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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.
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.
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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.
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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.
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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.
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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.
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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))
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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).
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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
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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.
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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 close
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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.
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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)
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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