technical indicators
TRANSCRIPT
Technical Analysis
TECHNICAL INDICATORS
Presented by: Ashwani Kumar Harit
“Don’t try to buy at the bottom and sell at the top. It can’t bedone except by liars.”“Don’t try to buy at the bottom and sell at the top. It can’t bedone except by liars.”
-Bernard Baruch
Technical Indicators: Definition• Technical indicators are mathematical representations of
market patterns and behavior
• The indicators are formed by plugging information suchas price and volume into a mathematical formula.
• Technical indicators are mathematical representations ofmarket patterns and behavior
• The indicators are formed by plugging information suchas price and volume into a mathematical formula.
Why indicators• Overbought: A technical condition that occurs when there has
been a lot of buying and the price of the stock is consideredtoo high and susceptible to a decline.
Oversold: A technical condition that occurs when there hasbeen a lot of selling and the price of the stock is consideredtoo low and a rally in prices is anticipated.
• Overbought: A technical condition that occurs when there hasbeen a lot of buying and the price of the stock is consideredtoo high and susceptible to a decline.
Oversold: A technical condition that occurs when there hasbeen a lot of selling and the price of the stock is consideredtoo low and a rally in prices is anticipated.
ImportanceEssentially traders use technical indicators for two things:
• To generate buy and sell signals
• To confirm price movement
Essentially traders use technical indicators for two things:
• To generate buy and sell signals
• To confirm price movement
Types of IndicatorsThere are two main types of indicators:
• Leading
• lagging
There are two main types of indicators:
• Leading
• lagging
Leading Indicators• A leading indicator precedes price movement, and is often
used to generate buy and sell signals.
• Leading indicators are affected more heavily by recent pricechanges and tend to generate more signals and allow moreopportunities to trade than lagging indicators.
• Since the indicators produce more buy and sell signals, theyalso produce more false signals.
• When leading indicators are right, they allow you to get into atrade early and make more money, but when they're wrongyou tend to lose money because you're in and out of tradesmore frequently.
• A leading indicator precedes price movement, and is oftenused to generate buy and sell signals.
• Leading indicators are affected more heavily by recent pricechanges and tend to generate more signals and allow moreopportunities to trade than lagging indicators.
• Since the indicators produce more buy and sell signals, theyalso produce more false signals.
• When leading indicators are right, they allow you to get into atrade early and make more money, but when they're wrongyou tend to lose money because you're in and out of tradesmore frequently.
Leading IndicatorsSome of the more common leading indicators are:
• Relative Strength Index (RSI)
• Parabolic SAR
• Stochastic
• Williams %R
Some of the more common leading indicators are:
• Relative Strength Index (RSI)
• Parabolic SAR
• Stochastic
• Williams %R
Lagging Indicators• A lagging indicator is a confirmation tool because it follows
price movement.
• It happens "after the fact".
• Change of trend
• A lagging indicator is a confirmation tool because it follows
price movement.
• It happens "after the fact".
