Technical Indicators
Technical indicator is a mathematical manipulation of a security price and/or volumes aimed at forecasting of future price changes. Decisions about how and when to open or close positions can be made on basis of signals from technical indicators. According to their functionalities, indicators can be divided into two groups: trend indicators and oscillators. Trend indicators help to assess the price direction and detect the turn moments synchronously or with a delay. Oscillators allow to find the turning moments ahead or synchronously.
Indicators are imposed into the chart from the "Navigator" window by means of Drag`n`Drop technique, by execution of the "Insert — Indicators" menu command, or by pressing of the button of the "Charts" toolbar. A technical indicator can be drawn in a separate indicator window that has a specific vertical scale (for example, MACD) or it can be imposed directly into the price chart (for example, Moving Average). At that, indicators can be drawn not only for price data and derivatives thereof (Median Price, Typical Price, Weighted Close), but also for other indicators. For example, Moving Average for Awesome Oscillator can be drawn, and a signal line can be obtained additionally to AO in this way. To do so, one has to draw AO indicator first, and then, using Drag`n`Drop technique, impose MA into AO and select "Previous Indicator Data" option in its settings in the "Apply to" option. If the "First Indicator Data" option is selected, MA will be drawn on basis of data of the very first imposed indicator that can be other than AO.
Besides analytical parameters, one can set colors for various elements, thickness of lines, and sizes of signs used, at setting up of the indicator. Moreover, the visualization mode of the object for different timeframes can be changed in the "Visualization" tab. At that, indicator will be shown on at timeframes that have been selected. This function can be useful if the tool has different settings for different timeframes. Using the "Show in the Data Window" option in the same tab, one can control over visualization of information about indicators in the "Data Window".
All settings can be changed. To do so, one has to select the desired indicator in the "Indicators List" window and press the "Edit" button or execute the "Properties..." command of the indicator context menu. Indicator context menu can be called by clicking with the right mouse button on a line, sign, or diagram of the desired indicator. To remove an indicator, one has to execute the "Delete Indicator" indicator context menu command or the "Delete Indicator Window" command in the chart or indicator context menus. The "Delete Indicator Window" command closes the indicator window.
Attention: Having placed cursor near a line, a sign, or a column border of an indicator histogram, one can determine precise value of this given indicator in this point.
1. Acceleration/Deceleration — AC
Acceleration/Deceleration Technical Indicator (AC) measures acceleration and deceleration of the current driving force. This indicator will change direction before any changes in the driving force, which, it its turn, will change its direction before the price. If you realize that Acceleration/Deceleration is a signal of an earlier warning, it gives you evident advantages.
The nought line is basically the spot where the driving force is at balance with the acceleration. If Acceleration/Deceleration is higher than nought, then it is usually easier for the acceleration to continue the upward movement (and vice versa in cases when it is below nought). Unlike in case with Awesome Oscillator, it is not regarded as a signal when the nought line is crossed. The only thing that needs to be done to control the market and make decisions is to watch for changes in color. To save yourself serious reflections, you must remember: you can not buy with the help of Acceleration/Deceleration, when the current column is colored red, and you can not sell, when the current column is colored green.Calculation
AC bar chart is the difference between the value of 5/34 of the driving force bar chart and 5-period simple moving average, taken from that bar chart.
AO = SMA(median price, 5)-SMA(median price, 34)AC = AO-SMA(AO, 5)
SMA — Simple Moving Average;
AO — Awesome Oscillator.
2.Accumulation/Distribution (A/D)
Accumulation/Distribution Technical Indicator is determined by the changes in price and volume. The volume acts as a weighting coefficient at the change of price — the higher the coefficient (the volume) is, the greater the contribution of the price change (for this period of time) will be in the value of the indicator.
In fact, this indicator is a variant of the more commonly used indicator On Balance Volume. They are both used to confirm price changes by means of measuring the respective volume of sales.Calculation:
A certain share of the daily volume is added to or subtracted from the current accumulated value of the indicator. The nearer the closing price to the maximum price of the day is, the higher the added share will be. The nearer the closing price to the minimum price of the day is, the greater the subtracted share will be. If the closing price is exactly in between the maximum and minimum of the day, the indicator value remains unchanged.
A/D = SUM[((CLOSE — MINIMUM) — (MAXIMUM — CLOSE))*VOLUME/(MAXIMUM — MINIMUM), N]N — the quantity of periods used in the calculation.
