Indicator of Bollinger borders consists of two lines. They are placed on the equal distance to definite amount of usual discrepancies. While the value of standard deflection depends on the price unsteadiness, the lines automatically control their width. The width increases if the market is more volatile and decreases when the market is not so unsteady.
Here are the features of Bollinger's lines:
- The fluctuations of the prices which begin from one of the line's borders, as a rule, reach the other border. The aforesaid feature can be helpful for forecasting price's orienting points;
- Uncontrolled changing of prices often happens after the line's shortening, which indicates decreasing of unsteadiness;
- If after the rises and falls outside the lines there are rises and falls inside the lines, it's probable that the turn of tendency can occur;
- If the prices go outside the borders, the ongoing tendency is expected to be continued.
The lines of Bollinger resembles the Envelopes Moving Averages indicator. The basic distinction between these indicators is that the borders of envelopes are placed over and under the line of changing average on the certain distance, which is calculated in percents, while the borders of the Bollinger lines are placed on the distances equal to definite number of standard deflections.
Bollinger Bands can help to define if ongoing data field values are behaving normally or breaking out in a new direction. For instance, when the closing price of a Forex market moves over its upper Bollinger Band, it usually increases in that direction. Bollinger Bands also helps to find out when trend reversals may happen. A reversal is usually characterized by new peaks or falls outside of the bands followed by another peak or fall inside the bands.
Bollinger Bands are a pair of values put as an "envelope" around a data field. To measure the values you should take the changing average of the data for a definite period and subtract or add the definite number of standard deflections for the same period from the moving average.
Bollinger Bands resemble Trading Bands and share many of their traits. However trading bands do not differ in width based on inconstancy.
This technical indicator consists of 3 lines. They are Moving Averages with various parameters. Here they are:
The First line, or the chap of alligator, is a line of balance to the considerable period of time. It's used for the chart constructing - 13 period smoothed shifting average, moved on 8 bars to the future. The Green line, or the lips of alligator, is the line of balance for the considerable period of time, which is one more step less - 5 period smoothed shifting average, moved on 3 bars to the future. The Red line, or the teeth of alligator, is the line of balance for the considerable period of time, which is one step less - 8 period smoothed shifting average, moved on 5 bars to the future.
How to interpret the lines? When all of them are jolloped, it means that the "Alligator" is sleeping, and the more it sleeps the more hungry it gets. Of course, when it wakes up after long sleep, it's very hungry and starts "hunting for food", which is price, till it is glutted. As soon as it happens, it looses interest to the food, which is price, and then the balance lines meet at the same point. It's when you should fix your profit. It's time to close all positions and wait till Alligator awakes up next time.
This indicator's aims are the following:
1. To become an easy for usage indicator to trade only in the current trade
2. To develop a reliable way of saving the money during the moving of the market bounded with the price channel
3. To represent united way for monitoring of the moving of the market.
The A/D indicator is the accumulation of the distinction between all upward movements (accumulation) in the period, when the price has raised by the closing point and downward movements (distribution) in the period, when the price has gone down by the closing point. The Accumulation/ Distribution indicator helps to determine if the Forex market is controlled by buyers (accumulation) or by sellers (distribution). It was worked out by Larry Williams. This indicator gives seldom signals forming discrepancy with the price at the critical tendencies' breaks.
Distinction between the highest price (high) and the close price (close) is subtracted from a distinction between the close price (close) and the lowest price (low). The value which is got as a result is multiplied by volume and divided on a difference of the highest and lowest prices. The indicator is equal to the sum of expression for all intervals of supervision. The A/D indicator recommends purchasing when prices go down to a new low, and sell when the price reaches a new peak.
The A/D indicator is defined by fluctuations of the price and volume. The volume serves as a weight factor at the price change. The more factor (volume), the bigger is the contribution of the price change for the defined time period in value of the indicator.
This indicator gives rather infrequent signals forming divergence with the price at the critical breaks of tendencies.
