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“Don’t try to buy at the bottom and sell at the top. It can’t bedone except by liars.” -Bernard Baruch
Technical Indicators: Definition• Technical indicators are mathematical representations of market patterns and behavior• The indicators are formed by plugging information such as price and volume into a mathematical formula.
Why indicators• Overbought: A technical condition that occurs when there has been a lot of buying and the price of the stock is considered too high and susceptible to a decline. Oversold: A technical condition that occurs when there has been a lot of selling and the price of the stock is considered too low and a rally in prices is anticipated.
ImportanceEssentially traders use technical indicators for two things: • To generate buy and sell signals • To confirm price movement
Types of IndicatorsThere are two main types of indicators:• Leading• lagging
Leading Indicators• A leading indicator precedes price movement, and is often used to generate buy and sell signals.• Leading indicators are affected more heavily by recent price changes and tend to generate more signals and allow more opportunities to trade than lagging indicators.• Since the indicators produce more buy and sell signals, they also produce more false signals.• When leading indicators are right, they allow you to get into a trade early and make more money, but when theyre wrong you tend to lose money because youre in and out of trades more frequently.
Leading IndicatorsSome of the more common leading indicators are: • Relative Strength Index (RSI) • Parabolic SAR • Stochastic • Williams %R
Lagging Indicators• A lagging indicator is a confirmation tool because it follows price movement.• It happens "after the fact".• Change of trend
Lagging IndicatorsTwo of the more common lagging indicators are: • MACD • Moving Averages
RSI- Introduction• Developed by J. Welles Wilder and introduced in his book – New Concepts in Technical Trading System• It is a momentum oscillator that measures the speed and change of price movements• RSI oscillates between zero and 100• Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30• The default look-back period for RSI is 14, but 9 and 7 are also popular
RSI- Introduction• 80 and 20 can also be used to indicate overbought and oversold levels but gives slightly less accurate results than 70-30• If the market is trending, then signals in the direction of the trend are likely to be more reliable • For example if prices are in an up trend, a safer trade entry may be obtained by waiting for prices to pullback giving an oversold signal and then turn up again
RSI – How to generate buy and sell signals• If the RSI is above 70 and you are looking for the market to form a top, then the RSI crossing back below 70 can be used as a sell signal• The same is true for market bottoms, buying after the RSI has moved back above 30• These signals are best used in non-trending markets
RSI - Bullish and Bearish Divergence• Divergence between the RSI and the price indicates that an up or down move is weakening• Bearish Divergence occurs when prices are making higher highs but the RSI is making lower highs. • This is a sign that the up move is weakening• Bullish Divergence occurs when prices are making lower lows but the RSI is making higher lows • This is a sign that the down move is weakening
RSI – Divergence Confirmation• RSI is an indicator not the confirmation• It is important to note that although Divergences indicate a weakening trend they do not in themselves indicate that the trend has reversed• The confirmation or signal that the trend has reversed must come from price action, for example a trend line break
Parabolic SAR - Introduction• Parabolic Time Price is a system that always has a position in the market, either long or short• One can close out the current position and enter a reverse position when the price crosses the current Stop And Reverse (SAR) point• The SAR points resemble a parabolic curve as they begin to tighten and close in on prices once prices begin to trend• Parabolic Time Price is usually charted with a bar analysis so that the stop and reverse points are easily identified
Parabolic SAR - Depiction• If you are long, the SAR points will be below the prices and the signal to go short will be when prices cross the current SAR point from above
Parabolic SAR - Depiction• If you are short, the SAR points will be above the prices and the signal to go long will be when prices cross the current SAR point from below
Ues of Parabolic• Signals to stop out of the current position and enter a reverse position are when prices cross the current SAR point• For example if the SAR points are below prices you would be long with an order to close out the current long position and enter a short position at that period’s SAR point
