increases.
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9. PERCENT ABOVE MOVING AVERAGE Conceptual Insight Percentage Above Moving Average is a breadth indicator that measures the internal strength or weakness in the underlying index. This indicator counts the percentage of stocks trading above a particular moving average. The 50-day moving average would be applicable for short-medium term range, whereas 200-day moving could be used for medium-long term range and it is available for Dow Jones, Nasdaq, Nasdaq 100, NYSE, S&P 100, S&P 500 and S&P/TSX Composite.
Applicability/Characteristics •
The degree of participation in the market could be shown by this indicator. When the majority of stocks trade at above to specific moving average, breadth is said to be strong and it is weak when case is vice versa.
•
When the indicator values lies above 50% (Presence of Bullish Bias), it shows that the more than 50% of stocks are trading above to some specific moving average, whereas the indicator values below 50% (Presence of Bearish Bias) signifies that the more than 50% of stocks are trading below to a particular moving average.
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•
We can look for overbought or oversold levels. These indicators are oscillators that fluctuate between zero and one hundred. With a defined range, the signal can be drawn for overbought levels near the top of the range and oversold levels near the bottom of the range.
•
Bullish and bearish divergences can predict a trend change. A bullish divergence occurs when the underlying index moves to a new low and the indicator remains above its prior low. This shows relative strength in the indicator can sometimes indicates a bullish reversal in the index.
•
If the underlying index makes a higher high and the indicator remains below its prior high, a signal of bearish divergence could occur. Furthermore, this is an indication of relative weakness in the indicator followed by a bearish reversal in the index.
Chart 9.NYSE Stocks Above 20 Day Simple Moving Average
Source: Wall Street Courier. For Educational Purposes Only.
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Technical Significance We can calculate Percent above Moving Average by dividing the number of stocks above their XX-day moving average by the total number of stocks in the underlying index. Percent above MA = (Number of stocks above XX-day moving average)/ (Total number of stocks in index)
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PART 2
TECHNICAL INDICATORS In this section are indicators for use on price and volume charts of individual securities and assets. These are the most common indicators used in conjunction with technical analysis, i.e. statistical analysis, of price and volume. Indicators are used to help analyze securities and assets including stock market indices, commodities, currencies and forex, bonds, funds, and, of course, stocks. Remember, these indicators are simply statistical calculations from price or volume. Technical analysis of price and volume should first be applied before using indicators. No indicator works 100% of the time. It takes experience and understanding of how an indicator works to know when to use each as a tool.
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1. BOLLINGER BANDS (STANDARD DEVIATIONS) Conceptual Insight Bollinger Bands are overlaid on top of the price charts. The upper and lower bands mark the price statistical standard deviations from the average price. The spacing between the bands varies based on the volatility of the prices. The band tends to become wider when there is an extreme price changes (High Volatility) and it becomes narrow during stagnant pricing (Low Volatility) periods.
Applicability/Characteristics The application of Bollinger Bands is summarized in below mentioned situations:
•
The current price trend will continue if prices move outside of the bands.
•
There could be a trend reversal if bottoms and tops are made outside of the band, then followed by bottoms and tops made inside of the band.
•
If there is any origination of move at one band tends to go all the way to the other band. This observation could be useful, when we are projecting the price targets.
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Chart 1. Bollinger Bands overlaid on Exxon’s (XOM) Price Chart, 1 Day. Timeframe: 5 Minute Bars.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance Bollinger Bands can be categorized into a set of three bands.
• Middle Band: The middle band is a normal moving average.
Where “n” is the number of time periods in the moving average (for example 20 days).
• Upper Band: The upper band is same as the middle band, but it is shifted up by the number of standard deviations.
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Where “D” is the number of standard deviations.
• Lower Band: The lower band is the moving average shifted down by the same number of standard deviations (i.e. “D”).
Mr. Bollinger recommends using “20” for the number of periods in the moving average, the moving average using the “Simple” method and using 2 standard deviations.
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2. MOVING AVERAGE (SIMPLE)
Conceptual Insight Average price of a security calculated by adding the closing price of a security for a time period (for example 30 days) and then dividing the sum by the number of days in a time period. For a simple moving average computation, equal weights should be given to each day closing price. A moving average cannot be calculated until we have a data of “n” time periods data. For example we can’t display 25 days moving average until the 25
th
day in chart for a particular
security. To calculate a moving average for a specific company, we have to add its closing price for the most recent period say 25 days and then dividing it by 25, this would give us the average of that security over a preceding 25 days. The same procedure should be replicated for the successive days and these points can be plotted in the chart.