The Average True Range is an indicator of volatility. It was developed by J. Welles Wilder in 1978. As well as the many other indicators, first it was created for the commodity markets, which are more unsteady than shares, and for the prices at the end of day. Nowadays it's widely used in Forex market, on other periods too.
First Wilder defines the True range, or TR, determined as maximal of the following 3 values: absolute value of a distinction between ongoing maximum and the previous close price; absolute value of a distinction between ongoing minimum and the previous close price; distinction between an ongoing maximum and an ongoing minimum. If the distinction between a maximum and a minimum is rather little, most likely other two aforesaid methods will be used for TR calculation. If the range changes inside of the period, a distinction between a maximum and a minimum, is rather big, most probably TR will calculate from it.
Formula:
ATR = Moving Average (TRj, n), Where TRj = maximal modules from three values |High - Low |, |High - Closej-1 |, |Low - Closej-1 |.
As a rule ATR with 14 periods is used. It's calculated both on a one-day basis, and on day-time or week and even monthly basis. Extreme values of the indicator often define reversal points or the start of a new fluctuation.
Average True Range can't predict a duration or direction of changes, as well as other volatility indicators. It specifies only an activity level. The indicator's low level points out quiet trade in a little range, and high values point out intensive trade in a wide range. The long period of low ATR points out integration which, most probably, will result in fast continuation of changes or a turn.
High values of ATR usually are the result of quick fluctuations and seldom stay like this for the long period. As ATR indicates absolute volatility value currency pairs on Forex with the low prices will have with other things being equal lower ATR and on the opposite. The main notion of this indicator says "the smaller is the indicator's value the more poor a trend direction is; the higher the indicator's value is, the higher possibility of a turn of a trend is".
Indicators such as the TICK can reveal the internal strength (or weakness) of the market and highlight intraday turning points
he TICK is a market breadth indicator that measures the difference between the number of New York Stock
Exchange (NYSE) stocks trading on auto pick (i.e., last price higher than the previous price) and the number of stocks trading on a downtick (last price lower than the previous price).For example, if at a given moment
5,200 NYSE stocks were trading up from their previous prices and 4,800 were trading down from their previous prices, the TICK reading would be +400 (5,200-4,800). The TICK indicator should not be confused with the term “tick,“ which issued to describe a minimum price fluctuation. Positive, rising TICK readings are a bullish signal; the opposite is true for negative, declining TICK. (However, very high or low TICK readings often indicate temporary market exhaustion.)A declining TICK in a rising market indicates stocks are beginning to tradeoff their highs, signifying the up trend may reverse, at least temporarily. Like wise, a rising TICK in a declining market indicates stocks are starting to trade off their lows, and a reversal of the down trend is possible. For more information
on the TICK, see “TICK basics ,”p. xx. When confirmed with other tools, TICK readings can be used to identify
intraday turning points. We’ll look at a few examples that combine the TICK with price patterns and Fibonacci retracement levels.
The RSI, or Relative Strength Index, is a value between 0 and 100. A number above 70 usually suggests that a currency is overbought and therefore due for a price reversal. A value below 30 indicates a currency is oversold.
As a price is making a new high, but the RSI fails to surpass its previous high, the trend is said to ‘diverge’. This often indicates an impending reversal of the trend. When the RSI dips below a recent bottom, it is said to have executed a ‘failure swing’. That move is seen as tending to confirm the impending price reversal.
There are several other common indicators, including MACD (Moving Average Convergence/Divergence), Momentum, OBV (On Balance Volume), Money Flow Index, Parabolic SAR, Stochastic Oscillators and dozens even more esoteric.
All these were developed as statistical tools to help predict prices and trends. But keep in mind that, though some technical analysts claim to eschew looking for causes, all of them are based on assumptions when used as technical indicators.
As with any tool, they should form part of a strategy for trading. They should not be used as a substitute for studying the market and using proper risk management.
