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Alpha-Beta
Trend Channel
The Alpha-Beta
Trend Channel study uses the
standard deviation of price
variation to establish two trend
lines, one above and one below
the moving average of a price
field. This creates a channel
(band) where the great majority
of price field values will
occur.
Arms Ease of
Movement
Developed by
Richard W. Arms, Jr., this
analysis routine expands on Mr.
Arms' Equivolume charting tool by
quantifying the shape aspects of
the plotted boxes. The purpose of
this quantifying is to determine
the ease, or lack thereof, with
which a particular issue is able
to move in one direction or
another. The ease with which an
issue moves is a product of a
ratio between the height (trading
range) and width (volume) of the
plotted box. In general, a higher
ratio results from a wider box
and indicates difficulty of
movement. A lower ratio results
from a narrower box and indicates
easier movement. This ratio is
then related to a comparison
between today's and yesterday's
trading-range midpoint values to
determine the ease of movement
value (EMV). A moving average is
then applied to the EMV value -
the moving average period can be
varied in order to make the EMV
flexible as a trading tool.
Average True
Range
True range is
the greatest of the following
differences:
- Today's
high to today's
low
- Today's
high to yesterday's
close
- Today's
low to yesterday's
close
The range is
normally the "high - low".
However, any time the value of
yesterday's close is not within
the range of today's bar, rule b)
or rule c) applies. As with most
other indicators, the periodic
value is summed and smoothed to
create the final indicator.
Bollinger
Bands
Bollinger
Bands plot trading bands above
and below a simple moving
average. The standard deviation
of closing prices for a period
equal to the moving average
employed is used to determine the
band width. This causes the bands
to tighten in quiet markets and
loosen in volatile markets. The
bands can be used to determine
overbought and oversold levels,
locate reversal areas, project
targets for market moves, and
determine appropriate stop
levels. The bands are used in
conjunction with indicators such
as RSI, MACD histogram, CCI and
Rate of Change. Divergence's
between Bollinger bands and other
indicators show potential action
points. As a general guideline,
look for buying opportunities
when prices are in the lower
band, and selling opportunities
when the price activity is in the
upper band.
Candlestick
Charts
Method of
drawing stock (or commodity)
charts which originated in Japan.
Requires the presence of Open,
High, Low and Close price data to
be drawn. There are two basic
types of candles, the white body
and the black body. As with
regular bar charts, a vertical
line is used to indicate the
periods (normally daily) high to
low. When prices close higher
than they opened a white
rectangle is drawn on top of the
high-low line. This rectangle
originates at the opening price
level and extends up towards the
closing price. A down day is
drawn in black. The combination
of several candles results in
patterns (with names like "two
crows" or "bullish engulfing
pattern") which give insight into
future price activity. For other
Japanese charting approaches also
see Renko and Kagi charts.
Chaikin
Oscillator
The Chaikin
Oscillator is created by
subtracting a 10 period
exponential moving average of the
Accumulation/Distribution line
from a 3 period moving average of
the Accumulation/Distribution
Line.
Commodity
Channel Index (CCI)
The CCI is a
timing system that is best
applied to commodity contracts
which have cyclical or seasonal
tendencies. CCI does not
determine the length of cycles -
it is designed to detect when
such cycles begin and end through
the use of a statistical analysis
which incorporates a moving
average and a divisor reflecting
both the possible and actual
trading ranges. Although
developed primarily for
commodities, the CCI could
conceivably be used to analyze
stocks as well.
Formula:
CCI=(M-MAVG)/(0.015xDAVG)
M=1/3 (H+L+C)
H=Highest price for a period
L=Lowest price for a period
C=Closing price for a period
MAVG=N-period simple moving
average of M DAVG= 1/n x SUMi=1
to n (ABS(MI-MAVG))
Commodity
Selection Index
The Commodity
Selection Index is related to the
Directional Movement Index.
Whereas the ADXR plot of the DMI
is used to rate contracts from
the longer term, trend-following
point of view, the CSI is used to
rate items in the more volatile
short term. The Commodity
Selection Index takes into
account the ADXR from the
Directional Movement Index, the
Average True Range, the value of
a one cent move as well as margin
and commission requirements. The
higher the CSI rating, the more
attractive an item is for
trading.