• Change of trend
Lagging IndicatorsTwo of the more common lagging indicators are:
• MACD
• Moving Averages
Two of the more common lagging indicators are:
• MACD
• Moving Averages
Other Indicators• Bollinger Band
• Ichimoku
• Bollinger Band
• Ichimoku
RSI- Introduction• Developed by J. Welles Wilder and introduced in his book –
New Concepts in Technical Trading System
• It is a momentum oscillator that measures the speed and
change of price movements
• RSI oscillates between zero and 100
• Traditionally, and according to Wilder, RSI is considered
overbought when above 70 and oversold when below 30
• The default look-back period for RSI is 14, but 9 and 7 are also
popular
• Developed by J. Welles Wilder and introduced in his book –
New Concepts in Technical Trading System
• It is a momentum oscillator that measures the speed and
change of price movements
• RSI oscillates between zero and 100
• Traditionally, and according to Wilder, RSI is considered
overbought when above 70 and oversold when below 30
• The default look-back period for RSI is 14, but 9 and 7 are also
popular
RSI- Introduction• 80 and 20 can also be used to indicate overbought and
oversold levels but gives slightly less accurate results than70-30
• If the market is trending, then signals in the direction of thetrend are likely to be more reliable• For example if prices are in an up trend, a safer trade entry may be
obtained by waiting for prices to pullback giving an oversold signal andthen turn up again
• 80 and 20 can also be used to indicate overbought andoversold levels but gives slightly less accurate results than70-30
• If the market is trending, then signals in the direction of thetrend are likely to be more reliable• For example if prices are in an up trend, a safer trade entry may be
obtained by waiting for prices to pullback giving an oversold signal andthen turn up again
RSI – How to generate buy and sell signals• If the RSI is above 70 and you are looking for the market to
form a top, then the RSI crossing back below 70 can be used
as a sell signal
• The same is true for market bottoms, buying after the RSI has
moved back above 30
• These signals are best used in non-trending markets
• If the RSI is above 70 and you are looking for the market to
form a top, then the RSI crossing back below 70 can be used
as a sell signal
• The same is true for market bottoms, buying after the RSI has
moved back above 30
• These signals are best used in non-trending markets
RSI - Bullish and Bearish Divergence• Divergence between the RSI and the price indicates that an up
or down move is weakening
• Bearish Divergence occurs when prices are making higher
highs but the RSI is making lower highs.
• This is a sign that the up move is weakening
• Bullish Divergence occurs when prices are making lower lows
but the RSI is making higher lows
• This is a sign that the down move is weakening
• Divergence between the RSI and the price indicates that an up
or down move is weakening
• Bearish Divergence occurs when prices are making higher
highs but the RSI is making lower highs.
• This is a sign that the up move is weakening
• Bullish Divergence occurs when prices are making lower lows
but the RSI is making higher lows
• This is a sign that the down move is weakening
RSI – Divergence Confirmation• RSI is an indicator not the confirmation
• It is important to note that although Divergences indicate a
weakening trend they do not in themselves indicate that the
trend has reversed
• The confirmation or signal that the trend has reversed must
come from price action, for example a trend line break
• RSI is an indicator not the confirmation
• It is important to note that although Divergences indicate a
weakening trend they do not in themselves indicate that the
trend has reversed
• The confirmation or signal that the trend has reversed must
come from price action, for example a trend line break
RSI
RSI- Divergence
RSI- Trade Confirmation
Contd…
Parabolic SAR
Parabolic SAR - Introduction• Parabolic Time Price is a system that always has a position in
the market, either long or short
• One can close out the current position and enter a reverseposition when the price crosses the current Stop And Reverse(SAR) point
• The SAR points resemble a parabolic curve as they begin totighten and close in on prices once prices begin to trend
• Parabolic Time Price is usually charted with a bar analysis sothat the stop and reverse points are easily identified
• Parabolic Time Price is a system that always has a position inthe market, either long or short
• One can close out the current position and enter a reverseposition when the price crosses the current Stop And Reverse(SAR) point
• The SAR points resemble a parabolic curve as they begin totighten and close in on prices once prices begin to trend
• Parabolic Time Price is usually charted with a bar analysis sothat the stop and reverse points are easily identified
Parabolic SAR - Depiction• If you are long, the SAR points will be below the prices and the
signal to go short will be when prices cross the current SAR
point from above
• If you are long, the SAR points will be below the prices and the
signal to go short will be when prices cross the current SAR
point from above
Parabolic SAR - Depiction• If you are short, the SAR points will be above the prices and
the signal to go long will be when prices cross the current SAR
point from below
• If you are short, the SAR points will be above the prices and
the signal to go long will be when prices cross the current SAR
point from below
Ues of Parabolic• Signals to stop out of the current position and enter a reverse
position are when prices cross the current SAR point
• For example if the SAR points are below prices you would be
long with an order to close out the current long position and
enter a short position at that period’s SAR point
• Signals to stop out of the current position and enter a reverse
position are when prices cross the current SAR point
• For example if the SAR points are below prices you would be
long with an order to close out the current long position and
enter a short position at that period’s SAR point
Entry and Exit Technique• One would take only long trades when the trend is up and
only short trades when the trend is down
Where to place a stop loss• After a trade has been entered using another method or
technique, the SAR points of Parabolic Time Price are used to
trail a stop on the position
• After a trade has been entered using another method or
technique, the SAR points of Parabolic Time Price are used to
trail a stop on the position
Stop Loss by using SAR
Stochastic•Fast Stochastic
•Slow Stochastic
•Fast Stochastic
•Slow Stochastic
Stochastic• Stochastics are oscillators developed by George Lane
• Are based on the following observation• As prices increase - closing prices tend to be closer to the upper
end of the price range
• As prices decrease - closing prices tend to be closer to the lowerend of the price range
• Stochastics are oscillators developed by George Lane
• Are based on the following observation• As prices increase - closing prices tend to be closer to the upper
end of the price range
• As prices decrease - closing prices tend to be closer to the lowerend of the price range
Stochastic• Stochastic consist of two lines, %K and %D
• The %K line measures, as a percentage, where the currentclose is, in relation to the lowest low over the observationperiod.• This is shown on a scale of 0 to 100, where 0 is the observation
period low, and 100 is the observation period high.