Applicability/Characteristics Compare a moving average of a security’s price with the security’s price itself.
•
The buy signal will generate when the security’s price rise above its moving average.
•
It is said to be sell signal when the security’s price falls below to its moving average.
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•
Commonly used moving averages are: 20-period moving average, 50-period moving average, and 200-period moving average. This moving average has a spectacular track record in long term market cycles.
Chart 2. 20-period, 50-period, and 200-period simple moving average of the closing price of Google (GOOG). Timeframe: 1-day bars, so 20-period = 20 days.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The formula to calculate the Simple Moving Average is mentioned below:
Simple Moving Average =
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Where “n” is the number of time periods in the moving average The most significant element in a moving average is the number of time periods used in the calculation of moving average. In this case, we have to find moving average period that would be consistent with the current trend. The time period used in the moving average calculation should have to fit into the market cycle we desired to follow. Example: If a security has a 40-day peak to peak cycle, the ideal moving average length would be 21 days.
Table 1: Trend
Moving Average
Very Short Term
5-13 days
Short Term
14-25 days
Minor Intermediate
26-49 days
Intermediate
50-100 days
Long Term
100-200 days
We can convert the daily moving average quantity into a weekly moving average quantity by dividing the number of days by 5 ( e.g. 200-day moving average is almost identical to a 40-week). If we want to convert the daily moving average into monthly moving average, we have to divide daily moving average by 21 days (e.g. a 200 day moving average is very similar to a 9-month moving average, because there are approximately 21 trading days in a month).
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3. MOVING AVERAGE (EXPONENTIAL)
Conceptual Insight An exponential or exponentially weighted moving average places more weight on recent prices and each price value gets a smaller weight as we move back in the series chronologically. The weight of each data point decrease exponentially. The reason behind is that more recent prices are considered to be more important than the older prices. This is in contrast simple moving average, which places equal weights on daily prices. For example, a 200-day moving average which is over 6 months old could be less relevant to current market conditions.
Applicability/Characteristics Straightforward rules are used for all the moving average strategies. Each test differs only by the type of moving average used i.e. simple, weighted or exponential.
•
Long entry: when the security’s current price crosses over its moving average. It means that the investor’s current expectations are higher than their average expectation and they are becoming increasingly bullish on it.
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•
Short entry: when the security’s current price crosses under its moving average. It means that the investor’s current expectations are below its average expectations and this leads to a bearish trend on the security.
Chart 3. 20-period, 50-period, and 200-period exponential moving average of the closing price of Google (GOOG). Timeframe: 1-day bars, so 20-period = 20 days
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The computation of exponential moving average is shown below with an example: For example, to calculate a 9% exponential moving average of a particular security, we will first take today’s closing price and multiply it by 9% and then add this product to the value of yesterday’s moving multiplied by 91%. (100% - 9% = 91%)
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The percentage figures of exponential weighted moving average can be converted into an approximate number of days. For example a 9% moving average is equal to a 21.2 time period exponential moving average. The formula for converting exponential percentages to time period is:
The formula for converting time periods to exponential average is:
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4. PIVOT POINTS
Conceptual Insight Pivot points are the average of the high, low and closing prices from the previous trading day. It determines the overall trend of the market over different time frames. Similar to the trend line analysis, the pivot point concept is used as support and resistance levels. These are also known as predictive and leading indicators. At least five different versions of pivot points are there, for example Standard Pivot Points, Demark Pivot Points and Fibonacci Pivot Points. Pivot Points are most applicable to market indicies such as the S&P500 and NASDAQ 100 or major markets such as gold and crude oil.
Applicability/Characteristics Pivot Points are used to project potential support and resistance price levels. This means that the largest price movement is expected to occur at one of these price levels. The other support and resistance levels are less influential, but may still generate significant price movements. Pivot points can be used in two ways (Investopedia: Pivot Points): 1. Overall market could be determined with the help of pivot points. The market is bullish when the pivot point price is broke out in an upward movement and vice versa. Pivot points are short term market indicators normally for a single day only. Weekly pivot points are used for a single week only. 2. When we need to enter and exit from the market, this could be well determined from pivot points. A trader may put a limit order to buy 100 shares, if the price broke down at resistance levels or he can set a stop-loss for the active trades, if the support levels exceeded.