3. Alligator
"Most of the time the market remains stationary. Only for some 15–30% of time the market generates trends, and traders who are not located in the exchange itself derive most of their profits from the trends. My Grandfather used to repeat: "Even a blind chicken will find its corns, if it is always fed at the same time". We call the trade on the trend "a blind chicken market". It took us years, but we have produced an indicator, that lets us always keep our powder dry until we reach the blind chicken market"
Bill Williams
In principle, Alligator Technical Indicator is a combination of Balance Lines (Moving Averages) that use fractal geometry and nonlinear dynamics.· The blue line (Alligator’s Jaw) is the Balance Line for the timeframe that was used to build the chart (13-period Smoothed Moving Average, moved into the future by 8 bars);
· The red line (Alligator’s Teeth) is the Balance Line for the value timeframe of one level lower (8-period Smoothed Moving Average, moved by 5 bars into the future);
· The green line (Alligator’s Lips) is the Balance Line for the value timeframe, one more level lower (5-period Smoothed Moving Average, moved by 3 bars into the future).
Lips, Teeth and Jaw of the Alligator show the interaction of different time periods. As clear trends can be seen only 15 to 30 per cent of the time, it is essential to follow them and refrain from working on markets that fluctuate only within certain price periods.Calculation
MEDIAN PRICE = (HIGH + LOW) / 2ALLIGATORS JAW = SMMA (MEDEAN PRICE, 13, 8)
ALLIGATORS TEETH = SMMA (MEDEAN PRICE, 8, 5)
ALLIGATORS LIPS = SMMA (MEDEAN PRICE, 5, 3)
MEDIAN PRICE — median price;
HIGH — the highest price of the bar;
LOW — the lowest price of the bar;
SMMA (A, B, C) — smoothed moving average. A parameter is for data to be smoothed, B is the smoothing period, C is shift to future. For example, SMMA (MEDIAN PRICE, 5, 3) means that the smoothed moving average will be calculated on the median price, smoothing period being equal to 5 bars and shift being 3;
ALLIGATORS JAW — Alligator's jaws (blue line);
ALLIGATORS TEETH — Alligator's teeth (red line);
ALLIGATORS LIPS — Alligator's lips (green line).
4. Average Directional Movement Index
Average Directional Movement Index Technical Indicator (ADX) helps to determine if there is a price trend. It was developed and described in detail by Welles Wilder in his book "New concepts in technical trading systems".
The simplest trading method based on the system of directional movement implies comparison of two direction indicators: the 14-period +DI one and the 14-period -DI. To do this, one either puts the charts of indicators one on top of the other, or +DI is subtracted from -DI. W. Wilder recommends buying when +DI is higher than -DI, and selling when +DI sinks lower than -DI.Calculation
ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N N — the number of periods used in the calculation.
5. Average True Range
Average True Range Technical Indicator (ATR) is an indicator that shows volatility of the market. It was introduced by Welles Wilder in his book "New concepts in technical trading systems". This indicator has been used as a component of numerous other indicators and trading systems ever since.
Average True Range can often reach a high value at the bottom of the market after a sheer fall in prices occasioned by panic selling. Low values of the indicator are typical for the periods of sideways movement of long duration which happen at the top of the market and during consolidation. Average True Range can be interpreted according to the same principles as other volatility indicators. The principle of forecasting based on this indicator can be worded the following way: the higher the value of the indicator, the higher the probability of a trend change; the lower the indicator’s value, the weaker the trend’s movement is.Calculation
True Range is the greatest of the following three values:· difference between the current maximum and minimum (high and low);
· difference between the previous closing price and the current maximum;
· difference between the previous closing price and the current minimum.
The indicator of Average True Range is a moving average of values of the true range.6. Awesome Oscillator
Awesome Oscillator Technical Indicator (AO) is a 34-period simple moving average, plotted through the middle points of the bars (H+L)/2, which is subtracted from the 5-period simple moving average, built across the central points of the bars (H+L)/2. It shows us quite clearly what’s happening to the market driving force at the present moment.
Signals to buy
Saucer
This is the only signal to buy that comes when the bar chart is higher than the nought line. One must bear in mind:· the saucer signal is generated when the bar chart reversed its direction from the downward to upward. The second column is lower than the first one and is colored red. The third column is higher than the second and is colored green.
· for the saucer signal to be generated the bar chart should have at least three columns.
Keep in mind, that all Awesome Oscillator columns should be over the nought line for the saucer signal to be used.Nought line crossing
The signal to buy is generated when the bar chart passes from the area of negative values to that of positive. It comes when the bar chart crosses the nought line. As regards this signal:· for this signal to be generated, only two columns are necessary;
· the first column is to be below the nought line, the second one is to cross it (transition from a negative value to a positive one);
· simultaneous generation of signals to buy and to sell is impossible.