Cutler's
RSI
Cutler's RSI
is a slight variation of Welles
Wilder's original Relative
Strength Index. The RSI is a
momentum oscillator used to
identify overbought and oversold
conditions by keying on specific
levels, generally 30 and 70, on a
chart scaled from 0 to 100. The
study can also be used to detect
the following:
- Movement
which might not be as readily
apparent on the bar
chart
- Failure
swings above 70 or below 30
which indicate
reversals
- Support
and resistance
- Divergence's
between RSI and
price
Cutler's RSI
is calculated as follows:
- RSI = 100
- (100 / ( 1 + RS )
)
-
- RS =
UPAV:x / DNAV:x, and . .
.
- UPAV:x =
(E, period's Closes UP) /
period
- DNAV:x =
(z: period's Closes DOWN) /
period
- A Close UP
(or DOWN) = CLOSE - CLOSE
previous
If the
difference is positive, it is a
Close UP. If the difference is
negative, the sign is changed and
it is a Close DOWN.
Demand
Aggregate
The Demand
Aggregate is used similarly as
the Demand Index but adds Open
Interest as a consideration in
the formula. In its simplest
terms, the system confirms price
trends by analyzing concurrent
Volume and Open Interest trends.
For example, a rise in price,
coupled with rising Volume and
Open Interest figures, is
considered a bullish indicator.
Interpretations are made with
respect to the relationship
between the movement of Volume,
Open Interest, and Price.
Demand
Index
The Demand
Index is a leading indicator
which combines volume and price
data in such a way as to indicate
a change in price trend. It is
designed so that at the very
least it is a coincidental
indicator, never a lagging one.
The calculation of this index is
relatively complex. This analysis
is based on the general
observation that volume tends to
peak before prices peak, both in
the commodity and stock
markets.
Detrend
Detrend is
simply another interpretation of
a moving average. It provides a
means of identifying underlying
cycles not apparent when the
moving average is viewed in its
original form by effectively
hiding the major cycles from
view. The moving average line is
drawn as a straight, horizontal
basis line on the Detrend chart.
Price bars are then repositioned
along this line depending on
their relation to the moving
average line.
Directional
Movement Index
Directional
Movement uses a rather
complicated set of calculations
designed to rate the directional
movement of commodities or stocks
on a scale from 0 to 100. For
those traders who employ
trend-following methods,
commodities or stocks rating in
the upper end of the scale would
be attractive. Those using
non-trending methods, commodities
or stocks rating at the lower end
of the scale should be considered
for trading. At its most basic,
the Directional Movement would
affect trading in the following
manner: Long positions would be
taken when the "+DI" line crosses
over the "-DI" line. Short
positions would be taken when the
"-DI" line crosses over the "+DI"
line. Further components of this
index are the ADX and ADXR
lines.
Elliott
Wave
Elliott wave
theory goes beyond traditional
charting techniques by providing
an overall view of market
movement that helps explain why
and where certain chart patterns
develop. The three major aspects
of wave analysis are pattern,
time and ratio. The basic Elliott
pattern consist of a 5 wave
uptrend followed by a three wave
correction. Each "leg" of a wave
in turn consists of smaller
waves. Elliott waves can be used
to successfully define where the
market currently is in relation
to "the big picture" but is
usually to unreliable for short
term trading.
Fibonacci
Ratios and Retracements
They can be
applied both to price and time,
although it is more common to use
them on prices. The most common
levels used in retracement
analysis are 61.8%, 38% and 50%.
When a move starts to reverse the
3 price levels are calculated
(and drawn using horizontal
lines) using a movements low to
high. These retracement levels
are then interpreted as likely
levels where counter moves will
stop. It is interesting to note
that the Fibonacci ratios were
also known to Greek and Egyptian
mathematicians. The ratio was
known as the Golden Mean and was
applied in music and
architecture. A Fibonacci spiral
is a logarithmic spiral that
tracks natural growth
patterns.
Gann
Square
The Gann
Square is a mathematical system
for finding support and
resistance based upon a commodity
or stock's extreme low or high
price for a given period.
Attainment of a particular price
level in a square tells you the
next probable price peak or
valley of future movement. The
probable price levels tend to be
more reliable if they are
extrapolated from Gann Square
values along one of the major
axes of the Gann Square. The Gann
Square is generated from a
central value, normally a
all-time or cyclical high or low.