• The %D line is a Simple Moving Average of the %K
• Stochastic consist of two lines, %K and %D
• The %K line measures, as a percentage, where the currentclose is, in relation to the lowest low over the observationperiod.• This is shown on a scale of 0 to 100, where 0 is the observation
period low, and 100 is the observation period high.
• The %D line is a Simple Moving Average of the %K
Stochastic• Slow Stochastics are the more commonly used of the two
Stochastic types
• Slow Stochastics are based on Fast Stochastics but provide aslower, smoother response to price movements
• Slow Stochastics are smoother and are less likely to give falsesignals
• Slow Stochastics are the more commonly used of the twoStochastic types
• Slow Stochastics are based on Fast Stochastics but provide aslower, smoother response to price movements
• Slow Stochastics are smoother and are less likely to give falsesignals
Uses of Stochastics• Indicate overbought and oversold conditions
• An overbought or oversold market is one where the prices haverisen or fallen too far and are therefore likely to retrace. If the %Dline is above 80% then the close is near the top end of the range ofthe observation period, while a reading below 20% means that theclose is near the bottom end of the range of the observation period.
• Generally the area above 80 is considered overbought, while thearea below 20 is oversold. The specified overbought/oversoldranges vary. Other commonly used ranges include 75-25, 70-30 and85-15.
• Overbought and oversold signals are most reliable in a non-trendingmarket where prices are making a series of equal highs and lows. Ifthe market is trending, then signals in the direction of the trend arelikely to be more reliable.
• Indicate overbought and oversold conditions
• An overbought or oversold market is one where the prices haverisen or fallen too far and are therefore likely to retrace. If the %Dline is above 80% then the close is near the top end of the range ofthe observation period, while a reading below 20% means that theclose is near the bottom end of the range of the observation period.
• Generally the area above 80 is considered overbought, while thearea below 20 is oversold. The specified overbought/oversoldranges vary. Other commonly used ranges include 75-25, 70-30 and85-15.
• Overbought and oversold signals are most reliable in a non-trendingmarket where prices are making a series of equal highs and lows. Ifthe market is trending, then signals in the direction of the trend arelikely to be more reliable.
Stochastic: Overbought and Oversold
Stochastic: Overbought and Oversold
Stochastic: Generate buy and sell signals
• For a buy or sell signal the following conditions must be met in
order
• The %K and %D lines move above 80 or below 20
• The %K and %D lines cross
• For a buy or sell signal the following conditions must be met in
order
• The %K and %D lines move above 80 or below 20
• The %K and %D lines cross
• Bearish Divergence occurs when prices are making higher highs but theStochastics are making lower highs. This is a sign that the up move is weakening.