Two pikes
This is the only signal to buy that can be generated when the bar chart values are below the nought line. As regards this signal, please, bear in mind:· the signal is generated, when you have a pike pointing down (the lowest minimum) which is below the nought line and is followed by another down-pointing pike which is somewhat higher (a negative figure with a lesser absolute value, which is therefore closer to the nought line), than the previous down-looking pike.
· the bar chart is to be below the nought line between the two pikes. If the bar chart crosses the nought line in the section between the pikes, the signal to buy doesn’t function. However, a different signal to buy will be generated — nought line crossing.
· each new pike of the bar chart is to be higher (a negative number of a lesser absolute value that is closer to the nought line) than the previous pike.
· if an additional higher pike is formed (that is closer to the nought line) and the bar chart has not crossed the nought line, an additional signal to buy will be generated.
Signals to sell
Awesome Oscillator signals to sell are identical to the signals to buy. The saucer signal is reversed and is below zero. Nought line crossing is on the decrease — the first column of it is over the nought, the second one is under it. The two pikes signal is higher than the nought line and is reversed too.Calculation
AO is a 34-period simple moving average, plotted through the central points of the bars (H+L)/2, and subtracted from the 5-period simple moving average, graphed across the central points of the bars (H+L)/2. AO = SMA(MEDIAN PRICE, 5)-SMA(MEDIAN PRICE, 34)
SMA — Simple Moving Average.
7. Bears Power
Everyday trading represents a battle of buyers ("Bulls") pushing prices up and sellers ("Bears") pushing prices down. Depending on what party scores off, the day will end with a price that is higher or lower than that of the previous day. Intermediate results, first of all the highest and lowest price, allow to judge about how the battle was developing during the day.
It is very important to be able to estimate the Bears Power balance since changes in this balance initially signalize about possible trend reversal. This task can be solved using the Bears Power oscillator developed by Alexander Elder and and described in his book titled Trading for a Living. Elder based on the following premises when deducing this oscillator:· moving average is a price agreement between sellers and buyers for a certain period of time,
· the lowest price displays the maximum sellers' power within the day.
On these premises, Elder developed Bears Power as the difference between the lowest price and 13-period exponential moving average (LOW - EMA).Application
This indicator is better to use together with a trand indicator (most frequently Moving Average):· if trend indicator is up-directed and the Bears Power index is below zero, but growing, it is a signal to buy;
· it is desirable that, in this case, the divergence of bases were being formed in the indicator chart.
Calculation
The first stage of this indicator calculation is calculation of the exponential moving average (as a rule, it is recommended to use the 13-period EMA).BEARS — Bears Power;
LOW — the lowest price of the current bar;
EMA — exponential moving average.
In the down-trend, LOW is lower than EMA, so the Bears Power is below zero and histogram is located below zero line. If LOW rises above EMA when prices grow, the Bears Power becomes above zero and its histogram rises above zero line.8. Bollinger Bands
Bollinger Bands Technical Indicator (BB) is similar to Envelopes. The only difference is that the bands of Envelopes are plotted a fixed distance (%) away from the moving average, while the Bollinger Bands are plotted a certain number of standard deviations away from it. Standard deviation is a measure of volatility, therefore Bollinger Bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen and they contract during less volatile periods.
Bollinger Bands are usually plotted on the price chart, but they can be also added to the indicator chart (Custom Indicators). Just like in case of the Envelopes, the interpretation of the Bollinger Bands is based on the fact that the prices tend to remain in between the top and the bottom line of the bands. A distinctive feature of the Bollinger Band indicator is its variable width due to the volatility of prices. In periods of considerable price changes (i.e. of high volatility) the bands widen leaving a lot of room to the prices to move in. During standstill periods, or the periods of low volatility the band contracts keeping the prices within their limits.1. abrupt changes in prices tend to happen after the band has contracted due to decrease of volatility.
2. if prices break through the upper band, a continuation of the current trend is to be expected.
3. if the pikes and hollows outside the band are followed by pikes and hollows inside the band, a reverse of trend may occur.
4. the price movement that has started from one of the band’s lines usually reaches the opposite one. The last observation is useful for forecasting price guideposts.
Calculation
Bollinger bands are formed by three lines. The middle line (ML) is a usual Moving Average.N — is the number of periods used in calculation;
SMA — Simple Moving Average;
StdDev — means Standard Deviation.
StdDev = SQRT(SUM[(CLOSE — SMA(CLOSE, N))^2, N]/N)
9. Bulls Power
Everyday trading represents a battle of buyers ("Bulls") pushing prices up and sellers ("Bears") pushing prices down. Depending on what party scores off, the day will end with a price that is higher or lower than that of the previous day. Intermediate results, first of all the highest and lowest price, allow to judge about how the battle was developing during the day.