Entry and Exit Technique• One would take only long trades when the trend is up and only short trades when the trend is down
Where to place a stop loss• After a trade has been entered using another method or technique, the SAR points of Parabolic Time Price are used to trail a stop on the position
Stochastic• Stochastics are oscillators developed by George Lane• Are based on the following observation • As prices increase - closing prices tend to be closer to the upper end of the price range • As prices decrease - closing prices tend to be closer to the lower end of the price range
Stochastic• Stochastic consist of two lines, %K and %D• The %K line measures, as a percentage, where the current close is, in relation to the lowest low over the observation period. • This is shown on a scale of 0 to 100, where 0 is the observation period low, and 100 is the observation period high.• The %D line is a Simple Moving Average of the %K
Stochastic• Slow Stochastics are the more commonly used of the two Stochastic types• Slow Stochastics are based on Fast Stochastics but provide a slower, smoother response to price movements• Slow Stochastics are smoother and are less likely to give false signals
Uses of Stochastics• Indicate overbought and oversold conditions• An overbought or oversold market is one where the prices have risen or fallen too far and are therefore likely to retrace. If the %D line is above 80% then the close is near the top end of the range of the observation period, while a reading below 20% means that the close is near the bottom end of the range of the observation period.• Generally the area above 80 is considered overbought, while the area below 20 is oversold. The specified overbought/oversold ranges vary. Other commonly used ranges include 75-25, 70-30 and 85-15.• Overbought and oversold signals are most reliable in a non-trending market where prices are making a series of equal highs and lows. If the market is trending, then signals in the direction of the trend are likely to be more reliable.
Stochastic: Generate buy and sell signals• For a buy or sell signal the following conditions must be met in order • The %K and %D lines move above 80 or below 20 • The %K and %D lines cross
• Bearish Divergence occurs when prices are making higher highs but the Stochastics are making lower highs. This is a sign that the up move is weakening.• Bullish Divergence occurs when prices are making lower lows but the Stochastics are making higher lows. This is a sign that the down move is weakening
Wiliams % R• Developed by Larry Williams• Williams %R is a momentum indicator that works much like the Stochastic Oscillator• It is especially popular for measuring overbought and oversold levels• Shows the relationship of the close relative to the high-low range over a set period of time
Wiliams % R: Scale• The scale ranges from 0 to -100• Readings from 0 to -20 considered overbought• Readings from -80 to -100 considered oversold• The nearer the close is to the top of the range, the nearer to zero (higher) the indicator will be• The nearer the close is to the bottom of the range, the nearer to -100 (lower) the indicator will be
Wiliams % R: Uses• Identify the underlying trend and then look for trading opportunities in the direction of the trend• In an up trend, traders may look to oversold readings to establish long positions• In a downtrend, traders may look to overbought readings to establish short positions
MACD: Moving Average Convergence Divergence• Developed by Gerald Appel• 26 and 12-week cycles in the stock market• MACD is a type of oscillator that can measure market momentum as well as follow or indicate the new trend
What is MACD• MACD consists of two lines • MACD Line • Signal Line• The MACD Line measures the difference between a short Moving Average and a long Moving Average• The Signal Line is a Moving Average of the MACD Line• MACD oscillates above and below a zero line without upper and lower boundaries
MACD: Use• To Generate buy and sell signals• Signals are generated when the MACD Line and the Signal Line cross• A buy signal occurs when the MACD Line crosses from below to above the Signal Line, the further below the zero line that this occurs the stronger the signal• A sell signal occurs when the MACD Line crosses from above to below the Signal Line, the further above the zero line that this occurs the stronger the signal
Indicating trend direction with MACD• If a trend is gaining momentum then the difference between the short and long moving average will increase• This means that if both MACD lines are above (below) zero and the MACD Line is above (below) the Signal Line, then the trend is up (down)
