Bollinger Bands are made up of three lines:
- Simple Moving Average (SMA)
- The upper trading band
- The lower trading band
This is used as a Lag indicator where it can be assumed that when a candle stick reaches above the upper trading band that it may be considered a sell signal. If a candlestick were to fall below the lower trading band then it may be considered a buy signal.
The trading bands form a support and resistance levels as they are often spaced two standard deviations (95% of the volume traded) off the simply moving average.
Chaikin Money Flow
This is a popular indicator which is based on the Accumulation/Distribution line. The indicator often warns of breakouts and provides traders with trend confirmation.
Likewise, selling pre Chaikin Money Flow is based on the observation that buying support is normally signalled by increased volume and frequent closes in the top half of the daily range is evidenced by increased volume and frequent closes in the lower half of the daily range.
A positive Chaikin Money Flow signals accumulation within the market whilst distribution is signalled when the indicator line is below zero. The higher the reading (above or below zero), the stronger the signal.
Commodity Channel Index (CCI)
Commodity Channel Index (CCI) is an oscillator used in technical analysis to assist in determining when a stock has been overbought and oversold. This referred to as a market timing tool, and is used to keep trades neutral in a sideways moving market. Additionally the CCI is used to identify entry points when a breakout occurs.
CCI can be used to interpret a number of signals, firstly overbought and oversold stock. CCI shows stock is oversold when approaching +100, and over sold and approaching a rally when -100.
Secondly, the interpretation is when the CCI breaks into triple digits it will continue a trend. When the CCI rises above +100, it is a bullish signal. When the CCI dips below -100, it is a bearish signal.
Finally, the CCI is used to interpret data, and look for divergences as the key defining factor. An example of this is if the price is breaking new highs whilst the CCI is not, the security is then potentially oversold. If both are reaching new highs then an uptrend will possibly ensure. The reverse conditions can hold true when the price reaches new lows over a certain time period.
Directional Moving Index (DMI)
The Directional Movement Index (DMI) is a trend-following indicator developed by J. Welles Wilder Jr and is designed to determine whether a security is in a trending or non-trending market. Since the market is in a strong trend only about 30% of the time and in sideways about 70% of the time, this indicator is used to capture the period when the market shows significant trending or directional behaviour.
The calculation of the DMI is fairly complex, and consists of three lines:
- +DI: current positive directional index, the range of highs divided by the price range over the last day and previous close, smoothed over a given number of periods
- –DI: current negative directional index, the range of lows divided by the price range over the last day and previous close, smoothed over a given number of periods
- ADX: modified moving average of the difference of +DI and -DI divided by the sum of +DI and -DI, multiplied by 100
When the +DI rises above the -DI, it can be considered a signal for an uptrend. When the +DI crosses below the -DI, it can be considered a signal for a downtrend.
A traditional understanding of DMI would see three criteria being met for a signal to be considered true in most circumstances:
- ADX should be rising;
- ADX should be above 50;
- Confirmation from another indicator is encouraged pointing towards strong trending or volatility characteristics.
Elder Ray Index
This technical indicator measures the amount of buying and selling pressure in the market. The Elder Ray Index has two indicators, Bull Power and Bear Power. Traders can use these indicators to interpret price position in relation to a certain exponential moving average (EMA).
The values of the bull and bear power along with divergence to make transaction is a key focus for traders when making decisions. A trader will look to take a long position when the bear power has a value below zero but is increasing and the bull power’s latest peak is higher than its previous position. A trader will take a short position when the bull-power value is positive but falling and the bear power’s recent low has reached it’s lowest point since any previous bottom trend.
This is when an investor is using a MACD and they assume that a change in trend is about to start. As shown in the chart two fake outs have occurred where they have not crossed over to support a change in trend. Yet they have come extremely close. If an investor had purchased at these two points then they would have seen losses in their portfolio. Once again it is noted that not just one indicator should be used to determine a buy or sell signal.
This is a term used in technical analysis that refers to the likelihood that a financial asset’s price will retrace a large portion of an original move and find support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trendline between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.
Fibonacci retracement is a very popular tool used by many technical traders to help identify strategic places for transactions to be placed, target prices or stop losses. The notion of retracement is used in many indicators such as Tirone levels, Gartley patterns, Elliott Wave theory and more.
When one Fibonacci number is divided by the next number in the sequence, the result is approximately 62%. When that Fibonacci number is divided by the following number, the result is approximately 38%. These are the key Fibonacci retracement levels.
The principle behind a Fibonacci retracement is that after a stock moves upward or downward, the price will often retrace or correct some of this movement. Many technical analysts believe that the amount of retracement will often correspond to one of the Fibonacci levels. The five horizontal lines represent percentages of 100%, 62%, 50%, 38% and 0% (with 62 and 38 being Fibonacci numbers).
This indicator can be useful for identifying support and resistance levels when stocks correct upwards or downwards from a high.
A market breadth indicator that is based on the difference between the number of advancing and declining issues on a stock exchange or market. It is primarily used for short and intermediate term trading and is designed to determine the strength of a market trend.
In simple terms the formula looks as follows:
(19 Day EMA of Advances – Declines) – (39 Day EMA of Advances – Declines)
In most cases a small number of stocks making large gains signifies a weakening bull market. This gives the perception that the overall market is healthy, however this is not necessarily so. As rising prices are being driven by a small number of stocks. Conversely, when a bear market is still declining, but a smaller amount of stocks are declining, an end to the bear market may be near.