It is very important to be able to estimate the Bulls Power balance since changes in this balance initially signalize about possible trend reversal. This task can be solved using the Bulls Power oscillator developed by Alexander Elder and and described in his book titled Trading for a Living. Elder based on the following premises when deducing this oscillator:· moving average is a price agreement between sellers and buyers for a certain period of time,
· the highest price displays the maximum buyers' power within the day.
On these premises, Elder developed Bulls Power as the difference between the highest price and 13-period exponential moving average (HIGH - EMA).Application
This indicator is better to use together with a trand indicator (most frequently Moving Average):· if trend indicator is down-directed and the Bulls Power index is above zero, but falling, it is a signal to sell;
· it is desirable that, in this case, the divergence of peaks were being formed in the indicator chart.
Calculation
The first stage of this indicator calculation is calculation of the exponential moving average (as a rule, it is recommended to use the 13-period EMA).BULLS — Bulls Power;
HIGH — the highest price of the current bar;
EMA — exponential moving average..
In the up-trend, HIGH is higher than EMA, so the Bulls Power is above zero and histogram is located above zero line. If HIGH falls under EMA when prices fall, the Bulls Power becomes below zero and its histogram falls under zero line.10. Commodity Channel Index
Commodity Channel Index Technical Indicator (CCI) measures the deviation of the commodity price from its average statistical price. High values of the index point out that the price is unusually high being compared with the average one, and low values show that the price is too low. In spite of its name, the Commodity Channel Index can be applied for any financial instrument, and not only for the wares.
There are two basic techniques of using Commodity Channel Index:1. Finding the divergences
The divergence appears when the price reaches a new maximum, and Commodity Channel Index can not grow above the previous maximums. This classical divergence is normally followed by the price correction.
The divergence appears when the price reaches a new maximum, and Commodity Channel Index can not grow above the previous maximums. This classical divergence is normally followed by the price correction.
2. As an indicator of overbuying/overselling
Commodity Channel Index usually varies in the range of ±100. Values above +100 inform about overbuying state (and about a probability of correcting decay), and the values below 100 inform about the overselling state (and about a probability of correcting increase).
Commodity Channel Index usually varies in the range of ±100. Values above +100 inform about overbuying state (and about a probability of correcting decay), and the values below 100 inform about the overselling state (and about a probability of correcting increase).
Calculation
1. To find a Typical Price. You need to add the HIGH, the LOW, and the CLOSE prices of each bar and then divide the result by 3.
TP = (HIGH + LOW +CLOSE)/3
TP = (HIGH + LOW +CLOSE)/3
2. To calculate the n-period Simple Moving Average of typical prices.
SMA(TP, N) = SUM[TP, N]/N
SMA(TP, N) = SUM[TP, N]/N
3. To subtract the received SMA(TP, N) from Typical Prices.
D = TP — SMA(TP, N)
D = TP — SMA(TP, N)
4. To calculate the n-period Simple Moving Average of absolute D values.
SMA(D, N) = SUM[D, N]/N
SMA(D, N) = SUM[D, N]/N
5. To multiply the received SMA(D, N) by 0,015.
M = SMA(D, N) * 0,015
M = SMA(D, N) * 0,015
6. To divide M by D
CCI = M/D
Where:CCI = M/D
SMA — Simple Moving Average;
N — number of periods, used for calculation.
11. DeMarker
Demarker Technical Indicator is based on the comparison of the period maximum with the previous period maximum. If the current period (bar) maximum is higher, the respective difference between the two will be registered. If the current maximum is lower or equaling the maximum of the previous period, the naught value will be registered. The differences received for N periods are then summarized. The received value is used as the numerator of the DeMarker and will be divided by the same value plus the sum of differences between the price minima of the previous and the current periods (bars). If the current price minimum is greater than that of the previous bar, the naught value will be registered.
When the indicator falls below 30, the bullish price reversal should be expected. When the indicator rises above 70, the bearish price reversal should be expected. Calculation:
The value of the DeMarker for the "i" interval is calculated as follows:· The DeMax(i) is calculated:
If high(i) > high(i-1) , then DeMax(i) = high(i)-high(i-1), otherwise DeMax(i) = 0
If high(i) > high(i-1) , then DeMax(i) = high(i)-high(i-1), otherwise DeMax(i) = 0
· The DeMin(i) is calculated:
If low(i) < low(i-1), then DeMin(i) = low(i-1)-low(i), otherwise DeMin(i) = 0
If low(i) < low(i-1), then DeMin(i) = low(i-1)-low(i), otherwise DeMin(i) = 0
· The value of the DeMarker is calculated as:
DMark(i) = SMA(DeMax, N)/(SMA(DeMax, N)+SMA(DeMin, N))
Where:DMark(i) = SMA(DeMax, N)/(SMA(DeMax, N)+SMA(DeMin, N))
SMA — Simple Moving Average;
N — the number of periods used in the calculation.