If a low is used, the numbers are
incremented by a constant amount
to generate the Gann Square. If a
high is used, the numbers are
decremented during the square
generation.
Haurlan
Index
This indicator
is calculated daily from the
plurality of NYSE advances over
declines. There are three
components of the Haurlan index:
Short Term, Long Term and
Intermediate Term.
1) Short Term.
A 3-day exponential moving
average is taken of the net NYSE
advances over declines, measuring
the short term condition of the
market. When this index moves
above +100, a market short term
buy signal is generated. The
signal is in effect until the
market drops below -150 at which
time a sell signal is generated.
The sell signal remains in effect
until the index moves above +100
again.
2)
Intermediate Term. Same as above
but with a 20-day exponential
moving average. This index is
considered the most important of
the three. Market buys and sells
are determined in this index by
the crossing of trend lines or
support/resistance levels
depending on the particular
market in question. For example,
when the market is basing out in
preparation for an uptrend, a
resistance level may be set up.
Once its value is determined, buy
and sell signals could be
generated for that market.
3) Long Term.
Same as above except for a
200-day exponential moving
average. Useful for determining
trends but not for signals.
Head
& Shoulder Pattern
Also
can be inverted. A reversal
pattern that is one of the more
common and reliable patterns. It
is comprised of a rally which
ends a fairly extensive advance.
It is followed by a reaction on
less volume. This is the left
shoulder. The head is comprised
of a rally up on high volume
exceeding the price of the
previous rally. And the head is
comprised of a reaction down to
the previous bottom on light
volume. The right shoulder is
comprised of a rally up which
fails to exceed the height of the
head. It is then followed by a
reaction down. this last reaction
down should break a horizontal
line drawn along the bottoms of
the previous lows from the left
shoulder and head. This is the
point in which the major decline
begins. The major difference
between a head and shoulder top
and bottom is that the bottom
should have a large burst of
activity on the
breakout.
Herrick
Payoff Index
This is a
commodity trading tool, useful
for the early spotting of changes
in price trend direction. The
Payoff Index is best used to
distinguish trends that are
destined to continue from those
that will most likely be
short-lived. The Payoff Index is
a commodity trading tool that is
useful in the early
identification of changes in the
direction of price trends. The
Payoff Index frequently helps
distinguish between a rally in a
trend that is destined to
continue and a significant trend
change that will provide a
worthwhile trading opportunity.
The Payoff Index tends to give
coincident signals within a day
or two before a significant
change in price trend. This
advance action is accomplished
through use of trading volume and
contract open interest to modify
the price action. Analysts have
observed that volume trends often
change before a price-trend
change. There are also generally
accepted relationships between
the price trend and the trend of
open interest.
Kagi
Chart
Like
Candlestick and Renko charts,
Kagi charts come from Japan and
were made popular in the USA by
Steve Nison. Kagi charts display
a series of connecting vertical
lines where the thickness and
direction of the lines are
dependent on the price action. If
closing prices continue to move
in the direction of the prior
vertical Kagi line, then that
line is extended. However, if the
closing price reverses by a
predetermined "reversal" amount,
a new Kagi line is drawn in the
next column in the opposite
direction. An interesting aspect
of the Kagi chart is that when
closing prices penetrate the
prior column's high or low, the
thickness of the Kagi line
changes.
MACD (Moving
Average
Convergence/Divergence)
The MACD is
used to determine overbought or
oversold conditions in the
market. Written for stocks and
stock indices, MACD can be used
for commodities as well. The MACD
line is the difference between
the long and short exponential
moving averages of the chosen
item. The signal line is an
exponential moving average of the
MACD line. Signals are generated
by the relationship of the two
lines. As with RSI and
Stochastics, divergence's between
the MACD and prices may indicate
an upcoming trend reversal.
McClellan
Oscillator
This index is
based on New York Stock Exchange
net advances over declines. It
provides a measure of such
conditions as overbought/oversold
and market direction on a
short-to- intermediate term
basis. The McClellan Oscillator
measures a bear market selling
climax when it registers a very
negative reading in the vicinity
of -150. A sharp buying pulse in
the market would be indicated by
a very positive reading, well
above 100.