The McClellan Oscillator consists of two significant sets of information to interpret. The first interpretation is to use regions to derive bullish and bearish signals. If the Oscillator extends below -100 or above 100, it represents extreme oversold/overbought conditions, and suggests a continuation of the current downtrend or uptrend for a short-to-intermediate period of time, respectively. If the McClellan Oscillator falls into the -70 to -100 region and turns up, it can be considered bullish. On the other hand, if it rises into the +70 to +100 region and turns down, it can be considered bearish.
- The second interpretation is to look at whether the Oscillator is positive or negative
- When the indicator goes from negative to positive, a bullish signal is generated
- When the indicator goes from positive to negative, a bearish signal is generated
Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence (MACD) is an indicator frequently used in technical analysis which shows the average value of a security’s price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance. It is one of the oldest and most widely used indicators.
Developed by Gerald Appel, Moving Average Convergence Divergence (MACD) is one of the simplest and most reliable indicators available. The most popular formula for the “standard” MACD is the difference between a security’s 26-day and 12-day Exponential Moving Averages (EMAs).
Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted alongside to act as a trigger line. A bullish crossover occurs when MACD moves above its 9-day EMA and a bearish crossover occurs when MACD moves below its 9-day EMA.
A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This is an indicator that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average.
If MACD is negative and declining further then the negative gap between the faster moving average and the slower moving average is expanding. Downward momentum is accelerating indicating a bearish period of trading. MACD centreline crossovers occur when the faster moving average crosses the slower moving average.
On Balance Volume (OBV)
On Balance Volume is a technical analysis tool that is used to detect momentum – the calculation of which relates volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. This indicator was developed by Joe Granville.
OBV attempts to detect when a stock is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend whilst a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the informed traders are starting to exit their positions and that a shift in trend may be coming.
A technical indicator derived by calculating the numerical average of a particular stock’s high, low and closing prices. The pivot point is used as a predictive indicator. If the following day’s market price falls below the pivot point, it may be used as a new resistance level. Conversely, if the market price rises above the pivot point, it may act as the new support level.
Rate of Change (ROC)
The rate of change is the speed at which a variable changes over a specific period of time. Rate of change is often used when speaking about momentum and it can generally be expressed as a ratio between a change in one variable relative to a corresponding change in another.
Graphically, the rate of change is represented by the slope of a line. Rate of change is often illustrated by the Greek letter delta. Many traders pay close attention to the speed at which one variable changes relative to another. For example, option traders observe the relationship between the rates of change in the price of an option in relation to a small change in the price of the underlying asset, known as an options delta
Relative Strength Index (RSI)
The Relative Strength Index (RSI) can be used to see if a stock is ‘overbought’ or ‘oversold’. RSI is based on momentum which measures the speed and change between price movements over a set period of time.
The chart has a range from 0 to 100. Generally investors use a limit or support line at 30. If the RSI reaches below 30 then the stock is considered to be “oversold” and can present an opportunity to buy this stock. Examples of this can be seen here in our chart in Feb, Jun and the end of Oct.
As for a sell signal, a resistance line can be used at the 70 level on the RSI. If levels are above 70 then it can be assumed that this stock is “overbought” and could produce a sell signal. Examples of this can be seen here in our chart in July and almost in December. Keep in mind that RSI should also be used in conjunction with other indicators as an investor may enter into a position to early or late.
A technical momentum indicator that is made up of a security’s closing price to its price range over a given time period. There can be a reduction in the oscillator’s sensitivity to market movements by adjusting the time period or by taking a moving average of the result.
The Stochastic Oscillator is calculated with the following formula:
%K = 100[(C – L14)/(H14‚ – L14)]
C = the most recent closing price
L14 = the low of the 14 previous trading sessions
H14 = the highest price traded during the same 14-day period
%D = 3-period moving average of %K
The theory behind this indicator is that in an upward-trending market prices tend to close near their high and during a downward-trending market prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called the %D.
Readings below 20 are thought to be oversold and readings above 80 are thought of as overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish. A security can continue to rise after the Stochastic Oscillator has reached 80 and continue to fall after the Stochastic Oscillator has reached 20.
One of the most reliable signs is to wait for a divergence to appear from overbought or oversold levels. Once the oscillator reaches overbought levels wait for a negative divergence to develop and then a cross below 80. This usually requires a double dip below 80 and the second dip results in the sell signal. For a buy signal wait for a positive divergence to develop after the indicator moves below 20. This usually requires a trader to disregard the first break above 20. After the positive divergence forms the second break above 20 confirms the divergence and a buy signal is given.
Speed Resistance Lines (SRL)
A tool in technical analysis that is used for determining potential areas of support and resistance. This tool, consisting of three trend lines, is created by drawing the first trend line from the most recent low to the most recent high when the asset is in an uptrend and from the most recent high to the most recent low when the asset is in a downtrend.
The other two trend lines are drawn with smaller angles in an attempt to predict areas that will act as possible restraint in the event of a retracement. Speed resistance lines are similar in interpretation to the Fibonacci Fan indicator.
Traders will commonly watch for a move below the two-thirds level to signal a continued retracement toward the one-third level. It is important to include other technical indicators to observe when the price of the asset is nearing the trend line to confirm the strength of the predicted support/resistance.
The Williams R is a momentum indicator that measures overbought and oversold levels. It was developed by Larry Williams and makes comparisons of a stock’s close price to the high-low range over a selected time period, and most commonly 14 days.
The Williams R is used to anticipate entry and exit points to the market. The measurement of this indicator is of a value from 0 to -100. If the value is over 80 it indicates stock is oversold and could represent a buy signal, while readings below 20 suggests a stock is overbought and could represent a sell signal.