12. Envelopes
Envelopes Technical Indicator is formed with two Moving Averages one of which is shifted upward and another one is shifted downward. The selection of optimum relative number of band margins shifting is determined with the market volatility: the higher the latter is, the stronger the shift is.
Envelopes define the upper and the lower margins of the price range. Signal to sell appears when the price reaches the upper margin of the band; signal to buy appears when the price reaches the lower margin. Calculation
Upper Band = SMA(CLOSE, N)*[1+K/1000]Lower Band = SMA(CLOSE, N)*[1-K/1000]
SMA — Simple Moving Average;
N — averaging period;
K/1000 — the value of shifting from the average (measured in basis points).
13. Force Index
Force Index Technical Indicator was developed by Alexander Elder. This index measures the Bulls Power at each increase, and the Bulls Power at each decrease. It connects the basic elements of market information: price trend, its drops, and volumes of transactions. This index can be used as it is, but it is better to approximate it with the help of Moving Average. Approximation with the help a short moving average (the author proposes to use 2 intervals) contributes to finding the best opportunity to open and close positions. If the approximations is made with long moving average (period 13), the index shows the trends and their changes.
· It is better to buy when the forces become minus (fall below zero) in the period of indicator increasing tendency;
· The force index signalizes the continuation of the increasing tendency when it increases to the new peak;
· The signal to sell comes when the index becomes positive during the decreasing tendency;
· The force index signalizes the Bears Power and continuation of the decreasing tendency when the index falls to the new trough;
· If price changes do not correlate to the corresponding changes in volume, the force indicator stays on one level, which tells you the trend is going to change soon.
Calculation
The force of every market movement is characterized by its direction, scale and volume. If the closing price of the current bar is higher than the preceding bar, the force is positive. If the current closing price if lower than the preceding one, the force is negative. The greater the difference in prices is, the greater the force is. The greater the transaction volume is, the greater the force is.FORCE INDEX (i) — Force Index of the current bar;
VOLUME (i) — volume of the current bar;
MA (ApPRICE, N, i) — any Moving Average of the current bar for N period:
Simple, Exponential, Weighted or Smoothed;
ApPRICE — applied price;
N — period of the smoothing;
MA (ApPRICE, N, i-1) — any Moving Average of the previous bar.
14. Fractals
All markets are characterized by the fact that on the most part the prices do not change too much, and only short periods of time (15–30 percent) account for trend changes. Most lucrative periods are usually the case when market prices change according to a certain trend.
A Fractal is one of five indicators of Bill Williams’ trading system, which allows to detect the bottom or the top.15. Gator Oscillator
Gator Oscillator is based on the Alligator and shows the degree of convergence/divergence of the Balance Lines (Smoothed Moving Averages). The top bar chart is the absolute difference between the values of the blue and the red lines. The bottom bar chart is the absolute difference between the values of the red line and the green line, but with the minus sign, as the bar chart is drawn top-down.
16. Ichimoku Kinko Hyo
Ichimoku Kinko Hyo Technical Indicator is predefined to characterize the market Trend, Support and Resistance Levels, and to generate signals of buying and selling. This indicator works best at weekly and daily charts.
When defining the dimension of parameters, four time intervals of different length are used. The values of individual lines composing this indicator are based on these intervals: · Tenkan-sen shows the average price value during the first time interval defined as the sum of maximum and minimum within this time, divided by two;
· Kijun-sen shows the average price value during the second time interval;
· Senkou Span A shows the middle of the distance between two previous lines shifted forwards by the value of the second time interval;
· Senkou Span B shows the average price value during the third time interval shifted forwards by the value of the second time interval.
Chinkou Span shows the closing price of the current candle shifted backwards by the value of the second time interval. The distance between the Senkou lines is hatched with another color and called "cloud". If the price is between these lines, the market should be considered as non-trend, and then the cloud margins form the support and resistance levels. · If the price is above the cloud, its upper line forms the first support level, and the second line forms the second support level;
· If the price is below cloud, the lower line forms the first resistance level, and the upper one forms the second level;
· If the Chinkou Span line traverses the price chart in the bottom-up direction it is signal to buy. If the Chinkou Span line traverses the price chart in the top-down direction it is signal to sell.