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Chart 5. S&P 500 Index ETF (SPY) and corresponding floor trader pivots for 5 days. Timeframe: 5-minute bars over 5 days.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The most common method to calculate pivot points is the five-point system. This method accommodate the five points i.e. previous day’s high, low and close, two support levels and two resistance levels to arrive at the pivot points. The equations involved are given below: R2 = P + (H - L) = P + (R1 - S1) R1 = (P x 2) - L P = (H + L + C) / 3
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S1 = (P x 2) - H S2 = P - (H - L) = P - (R1 - S1) Here, "S" represents the support levels, "R" the resistance levels and "P" the pivot point. High, low and close are represented by the "H," "L" and "C," respectively. Limited markets (such as the NYSE) simply use the high, low and close from the day's standard trading hours.
A common variation of the five-point system is the inclusion of the opening price in the formula: P = ((Today\'s O) + Yesterday\'s (H + L + C)) / 4 Here, the opening price, "O," is added to the equation. The opening price for foreign exchange markets is simply the last period's closing price. The supports and resistances can then be calculated in the same manner as the five-point system, except with the use of the modified pivot point.
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5. MACD (MOVING AVERAGE COVERGENCE-DIVERGENCE) Conceptual Insight The MACD is a momentum indicator that follows a trend and shows how two moving averages of prices are correlated. The MACD is the difference between a 26-day and 12-day exponential moving average. Usually, a 9-day exponential moving average, called the “signals” (or “trigger”) line is plotted on top of the MACD to show buy/sell opportunities.
Applicability/Characteristics MACD is most effective in trending markets. Crossovers, overbought/oversold and divergences are the three ways to use MACD. Crossover: when MACD falls below its signal line, it is the “sell” signal and a “buy” signal occurs when MACD rise above its signal line. Overbought/Oversold Conditions: It is also useful as an overbought/oversold indicator. When the shorter moving average drags away from the longer moving average this implies MACD is raising and it is more likely that security prices are overshooting and soon it will return to realistic levels. MACD overbought and oversold conditions exist and it varies from security to security. Divergences: when MACD diverges from the security it is an indication that the end in current trend may occur soon. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. A bearish divergence occurs when MACD makes new lows but prices of a security fails to form new lows. These two divergences are very significant when they occur at overbought/oversold levels.
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Chart 10. Whirlpool and its MACD
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The calculation of MACD is simply done by subtracting the 26-day exponential moving average from a 12-day exponential moving average. Afterwards on top of the MACD is a “signal line” which is the nine day dotted exponential moving average of the MACD.
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6. RELATIVE STRENGTH INDEX (RSI) Conceptual Insight The relative strength index, aka RSI, is an oscillator. It compares the internal strength of a single security rather that comparing the relative strengths of two or more securities. When charts compare two market indices, they’re known as “Comparative Relative Strength”.
Applicability/Characteristics When RSI was introduced, it was recommended to use 14-day RSI. However, 9-day and 25-day RSI settings are also popular. We can change the number of time periods in RSI calculation. The indicator would be more volatile the shorter the period is used to calculate the RSI. The RSI is a price following oscillator and its values ranges between 0 and 100. To analyze the RSI, we have to look for a divergence in which the security is making a new high, but the doesn’t surpass its previous high. This divergence is an indication of an impending reversal. When the RSI turns down or falls below its most recent trough, it is said to have completed a “failure swing”. A failure swing is a confirmation of the impending reversal. We can utilize RSI in five ways mentioned below: 1. Support and Resistance levels could be formed more evidently from RSI than prices themselves.
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2. The chart patterns like head and shoulders or triangles are plotted with the help of RSI. These patterns may be noticeable on the price charts. 3. Support or resistance penetrations or breakouts (collectively “Failure Swings”) could be studied through RSI. In these cases the RSI crosses the previous high or lies below to a new low. 4. When there is a situation such as when prices make a new high or low which are not confirmed by a new high or low in the RSI, divergence occurred. Normally under these situations prices correct themselves and move in line with RSI. 5. RSI forms tops and bottoms before the underlying price chart, when its values crosses above 70 and lies below 30 respectively. Chart 13. McDonalds (MCD) and its 14-day RSI
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
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A bearish divergence occurs when prices rise while RSI falls. Prices subsequently corrected and trended downward.
