Technical indicators

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 be
done 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 such
as 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 considered
too high and susceptible to a decline.

Oversold: A technical condition that occurs when there has
been a lot of selling and the price of the stock is considered
too low and a rally in prices is anticipated.

Importance

Essentially traders use technical indicators for two things:

• To generate buy and sell signals

• To confirm price movement

Types of Indicators

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 price
changes and tend to generate more signals and allow more
opportunities to trade than lagging indicators.
• Since the indicators produce more buy and sell signals, they
also produce more false signals.
• When leading indicators are right, they allow you to get into a
trade early and make more money, but when they're wrong
you tend to lose money because you're in and out of trades
more frequently.

Leading Indicators

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

Lagging Indicators

Two of the more common lagging indicators are:

• MACD

• Moving Averages

Other Indicators
• 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

RSI- Introduction
• 80 and 20 can also be used to indicate overbought and
oversold levels but gives slightly less accurate results than
70-30
• 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

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

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

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

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 reverse
position when the price crosses the current Stop And Reverse
(SAR) point
• The SAR points resemble a parabolic curve as they begin to
tighten and close in on prices once prices begin to trend
• Parabolic Time Price is usually charted with a bar analysis so
that 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

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

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

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

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 lower
end of the price range

Stochastic
• Stochastic consist of two lines, %K and %D
• The %K line measures, as a percentage, where the current
close is, in relation to the lowest low over the observation
period.
• 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 a
slower, smoother response to price movements
• Slow Stochastics are smoother and are less likely to give false
signals

Uses of Stochastics
• Indicate overbought and oversold conditions
• An overbought or oversold market is one where the prices have
risen or fallen too far and are therefore likely to retrace. If the %D
line is above 80% then the close is near the top end of the range of
the observation period, while a reading below 20% means that the
close is near the bottom end of the range of the observation period.
• Generally the area above 80 is considered overbought, while the
area below 20 is oversold. The specified overbought/oversold
ranges vary. Other commonly used ranges include 75-25, 70-30 and
85-15.
• Overbought and oversold signals are most reliable in a non-trending
market where prices are making a series of equal highs and lows. If
the market is trending, then signals in the direction of the trend are
likely to be more reliable.

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

• Bearish Divergence occurs when prices are making higher highs but the
Stochastics are making lower highs. This is a sign that the up move is weakening.
• Bullish Divergence occurs when prices are making lower lows but the
Stochastics are making higher lows. This is a sign that the down move is
weakening

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

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

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

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

What is MACD
• MACD consists of two lines
• MACD Line
• Signal Line
• The MACD Line measures the difference between a short
Moving 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 upper
and lower boundaries

MACD: Use
• To Generate buy and sell signals
• Signals are generated when the MACD Line and the Signal Line
cross
• A buy signal occurs when the MACD Line crosses from below
to above the Signal Line, the further below the zero line that
this occurs the stronger the signal
• A sell signal occurs when the MACD Line crosses from above
to below the Signal Line, the further above the zero line that
this occurs the stronger the signal

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) zero
and the MACD Line is above (below) the Signal Line, then the
trend 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

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 another
cycle 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

BOLLINGER BAND: Use
• Identify overbought and oversold markets
• An overbought or oversold market is one where the prices
have risen or fallen too far and are therefore likely to retrace
• Prices near the lower band signal an oversold market and
prices 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 equal
highs and lows

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

Used in combination with an oscillator to generate
buy 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

Negative Divergence with Bollinger Band

The bands often narrow just before a sharp price move. A period of low
volatility often precedes a sharp move in prices; low volatility will cause the
bands to narrow

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

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

Introduction
• The Ichimoku Kinko Hyo Japanese charting technique was
developed before World War II with the aim of portraying - in
a snapshot - where the price was heading and when was the
right 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 word
for "chart". Thus, Ichimoku Kinko Hyo simply means "a glance
at an equilibrium chart"
• Invented by a Japanese journalist with a pen name of
"Ichimoku Sanjin", meaning "a glance of a mountain man“

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, for
the past 26 periods
• Chikou Span = Lagging Span = Today's closing price plotted 26
periods behind
• Senkou Span A = Leading Span A = (Tenkan-Sen + Kijun-Sen) /
2, plotted 26 periods ahead
• Senkou Span B = Leading Span B = (Highest High + Lowest
Low) / 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 the
Kijun-Sen from above.
• If there was a bullish crossover signal and the price, at that
time, was trading above the Kumo (or cloud), this would be
considered 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 prevailing
trend of the market
• If the price is above the Kumo, the prevailing trend is said to
be up
• And if the price is below the Kumo, the prevailing trend is said
to be down.

HAPPY TRADING

ASHWANI KUMAR HARIT
9818688537
Ashwani_harit@yahoo.com
kumashwani@gmail.com

Technical indicators

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