Kijun-sen is used as an indicator of the market movement. If the price is higher than this indicator, the prices will probably continue to increase. When the price traverses this line the further trend changing is possible. Another kind of using the Kijun-sen is giving signals. Signal to buy is generated when the Tenkan-sen line traverses the Kijun-sen in the bottom-up direction. Top-down direction is the signal to sell. Tenkan-sen is used as an indicator of the market trend. If this line increases or decreases, the trend exists. When it goes horizontally, it means that the market has come into the channel. 17. Market Facilitation Index
Market Facilitation Index Technical Indicator (BW MFI) is the indicator which shows the change of price for one tick. Absolute values of the indicator do not mean anything as they are, only indicator changes have sense. Bill Williams emphasizes the interchanging of MFI and volume:
· Market Facilitation Index increases and volume increases — this points out that: a) the number of players coming into the market increases (volume increases) b) the new coming players open positions in the direction of bar development, i.e., the movement has begun and picks up speed;
· Market Facilitation Index falls and volume falls. It means the market participants are not interested anymore;
· Market Facilitation Index increases, but the volume falls. It is most likely, that the market is not supported with the volume from clients, and the price is changing due to traders’ (brokers and dealers) "on the floor" speculations;
· Market Facilitation Index falls, but the volume increases. There is a battle between bulls and bears, characterized by a large sell and buy volume, but the price is not changing significantly since the forces are equal. One of the contending parties (buyers vs. sellers) will eventually win the battle. Usually, the break of such a bar lets you know if this bar determines the continuation of the trend or annuls the trend. Bill Williams calls such bar "curtsying".
Calculation:
To calculate Market Facilitation Index you need to subtract the lowest bar price from the highest bar price and divide it by the volume.Where:
RANGE — is the multiplication factor, which brings the difference in points down to whole numbers.
18. Momentum
The Momentum Technical Indicator measures the amount that a security’s price has changed over a given time span.
There are basically two ways to use the Momentum indicator:· You can use the Momentum indicator as a trend-following oscillator similar to the Moving Average Convergence/Divergence (MACD). Buy when the indicator bottoms and turns up and sell when the indicator peaks and turns down. You may want to plot a short-term moving average of the indicator to determine when it is bottoming or peaking.
If the Momentum indicator reaches extremely high or low values (relative to its historical values), you should assume a continuation of the current trend. For example, if the Momentum indicator reaches extremely high values and then turns down, you should assume prices will probably go still higher. In either case, only trade after prices confirm the signal generated by the indicator (for example, if prices peak and turn down, wait for prices to begin to fall before selling).
· You can also use the Momentum indicator as a leading indicator. This method assumes that market tops are typically identified by a rapid price increase (when everyone expects prices to go higher) and that market bottoms typically end with rapid price declines (when everyone wants to get out). This is often the case, but it is also a broad generalization.
As a market peaks, the Momentum indicator will climb sharply and then fall off — diverging from the continued upward or sideways movement of the price. Similarly, at a market bottom, Momentum will drop sharply and then begin to climb well ahead of prices. Both of these situations result in divergences between the indicator and prices. Calculation
Momentum is calculated as a ratio of today’s price to the price several (N) periods ago.
MOMENTUM = CLOSE(i)/CLOSE(i-N)*100CLOSE(i) — is the closing price of the current bar;
CLOSE(i-N) — is the closing bar price N periods ago.
19. Money Flow Index
Money Flow Index (MFI) is the technical indicator, which indicates the rate at which money is invested into a security and then withdrawn from it. Construction and interpretation of the indicator is similar to Relative Strength Index with the only difference that volume is important to MFI.
When analyzing the money flow index one needs to take into consideration the following points:· divergences between the indicator and price movement. If prices grow while MFI falls (or vice versa), there is a great probability of a price turn;
· Money Flow Index value, which is over 80 or under 20, signals correspondingly of a potential peak or bottom of the market.
Calculation
The calculation of Money Flow Index includes several stages. At first one defines the typical price (TP) of the period in question.
TP = (HIGH + LOW + CLOSE)/320. Moving Average
The Moving Average Technical Indicator shows the mean instrument price value for a certain period of time. When one calculates the moving average, one averages out the instrument price for this time period. As the price changes, its moving average either increases, or decreases.
There are four different types of moving averages: Simple (also referred to as Arithmetic), Exponential, Smoothed and Linear Weighted. Moving averages may be calculated for any sequential data set, including opening and closing prices, highest and lowest prices, trading volume or any other indicators. It is often the case when double moving averages are used.· Simple Moving Average (SMA)
· Exponential Moving Average (EMA)
· Smoothed Moving Average (SMMA)
· Linear Weighted Moving Average (LWMA)
Calculation:
Simple Moving Average (SMA)
Simple, in other words, arithmetical moving average is calculated by summing up the prices of instrument closure over a certain number of single periods (for instance, 12 hours). This value is then divided by the number of such periods.Where:
N — is the number of calculation periods.