Technical Significance The RSI is a fairly simple formula, but is difficult to explain without pages of examples. Refer to Wilder's book for additional calculation information. The basic formula is:
Where: U = An average of upward price change D = An average of downward price change
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7. STOCHASTIC OSCILLATOR Conceptual Insight The Stochastic Oscillator compares a security’s previous day closing price to its range of prices over a given period of time. This indicator is represented by two lines. The first and main line is called %K line and the second one is known as %D line. The %D line shows the moving average of %K line. In a graphical illustration, the %K line takes the form of solid line whereas %D line plotted as a dotted one.
Applicability/Characteristics There are several ways to interpret a Stochastic Oscillator. Three popular methods include: • Buy when the Oscillator (either %K or %D) falls below a specific level (e.g., 20) and then rises above that level. Sell when the Oscillator rises above a specific level (e.g., 80) and then falls below that level. • Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line. • Look for divergences. For instance: where prices are making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs.
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Chart 14. Avon Products and its 10-day Stochastic
Source: Technical Analysis A to Z. For Educational Purposes Only.
The "Buy" arrows are drawn when the %K line fell below, and then rose above, the 20 level. Similarly, the "Sell" arrows are drawn when the %K line rose above, and then fell below, the level of 80. The next chart also shows Avon Products
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Source: Technical Analysis A to Z. For Educational Purposes Only.
In this example the "Buy" arrows are drawn each time the %K line rose above the %D (dotted). Similarly, the "Sell" arrows are drawn when the %K line fell below the %D line. This final chart shows a divergence between the Stochastic Oscillator and prices.
Source: Technical Analysis A to Z. For Educational Purposes Only.
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This is a classic divergence where prices are headed higher, but the underlying indicator (the Stochastic Oscillator) is moving lower. When a divergence occurs between an indicator and price, the indicator typically provides the clue as to where prices will head.
Technical Significance The Stochastic Oscillator has four variables: %K Periods: this is the number of time periods used in the stochastic calculation. %K Slowing Periods: this value controls the internal smoothing of %K. A value of 1 is considered a fast stochastic; a value of 3 is considered a slow stochastic. %D Periods: this is the number of time periods used when calculating a moving average of %K. The moving average is called "%D" and is usually displayed as a dotted line on top of %K. %D Method: the method (i.e. Exponential, Simple, Time Series, Triangular, Variable, or Weighted) which is used to calculate %D. The formula for %K is:
For example, to calculate a 10-day %K, first find the security's highest-high and lowest-low over the last 10 days. As an example, let's assume that during the last 10 days the highest-high was 46 and the lowest-low was 38--a range of 8 points. If today's closing price was 41, %K would be calculated as:
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The 37.5% in this example shows that today's close was at the level of 37.5% relative to the security's trading range over the last 10 days. If today's close were 42, the Stochastic Oscillator would be 50%. This would mean that that the security closed today at 50%, or the mid-point, of its 10-day trading range. The above example used a %K Slowing Period of 1-day (no slowing). If we use a value greater than one, we have to average the highest-high and the lowest-low over the number of %K Slowing Periods before performing the division. A moving average of %K is then calculated using the number of time periods specified in the %D Periods. This moving average is called %D. The Stochastic Oscillator always ranges between 0% and 100%. A reading of 0% shows that the security's close was the lowest price that the security has traded during the preceding x-time periods. A reading of 100% shows that the security's close was the highest price that the security has traded during the preceding x-time periods.
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8. VOLUME-WEIGHTED AVERAGE PRICE (VWAP) Conceptual Insight Volume Weighted Average Price is the average of a security weighted by volume. It is valid for the current trading day only and intraday data is used to calculate it. VWAP is a method of pricing transactions and also a benchmark to measure the efficiency of institutional trading or the performance of traders themselves (Code Projects: VWAP Algorithm, e-article).
Applicability/Characteristics VWAP is primarily used by Institutional Traders. As with moving averages, VWAP lags price because it is an average based indicator based on past data. Lags are greater when there are more data. Despite the lag, we can compare the VWAP with the current price to determine the general direction of intraday prices. It works similar to a moving average. In general, intraday prices fall when they are below VWAP and intraday prices rise when they are above VWAP. VWAP will be somewhere between the day's high-low range when prices are range bound for the day. Price levels weighted by volume are reflected by VWAP and applicable to determine the liquidity points. It helps the institutions with large orders to identify the liquid and illiquid price points for a particular security over a comparatively very short period of time.