Divergence with MACD• Divergence between the MACD and the price indicates that an up or down move is weakening• Bearish Divergence occurs when prices are making higher highs but the MACD is making lower highs. This is a sign that the up move is weakening• Bullish Divergence occurs when prices are making lower lows but the MACD is making higher lows. This is a sign that the down move is weakening
Parameters for MACD• Short averaging period: (default 12)• Long averaging period: (default 26)• Signal line averaging period: (default 9)• You may wish to change the parameters to match another cycle period you have observed
BOLLINGER BAND• Developed by John Bollinger, Bollinger Bands• charted by calculating a simple moving average of price, then creating two bands a specified number of standard deviations above and below the moving average• Generally +/- 2 standard deviation• Bollinger Bands gives best results with a bar chart, so that the proximity of the bands to the prices can be easily observed
BOLLINGER BAND: Use• Identify overbought and oversold markets• An overbought or oversold market is one where the prices have risen or fallen too far and are therefore likely to retrace• Prices near the lower band signal an oversold market and prices near the upper band signal an overbought market• Overbought and oversold signals are most reliable in a non- trending market where prices are making a series of equal highs and lows
Signal in a trendy market• If the market is trending, then signals in the direction of the trend are likely to be more reliable• For example if prices are in an up trend, a safer trade entry may be obtained by waiting for prices to pullback giving an oversold signal and then turn up again
Used in combination with an oscillator to generatebuy or sell signals• If we use Bollinger Bands in combination with an oscillator such as Relative Strength Index (RSI), buy and sell signals are generated when the Bollinger Bands signal an overbought/oversold market at the same time the oscillator signals a divergence
The bands often narrow just before a sharp price move. A period of lowvolatility often precedes a sharp move in prices; low volatility will cause thebands to narrow
Signal potential tops and bottoms• A top that breaks above the upper band followed by another that is between the bands signals a potential top in the market• A bottom that breaks below the lower band followed by another that is between the bands signals a potential bottom
Parameters for Bollinger Band• The length of the moving average is usually 20 days or less i.e. a simple moving average in the middle of the Bollinger band• Bollinger used a figure of 2 standard deviations in his work, which was in stock trading
Introduction• The Ichimoku Kinko Hyo Japanese charting technique was developed before World War II with the aim of portraying - in a snapshot - where the price was heading and when was the right time to enter or exit t• The word Ichimoku can be translated to mean "a glance" or "one look". Kinko translates into "equilibrium" or "balance", with respect to price and time, and Hyo is the Japanese word for "chart". Thus, Ichimoku Kinko Hyo simply means "a glance at an equilibrium chart"• Invented by a Japanese journalist with a pen name of "Ichimoku Sanjin", meaning "a glance of a mountain man“
Calculation• The Ichimoku chart consists of five lines• Tenkan-Sen = Conversion Line = (Highest High + Lowest Low) / 2, for the past 9 periods• Kijun-Sen = Base Line = (Highest High + Lowest Low) / 2, for the past 26 periods• Chikou Span = Lagging Span = Todays closing price plotted 26 periods behind• Senkou Span A = Leading Span A = (Tenkan-Sen + Kijun-Sen) / 2, plotted 26 periods ahead• Senkou Span B = Leading Span B = (Highest High + Lowest Low) / 2, for the past 52 periods, plotted 26 periods ahead• Kumo = Cloud = Area between Senkou Span A and B
Signals• Ichimoku uses three key time periods for its input parameters: 9, 26, and 52.• A bullish signal is issued when the Tenkan-Sen (orange line) crosses the Kijun-Sen (purple line) from below• A bearish signal is issued when the Tenkan-Sen crosses the Kijun-Sen from above.• If there was a bullish crossover signal and the price, at that time, was trading above the Kumo (or cloud), this would be considered a very strong buy signal
Feature• Another striking feature of the Ichimoku charting technique is the identification of support and resistance levels• These levels can be predicted by the presence of the Kumo• The Kumo can also be used to help identify the prevailing trend of the market• If the price is above the Kumo, the prevailing trend is said to be up• And if the price is below the Kumo, the prevailing trend is said to be down.