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The Aroon is an indicator system which helps to define if the trading instrument is trending or not and if the trend is strong. Aroon Indicator and Oscillator were developed by Tushar Chande in 1995. "Aroon" is translated from Sanskrit as "Dawn's Early Light" and Chande named the indicator like that as it's supposed to reflect the start of a new trend. The two lines, "Aroon up" and "Aroon down" form The Aroon indicator. The Aroon Oscillator is one line that is a distinction between "Aroon up" and "Aroon down". These three lines take the same parameter - the number of time periods - for the calculation. Both "Aroon up" and "Aroon down" fluctuate between 0 and +100, that's why the Aroon Oscillator can make up from -100 to +1 00, while with zero is used as the crossover line.
To calculate "Aroon up" for a certain period of time you should define how much time in percents passed between the beginning of the time period and the point when there was the highest peak during that time period. For example, "Aroon up" will be 100 if the instrument is setting new highs for the time period. And "Aroon up" will be zero when the instrument has moved lower every day during the time period.
To calculate "Aroon down" you should do the opposite action and to search new falls and not new peaks. Chande says that when "Aroon up" and "Aroon down" are moving lower in close proximity, it demonstrates an integration phase has started and strong trend isn't obvious. If "Aroon up" falls under 50, it means that the ongoing trend has lost its upwards momentum. In the same way when "Aroon down" falls under 50, the ongoing downtrend has lost its momentum. Values higher than 70 show a strong trend in the same direction as the "Aroon up or down" is starting. Values less than 30 mean that a strong trend in the contrary direction is starting.
The Chaikin Money Flow compares sum volume to the closing price and the daily peaks and falls to define the number of issues being purchased and sold of a certain security. This indicator was developed by Marc Chaikin.
It's supposed that a bullish stock has a rather high close price within its daily range and an increasing volume, and the indicator is based on this statement. Still if a stock is permanently closed with a rather low close price within its daily range with high volume, this demonstrates a weak security. There is selling pressure when a stock closes in the lower half of the period's trading range and there is pressure to purchase when a stock closes in the upper half of a period's range. Certainly the precise number of the indicator's periods can differ depending on the sensitivity and the time limits of individual investors.
If Chaikin Money Flow is less than zero it's a definite first bearish signal. If the point is below zero it means that a security is experiencing distribution or stays under selling pressure.
A second possible bearish sign is the period of time for which Chaikin Money Flow has been below zero point. The more time it's negative, the more possible is distribution or long selling pressure. Long periods below zero can mean bearish sentiment towards the basic security and possibility of downward pressure on the price.
In the end, the third possible bearish signal is the degree of selling pressure. It can be defined by the absolute level of an oscillator. As a rule, readings on both sides of the zero line (plus or minus 0.10) are not supposed rather strong for guaranteeing bullish or bearish signals. If the indicator moves above +0.10 it's a sufficient sign for warranting a bullish situation. Just as if the indicator falls under the point of -0.10, the degree selling pressure starts warranting a bearish signal. Marc Chaikin proves that a reading above +0.25 predicts strong buying pressure. On the contrary, a reading below -0.25 is the signal of strong selling pressure.
The Chaikin Money Flow is based on the supposition that a bullish stock has increasing volume and a rather high close price within its daily range which means strong security. Still there is a weak security if it's permanently closed with a rather low close price within its high volume and daily range.
Bill Williams named this indicator in his book "New Trading Dimensions". The book touches upon chaos theory, and lets readers debate if the so-called supercomputers were used in developing different trading methods. The majority of readers is sure that the author's systems is an ideal filter and a good start for a short term trading system.
This indicator consists of 3 changing averages based on the Median Price (High+Low/2) for 21, 13 and 8 days, with 8, 5 and 3 days displacement correspondingly. The most used method of explaining a moving average is the comparison of the dependence of the security's price on moving averages of the security's price, and vice versa, or relationship between a few moving averages.
First the Commodity Channel Index was developed as the indicator for determining of reversal points in the commodity markets. But then it became rather popular in the share market and in Forex market. CCI was created by Donald Lambert.