Momentum
Momentum
provides an analysis of changes
in prices (as opposed to changes
in price levels). Changes in the
rate of ascent or descent are
plotted. The Momentum line is
graphed positive or negative to a
straight line representing time.
The position of the time- line is
determined by price at the
beginning of the Momentum period.
Traders use this analysis to
determine overbought and oversold
conditions. When a maximum
positive point is reached, the
market is said to be overbought
and a downward reaction is
imminent. When a maximum negative
point is reached, the market is
said to be oversold and an upward
reaction is indicated.
Moving
Averages
The moving
average is probably the best
known, and most versatile,
indicator in the analysts tool
chest. It can be used with the
price of your choice (highs,
closes or whatever) and can also
be applied to other indicators,
helping to smooth out volatility.
As the name implies, the Moving
Average is the average of a given
amount of data. For example, a 14
day average of closing prices is
calculated by adding the last 14
closes and dividing by 14. The
result is noted on a chart. The
next day the same calculations
are performed with the new result
being connected (using a solid or
dotted line) to yesterday’s.
And so forth. Variations of the
basic Moving Average are the
Weighted and Exponential moving
averages.
Norton
High/Low Indicator
The Norton
High/Low Indicator uses results
from the Demand Index and the
Stochastic study and is designed
to pick tops and bottoms on long
term price charts. Two lines are
generated: the NLP line and the
NHP line. The system also uses
level lines at -2 and -3. The NLP
line crossing -3 to the downside
is the signal that a new bottom
will occur in 4-6 periods, using
daily, weekly, or monthly data.
Similarly, the NHP line crossing
-3 to the downside indicates a
new top in the same time frame.
The indicator tends to be more
reliable using longer term data
(weekly or monthly). When either
indicator drops below the - 3
level, a reversal may be
imminent. The reversal (or hook)
is the signal to enter the
market. For greater reliability,
use the Norton High/Low Indicator
together with other studies for
confirmation.
Notis %V
A way to
measure volatility is to measure
the daily ranges between the high
and the low. Volatility is high
when the daily range is large and
low when the daily range is
small. The Notis %V study
contains two separate indicators.
It divides market volatility into
upward and downward components
(UVLT and DVLT). Both are plotted
separately in the same window,
and can be plotted as an
oscillator. The upward component
is also compared to the total
volatility (UVLT + DVLT) and
expressed as a percentage; thus
the name, %V. Volatility can be a
key to options trading. A good
sense of market volatility can
help you avoid those frustrating
times when the market moves your
way but your option still loses
value.
On Balance
Volume (OBV)
OBV is one of
the most popular volume
indicators and was developed by
Joseph Granville. Constructing an
OBV line is very simple: The
total volume for each day is
assigned a positive or negative
value depending on whether prices
closed higher or lower that day.
A higher close results in the
volume for that day to get a
positive value, while a lower
close results in negative value.
A running total is kept by adding
or subtracting each day's volume
based on the direction of the
close. The direction of the OBV
line is the thing to watch, not
the actual volume
numbers.
Formula:
OBV=SUM(C-CP)/(ABS(C-CP)xV)
C=Today's
Close CP=Yesterday's Close
V=Today's Volume
Parabolic
(SAR)
The Parabolic
is a Time/Price system for the
automatic setting of stops. The
stop is both a function of price
and of time. The system allows a
few days for market reaction
after a trade is initiated after
which stops begin to move in more
rapid incremental daily amounts
in the direction the trade was
initiated. For example, when a
long position is taken the stop
will move up regardless of price
direction. However, the distance
that the stop moves up is
determined by the favorable
distance the price has moved. If
the price fails to move favorably
within a certain period of time,
the stop reverses the position
and begins a new time period.
Point &
Figure Charts
The Point and
Figure (PF) charting method is a
technique that has been used for
many years in analyzing the
variations in prices of stocks
and commodities. There are
several types of PF charting
methods. Some employ trend lines,
resistance levels, and various
other additions to the chart. In
this study, we shall be concerned
with only daily reversal type
charts. The principal advantage
of a PF chart is that it is much
easier to read and interpret than
other types of charts. All the
small, and often confusing, price
movements are eliminated, and
only the most important features
of the price action remain. It
would be reasonable to think of
this method as a filter that
(hopefully) allows only
meaningful information to enter
the chart and ultimately the
decision process. Two basic
symbols are used:
X
Denotes the continuance of an
increase in price and is always
"stacked" in the vertical
direction.