• Bullish Divergence occurs when prices are making lower lows but theStochastics are making higher lows. This is a sign that the down move isweakening
Stochastic: Negative Divergence
Wiliams % R• Developed by Larry Williams
• Williams %R is a momentum indicator that works much like
the Stochastic Oscillator
• It is especially popular for measuring overbought and oversold
levels
• Shows the relationship of the close relative to the high-low
range over a set period of time
• Developed by Larry Williams
• Williams %R is a momentum indicator that works much like
the Stochastic Oscillator
• It is especially popular for measuring overbought and oversold
levels
• Shows the relationship of the close relative to the high-low
range over a set period of time
Wiliams % R: Scale• The scale ranges from 0 to -100
• Readings from 0 to -20 considered overbought
• Readings from -80 to -100 considered oversold
• The nearer the close is to the top of the range, the nearer to
zero (higher) the indicator will be
• The nearer the close is to the bottom of the range, the nearer
to -100 (lower) the indicator will be
• The scale ranges from 0 to -100
• Readings from 0 to -20 considered overbought
• Readings from -80 to -100 considered oversold
• The nearer the close is to the top of the range, the nearer to
zero (higher) the indicator will be
• The nearer the close is to the bottom of the range, the nearer
to -100 (lower) the indicator will be
Wiliams % R: Uses• Identify the underlying trend and then look for trading
opportunities in the direction of the trend
• In an up trend, traders may look to oversold readings to
establish long positions
• In a downtrend, traders may look to overbought readings to
establish short positions
• Identify the underlying trend and then look for trading
opportunities in the direction of the trend
• In an up trend, traders may look to oversold readings to
establish long positions
• In a downtrend, traders may look to overbought readings to
establish short positions
Divergence
Lagging Indicators• MACD
• Moving Averages
MACD: Moving Average Convergence Divergence• Developed by Gerald Appel
• 26 and 12-week cycles in the stock market
• MACD is a type of oscillator that can measure market
momentum as well as follow or indicate the new trend
• Developed by Gerald Appel
• 26 and 12-week cycles in the stock market
• MACD is a type of oscillator that can measure market
momentum as well as follow or indicate the new trend
What is MACD• MACD consists of two lines• MACD Line
• Signal Line
• The MACD Line measures the difference between a shortMoving Average and a long Moving Average
• The Signal Line is a Moving Average of the MACD Line
• MACD oscillates above and below a zero line without upperand lower boundaries
• MACD consists of two lines• MACD Line
• Signal Line
• The MACD Line measures the difference between a shortMoving Average and a long Moving Average
• The Signal Line is a Moving Average of the MACD Line
• MACD oscillates above and below a zero line without upperand lower boundaries
MACD: Use• To Generate buy and sell signals
• Signals are generated when the MACD Line and the Signal Linecross
• A buy signal occurs when the MACD Line crosses from belowto above the Signal Line, the further below the zero line thatthis occurs the stronger the signal
• A sell signal occurs when the MACD Line crosses from aboveto below the Signal Line, the further above the zero line thatthis occurs the stronger the signal
• To Generate buy and sell signals
• Signals are generated when the MACD Line and the Signal Linecross
• A buy signal occurs when the MACD Line crosses from belowto above the Signal Line, the further below the zero line thatthis occurs the stronger the signal
• A sell signal occurs when the MACD Line crosses from aboveto below the Signal Line, the further above the zero line thatthis occurs the stronger the signal
Buy/Sell signals using MACD
Indicating trend direction with MACD• If a trend is gaining momentum then the difference between
the short and long moving average will increase
• This means that if both MACD lines are above (below) zeroand the MACD Line is above (below) the Signal Line, then thetrend is up (down)
Divergence with MACD• Divergence between the MACD and the price indicates that an
up or down move is weakening
• Bearish Divergence occurs when prices are making higher
highs but the MACD is making lower highs. This is a sign that
the up move is weakening
• Bullish Divergence occurs when prices are making lower lows
but the MACD is making higher lows. This is a sign that the
down move is weakening
• Divergence between the MACD and the price indicates that an