The supposition on which the indicator is based consists that all actives move under influence of definite cycles, and maxima and minima appear with definite intervals. CCI corresponds to oscillators, measuring speed of price fluctuations. The index demonstrates a deflection of the ongoing price from its average value. Lambert developed a constant at a level 0.015 that approximately from 70 up to 80 % of CCI values were between levels -100 and +100 -- for the purposes of measurement.
How to use CCI
Here is the author's advice on the work with the CCI index in case it moves above +100 and below-100 and sends sell or purchase signals. Buy or sell signals happen 20 - 30 % of the time while from 70 up to 80 % of time Commodity Channel Index's value is fluctuating between +100 and -100. It's supposed that if CCI overcomes the level of +100 from below upwards, it means that the currency pair is moving in the direction of the strong ascending trend, thus there is a clear purchase signal. And once CCI goes under +100 the position is supposed to be closed on a return signal. At the same time, it's considered that if Commodity Channel Index moves to -100 point from top to down, it means that the currency pair is meeting a strong descending trend, and there's a sale signal. As soon as CCI again crosses the level of -100 this position is considered closed.
Later CCI started to work for determining if market is overbought or oversold, for definition of reversal points. The currency pair is considered overbought once it overcomes +100 level and is oversold once CCI goes under -100 point. While CCI stays in an overbought position which is above +100, the sale signal appears in case if CCI crosses a level +100 in the opposite direction - from the peak to the bottom. After CCI has entered into an oversold zone which is under -100 level, the purchase signal appears when CCI crosses -100 point in the opposite direction - from the bottom to the peak.
CCI is based on divergence analysis which widens a trading signal. Positive discrepancy less than -100 increases the signal force when the price crosses a level-100 from the bottom to the top. It happens only if there are 2 consecutive minima on CCI when the second minimum is more than the first one on the indicator but below the first one on the chart of prices. Negative divergence over +100 increases the signal force when CCI crosses +100 from top to bottom. The condition for this situation is 2 consecutive maxima on the indicator above +100 when the second maximum is under the first one on the indicator, but above on the chart of prices.
One can treat break of trend lines formed on the indicator as input or output signals from a position. At overbought - above +100 - the break of the trend line downwards is supposed a sale signal and at an oversold level - below-100 - the break of the trend line upwards is supposed a signal to growth of the market. Thus these lines are also based on the connection of consecutive maxima or minima.
Correlation Analysis compares a stock to any indicator or another stock and demonstrates how like or dislike they are to one another. One can use correlation analysis in two main ways - for defining connection between two securities and for defining the ability of an indicator to forecast the situation on the market.
The comparison of the correlation between an indicator and a security's price provides you with useful information. A high negative correlation - below -0.70 - shows that when the indicator changes, the security's price as a rule moves in the opposite direction. A high positive coefficient - over +0.70 - demonstrates that the indicator change as a rule forecasts a change in the security's price. A low - close to or equal to zero - coefficient demonstrates that the connection between the security's price and the indicator is not so important.
Also correlation analysis is useful for measuring the connection between two securities. As it often happens that one security's price causes or forecasts the price of another security. For instance, the correlation coefficient of gold against the dollar demonstrates a strong negative relationship. Thus, the dollar increase as a rule forecasts a decrease in the gold's price.
DeMarker Indicator which demonstrates phases of price depletion which usually correspond to price highs and bottoms fluctuates from 0 up to 1. The turn of the prices downwards is expected if the parameter of the indicator moves above a mark 0.7. The turn of the prices upwards is expected if the indicator moves below a mark 0.3.
That's why the DeMarker indicator searches for the phases of price exhaustion which as a rule corresponds to the prices' highs and bottoms. The DeMarker fluctuates between 0 and 1 point. If the indicator moves over 0.7, the price turn downward is predicted. If the indicator is under the 0.3 level, the price turn upward is predicted.