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Trading efficiency can be measures by the VWAP. Institutions or individuals can compare their price to VWAP values after buying or selling a security. A buy order executed below the VWAP value would be considered a good trade because the security was bought at a below average price. Conversely, a sell order executed above the VWAP would be a good move because it was sold at an above average price.
Chart 6. NASDAQ Index QQQ ETF (QQQ) price chart with VWAP overlay. Timeframe: 5-min bars over 1 day.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance VWAP can be calculated by dividing the total value of shares traded in a specific stock on a given day with total volume of shares traded in that stock on that particular day. Computation techniques vary, as some people use data from all markets or some from the primary market only.
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9. ACCUMULATION DISTRIBUTION LINE Conceptual Insight Volume-based indicator designed to measure the cumulative flow of money into or out of a security. The accumulation distribution line is formed by the running total of money flow volume in the security. The accumulation/distribution line is also referred as a momentum indicator that associates changes in price and volume. This indicator is based on the premise that the price move would be more significant such a move is accompanied by more volume.
Applicability/Characteristics •
The rising indicator value leads to the security accumulation as more volume is coupled with upward price movement.
•
The falling indicator values leads to the security distribution as most of the volume is coupled with downward price movement.
•
The divergence between the Accumulation/Distribution and the security’s price implies that the change in prices is going to happen very soon. Prices will normally reverse when the indicator moves up and a security price comes down.
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Chart 7. Goldman Sachs (GS) price chart with Accumulation/Distribution line below.
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Goldman Sachs price vs. accumulation/distribution indicator diverged as it reached new highs in July 2013 while the accumulation/distribution indicator was falling. Prices then corrected to confirm the indicator’s trend.
Technical Significance A fraction of each day’s volume should be added or subtracted from a cumulative total in order to calculate an Accumulation/ Distribution indicator. More volume should be added to the cumulative total if the closing price is nearer to the high of the day. More volume should be subtracted from cumulative total if the closing price is nearer to the low of the day.
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If the closing price is exactly on between to the high and lows of the day, nothing is added to the cumulative total.
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10. AVERAGE DIRECTIONAL INDEX (ADX) Conceptual Insight The Average Directional Movement Index (ADX) is a technical analysis indicator that shows when a market is trending or not trending. ADX is non-directional so it will quantify a trend's strength regardless of whether it is up or down. It is usually plotted in a chart window along with two lines known as the DMI (Directional Movement Indicators).
Applicability/Characteristics The Average Directional Index (ADX), Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI) represent a group of directional movement indicators that form a trading system. All these indicators used together to determine the direction and strength of a trend. The ADX is used to measure the strength and weakness of trend, not the actual direction. Directional movement is defined by +DI and –DI, the bulls have the edge when +DI is greater than - DI, while the bears have the edge when - DI is greater. Crosses of these directional indicators can be combined with ADX for a complete trading system. Chart 8. Gold ETF (GLD) price chart with ADX below.
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Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The ADX could be interpreted by considering a large number to be a strong trend and a low number for a weak trend (I Stock Analyst: ADX). The values of this index lie between 0 to100 but there is very less probability these values cross 60. The ADX was developed by J. Welles Wilder and is described in his 1978 book New Concepts In Technical Trading Systems.
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11. COMMODITY CHANNEL INDEX (CCI) Conceptual Insight A Commodity Channel Index (“CCI”) measures the variation of a security’s price from its statistical means. Don’t let the name fool you. CCI can be used effectively on any type of security, not just for commodities. High values of CCI indicate the prices are unusually high compare to its average prices whereas low values indicate that the prices are unusually low. It was developed by Donald Lambert.
Applicability/Characteristics There are two methods for interpreting CCI: the first one is to look for divergences and the second one is to consider it as an overbought/oversold indicator. Divergence occurs when the security’s prices are at a new high while CCI does not surpass its previous highs. This divergence is often followed by a correction in the security’s price. The CCI generally oscillates between +100 and -100. Readings above +100 implies an overbought condition (and price correction is pending) while the reading below -100 indicates and oversold condition (pending rally).