up or down move is weakening
• Bearish Divergence occurs when prices are making higher
highs but the MACD is making lower highs. This is a sign that
the up move is weakening
• Bullish Divergence occurs when prices are making lower lows
but the MACD is making higher lows. This is a sign that the
down move is weakening
Negative Divergence with MACD
Parameters for MACD• Short averaging period: (default 12)
• Long averaging period: (default 26)
• Signal line averaging period: (default 9)
• You may wish to change the parameters to match anothercycle period you have observed
• Short averaging period: (default 12)
• Long averaging period: (default 26)
• Signal line averaging period: (default 9)
• You may wish to change the parameters to match anothercycle period you have observed
OTHER INDICATORS• Bollinger Band
• Ichimoku
BOLLINGER BAND• Developed by John Bollinger, Bollinger Bands
• charted by calculating a simple moving average of price,
then creating two bands a specified number of standard
deviations above and below the moving average
• Generally +/- 2 standard deviation
• Bollinger Bands gives best results with a bar chart, so that the
proximity of the bands to the prices can be easily observed
• Developed by John Bollinger, Bollinger Bands
• charted by calculating a simple moving average of price,
then creating two bands a specified number of standard
deviations above and below the moving average
• Generally +/- 2 standard deviation
• Bollinger Bands gives best results with a bar chart, so that the
proximity of the bands to the prices can be easily observed
BOLLINGER BAND: Use• Identify overbought and oversold markets
• An overbought or oversold market is one where the priceshave risen or fallen too far and are therefore likely to retrace
• Prices near the lower band signal an oversold market andprices near the upper band signal an overbought market
• Overbought and oversold signals are most reliable in a non-trending market where prices are making a series of equalhighs and lows
• Identify overbought and oversold markets
• An overbought or oversold market is one where the priceshave risen or fallen too far and are therefore likely to retrace
• Prices near the lower band signal an oversold market andprices near the upper band signal an overbought market
• Overbought and oversold signals are most reliable in a non-trending market where prices are making a series of equalhighs and lows
Overbought/Oversold
Signal in a trendy market• If the market is trending, then signals in the direction of the
trend are likely to be more reliable
• For example if prices are in an up trend, a safer trade entry
may be obtained by waiting for prices to pullback giving an
oversold signal and then turn up again
• If the market is trending, then signals in the direction of the
trend are likely to be more reliable
• For example if prices are in an up trend, a safer trade entry
may be obtained by waiting for prices to pullback giving an
oversold signal and then turn up again
A typical Bollinger Band
Used in combination with an oscillator to generatebuy or sell signals• If we use Bollinger Bands in combination with an oscillator
such as Relative Strength Index (RSI), buy and sell signals
are generated when the Bollinger Bands signal an
overbought/oversold market at the same time the oscillator
signals a divergence
• If we use Bollinger Bands in combination with an oscillator
such as Relative Strength Index (RSI), buy and sell signals
are generated when the Bollinger Bands signal an
overbought/oversold market at the same time the oscillator
signals a divergence
Negative Divergence with Bollinger Band
The bands often narrow just before a sharp price move. A period of lowvolatility often precedes a sharp move in prices; low volatility will cause thebandstonarrow
Signal potential tops and bottoms• A top that breaks above the upper band followed by another
that is between the bands signals a potential top in the market
• A bottom that breaks below the lower band followed by
another that is between the bands signals a potential bottom
• A top that breaks above the upper band followed by another
that is between the bands signals a potential top in the market
• A bottom that breaks below the lower band followed by
another that is between the bands signals a potential bottom
Signals
Parameters for Bollinger Band• The length of the moving average is usually 20 days or less i.e.
a simple moving average in the middle of the Bollinger band
• Bollinger used a figure of 2 standard deviations in his work,
which was in stock trading
• The length of the moving average is usually 20 days or less i.e.
a simple moving average in the middle of the Bollinger band
• Bollinger used a figure of 2 standard deviations in his work,
which was in stock trading
Signals
ICHIMOKU
Introduction• The Ichimoku Kinko Hyo Japanese charting technique was
developed before World War II with the aim of portraying - ina snapshot - where the price was heading and when was theright time to enter or exit t
• The word Ichimoku can be translated to mean "a glance" or"one look". Kinko translates into "equilibrium" or "balance",with respect to price and time, and Hyo is the Japanese wordfor "chart". Thus, Ichimoku Kinko Hyo simply means "a glanceat an equilibrium chart"
• Invented by a Japanese journalist with a pen name of"Ichimoku Sanjin", meaning "a glance of a mountain man“
• The Ichimoku Kinko Hyo Japanese charting technique wasdeveloped before World War II with the aim of portraying - ina snapshot - where the price was heading and when was theright time to enter or exit t
• The word Ichimoku can be translated to mean "a glance" or"one look". Kinko translates into "equilibrium" or "balance",with respect to price and time, and Hyo is the Japanese wordfor "chart". Thus, Ichimoku Kinko Hyo simply means "a glanceat an equilibrium chart"
• Invented by a Japanese journalist with a pen name of"Ichimoku Sanjin", meaning "a glance of a mountain man“
The Chart
Calculation• The Ichimoku chart consists of five lines
• Tenkan-Sen = Conversion Line = (Highest High + Lowest Low) /2, for the past 9 periods
• Kijun-Sen = Base Line = (Highest High + Lowest Low) / 2, forthe past 26 periods
• Chikou Span = Lagging Span = Today's closing price plotted 26periods behind
• Senkou Span A = Leading Span A = (Tenkan-Sen + Kijun-Sen) /2, plotted 26 periods ahead
• Senkou Span B = Leading Span B = (Highest High + LowestLow) / 2, for the past 52 periods, plotted 26 periods ahead
• Kumo = Cloud = Area between Senkou Span A and B
• The Ichimoku chart consists of five lines
• Tenkan-Sen = Conversion Line = (Highest High + Lowest Low) /2, for the past 9 periods
• Kijun-Sen = Base Line = (Highest High + Lowest Low) / 2, forthe past 26 periods
• Chikou Span = Lagging Span = Today's closing price plotted 26periods behind
• Senkou Span A = Leading Span A = (Tenkan-Sen + Kijun-Sen) /2, plotted 26 periods ahead
• Senkou Span B = Leading Span B = (Highest High + LowestLow) / 2, for the past 52 periods, plotted 26 periods ahead
• Kumo = Cloud = Area between Senkou Span A and B
Signals• Ichimoku uses three key time periods for its input parameters:
9, 26, and 52.
• A bullish signal is issued when the Tenkan-Sen (orange line)crosses the Kijun-Sen (purple line) from below
• A bearish signal is issued when the Tenkan-Sen crosses theKijun-Sen from above.
• If there was a bullish crossover signal and the price, at thattime, was trading above the Kumo (or cloud), this would beconsidered a very strong buy signal
• Ichimoku uses three key time periods for its input parameters:9, 26, and 52.
• A bullish signal is issued when the Tenkan-Sen (orange line)crosses the Kijun-Sen (purple line) from below
• A bearish signal is issued when the Tenkan-Sen crosses theKijun-Sen from above.
• If there was a bullish crossover signal and the price, at thattime, was trading above the Kumo (or cloud), this would beconsidered a very strong buy signal
Feature• Another striking feature of the Ichimoku charting technique is
the identification of support and resistance levels
• These levels can be predicted by the presence of the Kumo
• The Kumo can also be used to help identify the prevailingtrend of the market
• If the price is above the Kumo, the prevailing trend is said tobe up
• And if the price is below the Kumo, the prevailing trend is saidto be down.
• Another striking feature of the Ichimoku charting technique isthe identification of support and resistance levels
• These levels can be predicted by the presence of the Kumo
• The Kumo can also be used to help identify the prevailingtrend of the market
• If the price is above the Kumo, the prevailing trend is said tobe up
• And if the price is below the Kumo, the prevailing trend is saidto be down.
Support Level
Resistance Level
Buy/Sell Signals
Buy/Sell Signals
Buy/Sell Signals
PIVOTS
HAPPY TRADING
ASHWANI KUMAR HARIT
9818688537
HAPPY TRADING
ASHWANI KUMAR HARIT
9818688537