Exponential Moving Average (EMA)
Exponentially smoothed moving average is calculated by adding the moving average of a certain share of the current closing price to the previous value. With exponentially smoothed moving averages, the latest prices are of more value. P-percent exponential moving average will look like:Where:
CLOSE(i) — the price of the current period closure;
EMA(i-1) — Exponentially Moving Average of the previous period closure;
P — the percentage of using the price value.
Smoothed Moving Average (SMMA)
The first value of this smoothed moving average is calculated as the simple moving average (SMA):SMMA1 = SUM1/N
SMMA(i) = (PREVSUM - SMMA(i - 1) + CLOSE(i)) / N
SUM1 — is the total sum of closing prices for N periods;
PREVSUM — smoothed sum of previous bar;
SMMA1 — is the smoothed moving average of the first bar;
SMMA(i) — is the smoothed moving average of the current bar (except for the first one);
CLOSE(i) — is the current closing price;
N — is the smoothing period.
SMMA (i) = (SMMA(i - 1) * (N - 1) + CLOSE (i)) / N
Linear Weighted Moving Average (LWMA)
In the case of weighted moving average, the latest data is of more value than more early data. Weighted moving average is calculated by multiplying each one of the closing prices within the considered series, by a certain weight coefficient.Where:
SUM(i, N) — is the total sum of weight coefficients.
21. Moving Average Convergence/Divergence
Moving Average Convergence/Divergence is the next trend-following dynamic indicator. It indicates the correlation between two price moving averages.
The Moving Average Convergence/Divergence Technical Indicator is the difference between a 26-period and 12-period Exponential Moving Average (EMA). In order to clearly show buy/sell opportunities, a so-called signal line (9-period indicators` moving average) is plotted on the MACD chart.Crossovers
The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the Moving Average Convergence/Divergence rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. Overbought/oversold conditions
The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. Divergence
An indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bullish divergence occurs when the Moving Average Convergence/Divergence indicator is making new highs while prices fail to reach new highs. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. Both of these divergences are most significant when they occur at relatively overbought/oversold levels. Calculation
The MACD is calculated by subtracting the value of a 26-period exponential moving average from a 12-period exponential moving average. A 9-period dotted simple moving average of the MACD (the signal line) is then plotted on top of the MACD. SIGNAL = SMA(MACD, 9)
EMA — the Exponential Moving Average;
SMA — the Simple Moving Average;
SIGNAL — the signal line of the indicator.
22. Moving Average of Oscillator
Moving Average of Oscillator is the difference between the oscillator and oscillator smoothing. In this case, Moving Average Convergence/Divergence base-line is used as the oscillator, and the signal line is used as the smoothing.
Calculation
OSMA = MACD-SIGNAL
23. On Balance Volume
On Balance Volume Technical Indicator (OBV) is a momentum technical indicator that relates volume to price change. The indicator, which Joseph Granville came up with, is pretty simple. When the security closes higher than the previous close, all of the day’s volume is considered up-volume. When the security closes lower than the previous close, all of the day’s volume is considered down-volume.
The basic assumption, regarding On Balance Volume analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV. When the public then moves into the security, both the security and the On Balance Volume will surge ahead. Calculation
If today’s close is greater than yesterday’s close then: OBV(i) = OBV(i-1)+VOLUME(i)OBV(i) — is the indicator value of the current period;
OBV(i-1) — is the indicator value of the previous period;
VOLUME(i) — is the volume of the current bar.
24. Parabolic SAR
Parabolic SAR Technical Indicator was developed for analyzing the trending markets. The indicator is constructed on the price chart. This indicator is similar to the Moving Average Technical Indicator with the only difference that Parabolic SAR moves with higher acceleration and may change its position in terms of the price. The indicator is below the prices on the bull market (Up Trend), when it’s bearish (Down Trend), it is above the prices.
If the price crosses Parabolic SAR lines, the indicator turns, and its further values are situated on the other side of the price. When such an indicator turn does take place, the maximum or the minimum price for the previous period would serve as the starting point. When the indicator makes a turn, it gives a signal of the trend end (correction stage or flat), or of its turn.Calculation
SAR(i) = SAR(i-1)+ACCELERATION*(EPRICE(i-1)-SAR(i-1)) SAR(i-1) — is the value of the indicator on the previous bar;
ACCELERATION — is the acceleration factor;
EPRICE(i-1) — is the highest (lowest) price for the previous period (EPRICE=HIGH for long positions and EPRICE=LOW for short positions).