O
Denotes the continuance of a
decrease in price and is always
"stacked" in the vertical
direction.
While prices
are rising X's are used. When
falling, O's are used. They are
always plotted on rectangular
grid graph paper such that
columns of X's and O's alternate.
A Point and Figure chart is
characterized by the
specification of two parameters:
box size and reversal number. The
box size dictates the price range
associated with a particular box
(cubical area within the grid),
while the reversal number
specifies the conditions which
terminate a column of X's and
begin a column of O's and
vice-versa.
Price
Patterns
Price Patterns
are formations which appear on
commodity and stock charts which
have shown to have a certain
degree of predictive value. Some
of the most common patterns
include: Head & Shoulders
(bearish), Inverse Head &
Shoulders (bullish), Double Top
(bearish), Double Bottom
(bullish), Triangles, Flags and
Pennants (can be bullish or
bearish depending on the
prevailing trend).
Randow Walk
Index
This indicator
is defined as the ratio of an
actual price move to the expected
random walk. If the move is
greater than a random walk, and
thus a trend is present, its
index will be larger that
1.0.
Rate of
Change
Rate of Change
is used to monitor momentum by
making direct comparisons between
current and past prices on a
continual basis. The results can
be used to determine the strength
of price trends. Note: This study
is the same as the Momentum
except that Momentum uses
subtraction in its calculations
while Rate of Change uses
division. The resulting lines of
these two studies operated over
the same data will look exactly
the same - only the scale values
will differ.
RSI -
Relative Strength Index
This indicator
was developed by Welles Wilder
Jr. Relative Strength is often
used to identify price tops and
bottoms by keying on specific
levels (usually "30" and "70") on
the RSI chart which is scaled
from from 0-100. The study is
also useful to detect the
following:
- Movement
which might not be as readily
apparent on the bar
chart
- Failure
swings above 70 or below 30
which can warn of coming
reversals
- Support
and resistance
levels
- Divergence
between the RSI and price
which is often a useful
reversal indicator
The Relative
Strength Index requires a certain
amount of lead-up time in order
to operate successfully. The
formula for calculating the RSI
is:
- rsi=100-(100/1-rs)
- rs=
average of x day’s up
closes divided by average of x
day’s down closes
Renko
Chart
The Renko
charting method probably got its
name from "renga", which is the
Japanese word for bricks.
Introduced by Steve Nison, a
well-known authority on the
Candlestick charting method,
Renko charts are similar to Three
Line Break charts except that in
a Renko chart, a line is drawn in
the direction of the prior move
only if a fixed amount (i.e., the
box size) has been exceeded. The
bricks are always equal in size.
Example: With a five unit Renko
chart, a 20 point rally is
displayed as four equally sized,
five unit high Renko bricks.
Stochastic
The Stochastic
Indicator is based on the
observation that as prices
increase, closing prices tend to
accumulate ever closer to the
highs for the period. Conversely,
as prices decrease, closing
prices tend to accumulate ever
closer to the lows for the
period. Trading decisions are
made with respect to divergence
between % of "D" (one of the two
lines generated by the study) and
the item's price. For example,
when a commodity or stock makes a
high, reacts, and subsequently
moves to a higher high while
corresponding peaks on the % of
"D" line make a high and then a
lower high, a bearish divergence
is indicated. When a commodity or
stock has established a new low,
reacts, and moves to a lower low
while the corresponding low
points on the % of "D" line make
a low and then a higher low, a
bullish divergence is indicated.
Traders act upon this divergence
when the other line generated by
the study (K) crosses on the
right-hand side of the peak of
the % of "D" line in the case of
a top, or on the right-hand side
of the low point of the % of "D"
line in the case of a bottom. Two
variations of the Stochastic
Indicator are in use: Regular and
Slow. When the Regular plot of
the Stochastic too choppy, the
"Slow" version can often clarify
the results by reducing the
sensitivity of the calculations.
