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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. Divergences between Bollinger
bands and other indicators show potential action points. As a general
guidline, 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 candels, 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
englufing patern") 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.
Forumla: 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
- Divergences 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 re-positioned 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 consits 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.
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 pre-determined "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, divergences 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- intermediateterm 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 mnthly 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 acutal 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 cylces can be detected on intra-day charts
as well.
Trading Index
This index (also kown 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 pre-requisite
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. |