25. Relative Strength Index
The Relative Strength Index Technical Indicator (RSI) is a price-following oscillator that ranges between 0 and 100. When Wilder introduced the Relative Strength Index, he recommended using a 14-day RSI. Since then, the 9-day and 25-day Relative Strength Index indicators have also gained popularity.
A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the Relative Strength Index then turns down and falls below its most recent trough, it is said to have completed a "failure swing". The failure swing is considered a confirmation of the impending reversal.· Tops and bottoms
The Relative Strength Index usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart;
The Relative Strength Index usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart;
· Chart Formations
The RSI often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart;
The RSI often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart;
· Failure swing ( Support or Resistance penetrations or breakouts)
This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough);
This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough);
· Support and Resistance levels
The Relative Strength Index shows, sometimes more clearly than price themselves, levels of support and resistance.
The Relative Strength Index shows, sometimes more clearly than price themselves, levels of support and resistance.
· Divergences
As discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in the direction of the RSI.
As discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in the direction of the RSI.
Calculation
RSI = 100-(100/(1+U/D)) U — is the average number of positive price changes;
D — is the average number of negative price changes.
26. Relative Vigor Index
The main point of Relative Vigor Index Technical Indicator (RVI) is that on the bull market the closing price is, as a rule, higher, than the opening price. It is the other way round on the bear market. So the idea behind Relative Vigor Index is that the vigor, or energy, of the move is thus established by where the prices end up at the close. To normalize the index to the daily trading range, divide the change of price by the maximum range of prices for the day. To make a more smooth calculation, one uses Simple Moving Average. 10 is the best period. To avoid probable ambiguity one needs to construct a signal line, which is a 4-period symmetrically weighted moving average of Relative Vigor Index values. The concurrence of lines serves as a signal to buy or to sell.
Calculation
RVI = (CLOSE-OPEN)/(HIGH-LOW) OPEN — is the opening price;
HIGH — is the maximum price;
LOW — is the minimum price;
CLOSE — is the closing price.
27. Standard Deviation
Standard Deviation — value of the market volatility measurement. This indicator describes the range of price fluctuations relative to simple moving average. So, if the value of this indicator is high, the market is volatile, and prices of bars are rather spread relative to the moving average. If the indicator value is low, the market can described as having a low volatility, and prices of bars are rather close to the moving average.
Normally, this indicator is used as a constituent of other indicators. Thus, when calculating Bollinger Bands, one has to add the symbol standard deviation value to its moving average. Calculation
StdDev = SQRT (SUM (CLOSE - SMA (CLOSE, N), N)^2)/N
Where:SQRT — square root;
SUM (..., N) — sum within N periods;
SMA (..., N) — simple moving average having the period of N;
N — calculation period.
28. Stochastic Oscillator
The Stochastic Oscillator Technical Indicator compares where a security’s price closed relative to its price range over a given time period. The Stochastic Oscillator is displayed as two lines. The main line is called %K. The second line, called %D, is a Moving Average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.
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 (for example, 20) and then rises above that level. Sell when the Oscillator rises above a specific level (for example, 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.
Calculation
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. his is the number of time periods used when calculating a moving average of %K;
· %D method. The method (i.e., Exponential, Simple, Smoothed, or Weighted) that is used to calculate %D.
The formula for %K is: %K = (CLOSE-LOW(%K))/(HIGH(%K)-LOW(%K))*100 CLOSE — is today’s closing price;
LOW(%K) — is the lowest low in %K periods;
HIGH(%K) — is the highest high in %K periods.
N — is the smoothing period;
SMA — is the Simple Moving Average.
29. Williams’ Percent Range
Williams’ Percent Range Technical Indicator (%R) is a dynamic technical indicator, which determines whether the market is overbought/oversold. Williams’ %R is very similar to the Stochastic Oscillator. The only difference is that %R has an upside down scale and the Stochastic Oscillator has internal smoothing.
To show the indicator in this upside down fashion, one places a minus symbol before the Williams Percent Range values (for example -30%). One should ignore the minus symbol when conducting the analysis.Calculation
Below is the formula of the %R indicator calculation, which is very similar to the Stochastic Oscillator formula: %R = (HIGH(i-n)-CLOSE)/(HIGH(i-n)-LOW(i-n))*100CLOSE — is today’s closing price;
HIGH(i-n) — is the highest high over a number (n) of previous periods;
LOW(i-n) — is the lowest low over a number (n) of previous periods.