The formula is:
Note: 5 Days
is the most commonly used value
for %K
%K=100
{(C-L5)/(H5-L5)}
The %D line is
a 3 day smoothed version of the
%K line
%D=100(H3/L3) where H3 is the 3
day sum of (C-L5) and L3 is the 3
day sum of (H5-L5)
Stoller STARC
Bands
STARC bands
create a channel surrounding a
simple moving average. The width
of the created channel varies
with a period of the average
range; thus the name ('ST' for
Stoller, plus 'ARC' for Average
Range Channel). STARC Bands, in a
fashion similar to Bollinger
Bands, will tighten in steady
markets and loosen in volatile
markets. However, rather than
being based on closes, the STARC
Bands are based on the average
true range, thus giving a more in
depth picture of the market
volatility. While the penetration
of a Bollinger Band may indicate
a continuation of a price move,
the STARC Bands define upper and
lower limits for normal price
action.
Swing
Index
The Swing
Index (primarily for use with
commodity trading) attempts to
determine real market direction,
and changes in direction, by
making use of the most
significant comparisons between
the results (Open-High-Low-Close)
of the current and previous days'
trading.
Time
Cycles
Some analysts
believe that price analysis alone
only offers half the information
needed for successful trading.
The other part is time, more
exactly time cycles, which give
actual insight into understanding
the movements of markets. Common
cycles are the seasonal cycles
apparent in many commodity
markets, but cycles can be
detected on intra-day charts as
well.
Trading
Index
This index
(also known as the "Arms" index,
or "TRIN") measures the relative
strength of volume associated
with advancing stocks against the
strength of volume associated
with declining stocks. When used
as a short term indicator,
readings below 1.0 are considered
bullish while readings above 1.0
are considered bearish. An
extreme bearish reading would be
1.5 or higher; an extreme bullish
reading would be .5 and lower.
Readings of 2.0 or .3 would be
considered "climactic". For the
intermediate term, a bearish sign
is an index over 1.0, bullish
under 1.0. For the long term, the
Trading Index can be viewed as an
overbought / oversold
indicator.
Trix
Single linear
exponential smoothing was
developed in the early 1950s as a
means of prediction along a
straight line whose slope was
based on previous data. The
Triple Exponential Smoothing
Oscillator (Trix) has now been
developed to act on trends of a
higher order than linear. Trix
uses a one-day momentum of a
triple exponential smoothed price
series to produce an indicator
which is cycle dependent. Changes
in the Trix direction are less
prone to whipsaws than standard
cycle-momentum indicators. The
period is chosen to filter out
any insignificant cycles shorter
than the period. Fourier Analysis
or visual observation may be used
to find the proper cycle length
of a given market. Raising the
number of days will remove more
small cycles and smooth out the
oscillator, but at the loss of
sensitivity. The more smoothing
that is applied to the data, the
more of a lag in the oscillator,
but not nearly the lag of a
normal moving average.
Volume
Accumulation
This volume
indicator addresses some of On
Balance Volume's shortcomings and
was developed by Marc Chaikin.
Where OBV assigns all of a day's
volume a positive or negative
value, Volume Accumulation counts
only a percentage of the volume
as positive or negative,
depending on where the close is
in relation to the average price
of the day. The only time the
entire day's volume is assigned a
positive value is when the close
is the same as the day's high.
The opposite applies for a close
at the day's low.
Volatility
This analysis
is based on the idea that stocks
bottom from "panic" selling,
after which a rebound is
imminent. One way of measuring
this phenomenon is to observe a
widening range between high and
low prices each day. In general a
progressively wider range,
observed over a relatively short
period of time, can indicate that
a bottom is near. Price tops are
generally reached at a more
leisurely pace and can be
characterized by a narrowing of
the price range. This measure of
the trading range takes place
over a specified period in order
to determine whether or not an
issue is being "dumped" and is
approaching a bottom. A
prerequisite to a valid bottom is
an increase in the volatility
line above the reference line. In
a similar manner, an indication
of an imminent top would be a
decrease in the volatility line
below the reference line. As long
as volatility is rising, in all
probability a stock will not
approach a top. It should be
noted that this study should be
used in conjunction with trend
following analyses and momentum
oscillators for confirmation and
accuracy.
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Technical
Charting
Patterns on a
Chart:
