Technical Indicators
Charles Dow is credited with the rationale behind all modern technical analysis theories. As discussed previously, the market price of a stock / commodity / forex reflects all the current available information about it.
Technical analysis is the process of analyzing historical price movement to predict it’s future price.
Most of the theories behind technical analysis are based on the analysis of price and volume.
For any given commodity / stock / forex, the day’s trading session contains the open, high, low and close values. The traded volumes too are recorded.
Technical analysts use the trends and various indicators to predict future values.
Trends visually depict the possible direction of the price movement; indicators evaluate the support and resistance levels.
How many Technical Indicators Should You Use?
It is beyond the scope of this article to discuss in detail all the different indicators, but we do focus on the more important indicators later on in the course.
| MACD | One of the simplest and most reliable indicators available, MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. |
| McClellan Oscillator | A breadth indicator derived from each day’s net advances (the number of advancing issues less the number of declining issues). Also serves as a momentum indicator that displays overbought/oversold conditions and can generate buy/sell signals. |
| McClellan Summation Index | An indicator derived from the McClellan Oscillator by tracking its daily accumulation or “summation”. This provides a longer-term view of the McClellan concept and many regard it as an excellent indicator of the overall “health” of the market and the market’s current trend. |
| Money Flow Index (MFI) | A volume-weighted momentum indicator that measures the strength of money flowing in and out of a security. |
| Moving Average Envelopes | A pair of lines that run parallel to the moving average line, and are placed a specified percentage distance above and below it. MA envelopes allow a user to determine when prices have strayed from the moving average line by that percentage. |
| Moving Averages | One of the most popular and easy to use tools available to the technical analyst. By using an average of prices, moving averages smooth a data series and make it easier to spot trends. |
| On Balance Volume (OBV) | One of the first and most popular indicators to measure positive and negative volume flow. The OBV charts a cumulative total of volume that increases when the price closes up and decreases when the price closes down. The line it forms can be used to look for divergences or confirmation. |
| Parabolic SAR | Also referred to as the stop-and-reversal indicator, Parabolic SAR sets trailing price stops for long or short positions. It is most useful when a security is trending. |
| Percentage Volume Oscillator (PVO) | The percentage difference between two moving averages of volume. The PVO can be used to identify periods of expanding or contracting volume. |
| Price Channels | Similar to Bollinger Bands, price channels form boundaries above and below the price line and can be used as indicators of volatility. Price channels are created by specifying a number of periods that will chart an n-period high or low around the price line. |
| Price Oscillator (including PPO) | An indicator based on the difference between two moving averages, expressed as either a percentage or in absolute terms. |
| Price Relative | Compares the performance of one security to another. It is often used to compare the performance of a particular stock to a market index, usually the S&P 500. |
| Price By Volume | A horizontal histogram that displays total volume within a certain price range. |
| Rabbitt Q-StockRank | A combination of nine fundamental and technical models applied to over 3000 stocks daily. The Q-StockRank is a starting point that identifies stocks to which you may then apply your own experience, insights, judgment, and knowledge. |
| Rate of Change | A simple yet effective momentum indicator that compares the price today with the price n periods ago. |
| Relative Strength Index (RSI) | A momentum oscillator that compares the magnitude of gains against the magnitude of losses. |
| Standard Deviation | A statistical term that provides a good indication of volatility. It measures how widely values are dispersed from the average. |
| Stochastic Oscillator | A momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. |
| StochRSI | An oscillator that measures the level of RSI relative to its range, over a set period of time by applying the formula behind Stochastics. |
| TRIN | A contrarian indicator used to detect overbought and oversold levels in the market. TRIN has an inverse relationship with the market. |
| TRIX | A momentum indicator that displays the percent rate-of-change of a triple exponentially smoothed moving average of a security’s closing price. |
| YIX | A weighted measure of implied volatility for 8 OEX put and call options. VIX has an inverse relationship to the market. |
| Ultimate Oscillator | A bounded oscillator that incorporates three different time frames into one number. |
| Williams %R | A momentum indicator especially popular for measuring overbought and oversold levels. |
| ZigZag | ZigZag isn’t a true indicator, but means to filter chart noise and compare relative price movements. Beware – ZigZag has zero predictive power! |
Conflicting Indicators: Bullish or Bearish?
Japanese Candlestick Patterns
Candlestick patterns are a different way of looking at the price movement. Based on late 17th century techniques developed by Japanese rice traders, these patterns accurately predict the future movement.
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