The DeMarker indicator compares the period maximum with the previous period maximum which are summed up in the end. The indicator of Demark is used to search the regions with high and low risk for selling or purchasing. It registers the areas of price depletion, which correspond to price highs and bottoms. The DeMarker indicator fluctuates from 0 up to 1. If the indicator falls below 0.3, they predict the turn of the prices upwards. If the indicator goes over 0.7 level, they predict the turn of the prices downwards.
DMI filtrates on price exchange rates lays in the basis and lets enter the market only if substantial trends exist. It is developed for increasing the strength of all upward or downward trends in the Forex trading market. The Directional Movement Index consists of Average Directional Index, or ADX, which defines the strength of the trend and DI+ and DI- which demonstrate the strength of the decreasing and increasing prices correspondingly. ADX is a moving average of Directional Index, or DX, with a smoothing constant makes time period selected for calculating upward and downward fluctuations twice as long.
In a trading system with DMI in the centre, there is a purchase signal when the DI+ value overcomes the DI-, and for a sell signal, search the point in which DI exceeds DI+. Both Forex trading signals are given only if there is a rather strong trend- for instance, if the value of ADX is more than 25%.
How does the Directional Movement Index give the opportunity to define if a currency is trending? The main Directional Movement system compares the 14-day +DI, the so-called Directional Indicator, to the 14-day -DI. There are 2 ways to do it: by subtracting the +DI from the -DI or by placing the both indicators on top of each other. When the +DI exceeds the -DI specialists advice to purchase and when the +DI is under the -DI it's better to sell. They name these easy trading rules "extreme point rule" which is developed to prevent whipsaws and lower the deals' number.
According to the extreme point rule the "extreme point" is set on the day when the +DI and -DI cross. The extreme price is the low price on the day the lines cross when the +DI becomes less than the -DI. The extreme price is the high price on the day the lines cross when the +DI is over the -DI. Afterwards the extreme point is like a start signal at which you should execute trade deals.
For instance, when the +DI rises above the -DI (which is a clear purchase signal), you should wait a little before purchasing until the security's price rises above the extreme point - when the high price on the day that the +DI and -DI lines crossed. In case if the price doesn't move over the extreme point, it's better if a dealer foes on keeping up to the short position.
To demonstrate the Forex trading range of a certain Forex trading market over and under an average price we use Envelopes. To do this you should take an exponential moving average against the Forex market and then use a trading band by subtracting and adding a definite percentage of the day average. In this way the price 5% over and 5% under the average will be measured.
Envelopes determine the lower and the upper margins of the price range. Two moving averages - one of which moves upward and another one moves downward -are the base of the Envelopes.
It's the market inconstancy which defines the assortment of the best corresponding number of band margins moving. The higher this inconstancy is, the stronger the move becomes. Purchase signal occurs if the price attains the lower margin. Selling signal occurs if the price attains the upper margin of the band.
Envelopes also determine the upper and lower borders of a security's ordinary trading range. It's a sell signal if the security attains the upper band whereas a purchase signal if it moves to the lower boundary. It's the security volatility range which influences the preferable percentage move (the more inconstant, the bigger the percentage).
The Envelopes interpretation resembles the interpretation of Bollinger Bands as too fervent dealers make the price move to the extremes - for example, the upper and lower bands - at which point the prices are often fixed by moving to more optimum points.
Jack Weinberg, the developer of the Range Indicator has grounded it on the fact he has noticed that general range of intraday changes from higher to lower in comparison with the general daily interday range taken from close to close can signalize the occur of a new trend as well as the present trend finishing.
The "out of balance" market is seen when the intraday fluctuations exceed interday ranges much and the Range indicators takes high values in this case. You should be careful and expect the trend finishing when this situation occurs. A new trend can be expected when the value of the Range Indicator is lower than 20.
Trend-following trading systems can be dealt with as well as various momentums are possible to be improved by using the Range Indicator. According to Weinberg, the data of basic two moving average crossover system can be more sufficient when the Range Indicator showings are taken into consideration. The increase both of the risk and the amount of transactions is seen when the Range Indicator exceeding the certain low value provokes the long position entering as well as its falling lower than the set high level causes the exit.