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Chart 9. Halliburton (HAL) price chart with 20-period CCI. Timeframe: 1-day bars
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
In the chart above, the rising green line on the price chart and the declining red line on the CCI shows a bearish divergence. This means the direction of the price versus CCI has diverged. Prices corrected itself following this divergence. Each of these divergences occurred at extreme levels (i.e. above +100 or below -100), making them even more significant.
Technical Significance These are the steps involve in the calculation of CCI:
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•
Add each period's high, low, and close and divide this sum by 3. This is the typical price.
•
Calculate an n-period simple moving average of the typical prices computed in Step 1.
•
For each of the prior n-periods, subtract today's Step 2 value from Step 1's value n days ago. For example, if we were calculating a 5-day CCI, we would have to perform five subtractions using today's Step 2 value.
•
Calculate an n-period simple moving average of the absolute values of each of the results in Step
•
Multiply the value in Step 4 by 0.015.
•
Subtract the value from Step 2 from the value in Step 1.
•
Divide the value in Step 6 by the value in Step 5.
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12. KELTNER CHANNELS
Conceptual Insight The Keltner Channel consists of moving average band indicators whose upper and lower bands are adjusted to changes in volatility. These are basically volatility based envelopes set above and below of an exponential moving average. Instead of using standard deviation, the Keltner Channels use Average True Range (ATR) to set channel distance. The channel set typically two Average True Range values above and below the 20-day EMA. It is used to signal price breakouts, trends, and give overbought/oversold readings.
Applicability/Characteristics Buy Signal When price closes above the upper band, it’s a buy signal. A strong trend cannot persist for long after the occurrence of channel breakout and security prices oscillate between the channel lines.
Sell Signal When price closes below the lower band, sell. Sometime trading ranges are marked by comparatively flat moving averages. The channel boundaries can be used to identify overbought and oversold levels for trading purposes.
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Keltner Channel trends start with strong moves in one direction or another. A surge above the upper channel line shows the “extraordinary strength” while a plunge below the lower channel line shows “extraordinary weakness”. These are the signals of end of one trend and the beginning of another. Keltner Channel is a trend following indicator and it lags price action. The channel follows the direction of moving average. In general, a downtrend is present when the channel moves lower, while an uptrend exists when the channel moves higher. The trend is flat when the channel moves sideways.
Chart 4. Keltner Channel of Apple (AAPL). Timeframe: 1-day bars (Daily).
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
The above chart is plotted by using the 20-day moving average and an average true range multiplier of 1.5.
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Technical Significance There are three steps to calculate Keltner Channels. •
First, select the length for the exponential moving average.
•
Second, choose the time periods for the Average True Range (ATR).
•
Third, choose the multiplier for the Average True Range.
With Keltner Channels, the moving averages lag prices. A longer-period moving average will have more lag while a shorter-period moving average will have less lag. Short timeframes, such as 10, produces a more volatile ATR that fluctuates as 10-period volatility increase and decrease. Longer timeframes, such as 100, smooth these fluctuations to produce a more constant ATR reading. The multiplier has the most affect on the channel width. Simply changing from 2 to 1 will cut channel width in half. Increasing from 2 to 3 will increase channel width by 50%.
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13. MONEY FLOW INDEX (MFI) Conceptual Insight The Money Flow Index is more or less similar to the Relative Strength Index (RSI). However, MFI is different to RSI, which is only based on prices. MFI incorporates volume to produce signals. It is a momentum indicator and captures the strength on money flowing in and out for a particular security.
Applicability/Characteristics The interpretation of the Money Flow Index is as follows:
There is an indication of price reversal when the security’s price moves up and MFI values tend to be in a lower direction and vice versa. This is a divergence between an indicator and the price action. When the MFI is above 80 we have to look for market tops to occur. Market bottoms seems to occur when the MFI is below 20.
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Chart 11. Intel (INTC) price chart and its 14-day Money Flow Index
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance The Money Flow Index requires a series of calculations. First, the period's Typical Price is calculated.
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Next, Money Flow (not the Money Flow Index) is calculated by multiplying the period's Typical Price by the volume.
Positive Money Flow: When today’s typical price is greater than the yesterday’s typical price and it is an addition of Positive Money Flow over a particular period of time. Negative Money Flow: When today’s price is less that the yesterday’s typical price and it is an addition of Negative Money Flow over a specific time frame.
Finally, the Money Flow Index is calculated using the Money Ratio.
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14. ON BALANCE VOLUME (OBV) Conceptual Insight On Balance Volume (OBV) combines price and volume to determine whether price movements are strong or weak and lacking confidence. The basic assumption regarding OBV analysis is that OBV changes precede price changes. Smart money can be seen flowing into the security by a rising OBV.
Applicability/Characteristics On Balance Volume is interpreted as follows: Up Volume: All of the day’s volume is termed as an up volume when the security’s price closes higher than the yesterday’s closing price. Down Volume: All of the day’s volume is said to be down volume when the security’s price closes lower than the yesterday’s closing price. If the security’s price precedes OBV movement, a “non-confirmation” has occurred. It can occur at bull market tops (when the security rises without, or before, the OBV) or at the bear market bottoms (when the security falls without, or before, the OBV). Rising trend is established when each new peak formed is higher than the previous one and each new trough is higher the previous trough.
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The OBV would be in a falling trend when each new peak is lower than the earlier peak and each trough thereafter lies lower than the previous trough. Sideways movements of OBV without making any successive highs and lows are an indication of doubtful trend.
Up Trend
Down Trend
Doubtful Trend
OBV remains in full intensity once a trend is established. There are two ways in which this trend could be discontinued: 1. When a rising trend changes into a falling trend or vice versa. 2. When the rising/falling trend changes into a doubtful trend and remains as it is for more than three days. The OBV is known to be always in a rising trend when a rising trend of a security changes into a doubtful trend and follows it only for two days before to revert back on a rising trend. Changes in trends mentioned above leads to the emergence of “breakout”. Usually, price breakouts follows the OBV breakouts and “buy long signal” could be generated in case of OBV upside breakouts, whereas there is an indication to “sell short” if OBV forms a downside breakouts. These positions should be retained until any change happens in price trends.
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Chart 12. Pepsi (PEP) and the On Balance Volume Indicator
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance On Balance Volume is a simple calculation. On an up day, the volume is added to the previous day's OBV. On a down day, the volume is subtracted from the previous day's OBV. (Online Trading Concepts: e-Article) If today's close is greater than yesterday's close then: OBV = Yesterday’s OBV + Today’s Volume If today's close is less than yesterday's close then: OBV = Yesterday’s OBV – Today’s Volume
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If today's close is equal to yesterday's close then: OBV = Yesterday’s OBV
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15. ULTIMATE OSCILLATOR Conceptual Insight This oscillator is devised by Larry Williams to address the issues encountered by most of the oscillators when there is difference in length of time periods. Signals could be derived based on the divergence, breakouts, overbought and oversold areas. The values vary greatly depending on the length of time periods used in a computation.
Applicability/Characteristics We have to initiate trade following divergence and a breakout in the Ultimate Oscillator’s trend. This oscillator is plotted on a vertical scale of 0 to 100 as single line. Below are some of the points highlighting the implications of this oscillator. A Buy signal occurs when:
•
A positive or bullish divergence occurs between the Oscillator and the price.
•
The Oscillator falls below 30 and then rises above the previous high established during the divergence (the actual buy signal).
A Sell Signal occurs when:
•
A negative or bearish divergence occurs between the Oscillator and the price.
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•
The Oscillator rises above 70 and then falls below the previous low established during the divergence (the actual sell signal).
Closing existing positions: •
Close long positions when the oscillator exceeds 70.
•
Close short positions when the oscillator goes below 30
Chart 15. Autozone and its Ultimate Oscillator
“Sell" arrows are drawn when the conditions for a sell signal were met: •
A bearish divergence occurred (lines "A") when prices made a new high that was not
confirmed by the Oscillator.
•
The Oscillator rose above 50 during the divergence.
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•
The Oscillator fell below the lowest point reached during the span of the divergence
(line "B"). “Buy" arrows are drawn when the conditions for a buy signal were met: •
A bullish divergence occurred (lines "C") then prices made a new low that was not
confirmed by the Oscillator.
•
The Oscillator fell below 30 during the divergence.
•
The Oscillator rose above the highest point reached during the span of the divergence
(line D)
Technical Significance The weighted sum of three oscillators explaining the short, intermediate, and long term market cycles. For example, 7, 14 and 28 period is normally what’s used in the calculation of ultimate oscillator. These three oscillators form the interpretation of William’s description of “buying and selling pressure” (On Line Article: Technical Chart Indicators and Studies). The calculation of Ultimate Oscillator involves the following steps:
•
Calculate Today's "True Low (TL)". TL = the lower of today's low or yesterday's close.
•
Calculate Today's "Buying Pressure (BP)". BP = Today's close - Today's TL.
•
Calculate Today's "True Range (TR)". TR = the higher of 1.) Today's High - Today's Low;
2.) Today's High - Yesterday's Close; 3.) Yesterday's Close - Today's Low. •
Calculate BPSum1, BPSum2, and BPSum3 by adding up all the BPs for each of the
three specified time frames. •
Calculate TRSum1, TRSum2, and TRSum3 by adding up all of the TR's for each of the
three specified time frames.
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•
The Raw Ultimate Oscillator (RawUO) is equal to = 4 * (BPSum1 / TRSum1) + 2 *
(BPSum2 / TRSum2) + (BPSum3 / TRSum3) •
The Final Ultimate Oscillator is equal to = ( RawUO / (4 + 2 + 1) ) * 100
The oscillator could be used on intraday, daily, weekly or monthly data and the number of periods varies in a calculation.
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16. WILLIAM’S %R Conceptual Insight Larry William developed trading formula called the %R. The method’s basic settings uses ten trading days to determine the trading range. Once the ten-day trading range was determined, where today's closing price will fall within that range, we can easily make out. It attempts to measure overbought and oversold market conditions. The %R always falls between a value of 100 and 0.
Applicability/Characteristics •
The trading rules are simple. We can sell when %R reaches 10% or lower and buy when
it reaches 90% or higher. Readings in the range of 80 to 100% indicate that the security is oversold while readings in the 0 to 20% range suggest that it is overbought. •
Some technicians prefer to use a value that corresponds to 1/2 of the normal cycle
length. If we specify a small value for the length of the trading range, the result would be quite volatile. Conversely, a large value smoothes the %R, and it generates fewer trading signals. •
An interesting phenomenon of the %R indicator is it’s strange ability to anticipate a
reversal in the underlying security's price. The indicator almost always forms a peak and turns down a few days before the security's price peaks and turns down. Likewise, %R usually creates a trough and turns up a few days before the security's price turns up.
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Chart 16. OEX Index and its 14-day William’s R
Chart Created with thinkorswim by TD Ameritrade. For Educational Purposes Only. (Download thinkorswim: http://bit.ly/25ebooktos )
Technical Significance %R can be a volatile indicator. It fluctuates quickly and widely. The formula to calculate William’s R is similar to the Stochastic Oscillator.
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References 1. Code Projects: VWAP Algorithm (e-article) ( Accessed on: 09 June, 2013) (http://www.codeproject.com/Articles/12610/Volume-Weighted-Average-Price-VWAPAlgorithm) 2. Investopedia ( Article: Pivot Points) (Accessed on: 09 June, 2013) (http://www.investopedia.com/articles/technical/04/041404.asp) 3. IStock Analyst (e-article: ADX) (Accessed on: 09 June, 2013) (https://www.istockanalyst.com/help/Average_Directional_Index) 4. Market Volume: Advance Decline Percentage Oscillator (e-article)( Accessed on: 09 June, 2013) (http://www.marketvolume.com/technicalanalysis/advancedecline_po.asp) 5. Online Trading Concepts: On Balance Volume (Accessed on: 08 June, 2013) Article (http://www.onlinetradingconcepts.com/TechnicalAnalysis/OnBalanceVolume.html) 6. Online Trading Tutorials ( e-article) (Accessed on : 08 June, 2013) (http://ta.mql4.com/indicators/oscillators/stochastic) 7. Online Article: Technical Chart Indicators And Studies (Accessed on; 08 June,2013)
(http://www.barchart.com/education/std_studies.php?what=std_ultosc#study) 8. Online Article: Keltner Channel (Accessed on: 09 June, 2013) (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:keltner_ch annels) 9. Steven B. Achelis : Technical Analysis A to Z, (Online : e –book) ( http://www.spytrdr.com/TechnicalAnalysisAtoZ.pdf ) 10. Wall Street Courier (e-article – Advance/Decline Volume Line) (Accessed on: 09 June, 2013) (http://www.wallstreetcourier.com/v/bi-advance-decline-volume-line.htm)
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