invast technical analysis indicator · pdf filepage 4 of 20 moving averages moving averages in...

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Invast - Technical Analysis Indicator Guide

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Contents Invast - Technical Analysis Indicator Guide ............................................................................................. 1

Introduction to Technical Indicators ....................................................................................................... 3

Moving Averages..................................................................................................................................... 4

Simple moving average (SMA) – (Trending Indicator) ............................................................................ 5

Exponential moving average (EMA) – (Trending Indicator) .................................................................... 6

Ichimoku Kinkō Hyō ................................................................................................................................ 7

The Relative Strength Index (RSI) – (Oscillator Indicator) ....................................................................... 9

MACD (Moving Average Convergence/Divergence) - (Oscillator Indicator)......................................... 10

Parabolic SAR – (Trending Indicator) .................................................................................................... 12

TRIX (Triple Exponential) - (Oscillator Indicator) .................................................................................. 13

Average True Range (ATR) – (Volatility Indicator) ................................................................................ 14

Bollinger Bands – (Volatility Indicator) ................................................................................................. 15

Stochastic Oscillator - (Oscillator Indicator) ......................................................................................... 17

Ultimate Oscillator - (Oscillator Indicator) ............................................................................................ 19

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Introduction to Technical Indicators Technical indicators are indicators deriving from mathematical calculation that are applied to a security's price or volume to help guide traders to anticipate future changes in money flow, trends, volatility and momentum. As a trader, it is important to understand technical indicators are a source of additional information to your analysis and actual price movements should not be disregarded. The main benefits with using technical indicators in your trading can provide confirmation on price movement, filtering out erratic price movement (noise) to visually improving the quality of chart patterns, and to assist on buy and sell signals. Having a solid understanding on what type of technical indicators are out there can improve dramatically your trading performance and by identifying what technical indicators suits your trading style and trading environment will surely give you an edge to your trading. So what technical indicator should I use? Technical indicators are either leading or lagging indicators. Leading indicators precedes price movements, therefore has a predictive nature in forecasting price movements. Generally, leading indicators are great during periods of sideways or non-trending trading ranges. An example of leading technical indicators are oscillators. Oscillators are bound within a range - for example between zero and 100, and signal periods where the security is overbought (near 100) or oversold (near zero). On the other hand, a lagging indicator trails behind the current price movement. Not like the leading indicators, lagging indicators are terrible during periods of sideways or non-trending trading ranges. The lagging indicator are great indicators for confirming and identifying trends due to its lagging nature on price movement. Two most popular ways technical indicators can form buy and sell signals are via crossovers and divergence. Crossovers are reflected when either the price moves through the moving average, or when two different moving averages cross over each other. Divergence happens when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. Divergences can aid the trader in identifying that the direction of the price trend is weakening. As we have mentioned, technical indicators are extremely useful and needs to be in every trader’s tool kit. What indicator to use? Well, this will depend on your trading strategy and the environment you are trading in. Technical indicators are great when they are used in conjunction with other indicators, chart patterns and price and volume movement.

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Moving Averages Moving averages in technical analysis terms is used to filter out the random “noise” of price action over time by smoothing out short-term volatility and highlight trends. The moving averages uses a set of numbers, each of which is the average of the corresponding subset of a larger set of price data. The shorter the length of a moving average, the more sensitive it will be to short-term price fluctuations. An 8-day moving average will react more quickly to a change in price than the 21-day moving average. The longer the length of a moving average, the less distortion it will be to price fluctuations. Generally, traders would use longer time period i.e. 50, 100, 200 moving averages for identifying market trends either uptrend or downtrend. During periods of market consolidation a shorter time frame i.e. 8, 21 moving average would be used to identify minor trend moves more easily. Moving averages can act as support/ resistance and buy/sell signals.

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Simple moving average (SMA) – (Trending Indicator) A simple moving average is the average of a price series over a selected time period. For example, a 10-day simple moving average (SMA) of closing price is the mean of the previous 10 days' closing prices, resulting in an average. As the market moves forward in time, the oldest price is removed from the moving average calculation and replaced by the most recent price. A direction of trend can be indicated by the market price crossing over the SMA. Generally a buy signal is generated when a price breaks above the moving average and a sell signal is generated by a price break below the moving average. It is added confirmation when the moving average line turns in the direction of the price trend. The simple moving averages is a lagging indicator as the averages tend to trail behind the current market price as it gives equal weight to each period’s price. This has prompted to the use of weighted and exponential moving averages.

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Exponential moving average (EMA) – (Trending Indicator) An exponential moving average (EMA) attempts to reduce the lag by giving more weight to recent

prices, thereby allowing the moving average to respond more quickly to current market conditions.

The important thing to remember is that the exponential moving average puts more weight on

recent prices therefore, they are more sensitive to prices movement and will turn before simple

moving averages.

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Ichimoku Kinkō Hyō Ichimoku Kinko Hyo (ichimoku) was developed by Goichi Hosoda, a Japanese journalist in the late 1930s. It has increased in popularity among the Japanese traders as it builds on candlestick charting to improve the accuracy of forecasted price moves. Ichimoku is a based trending moving average it uses the 50% point of the highs and lows as opposed to the candle's closing price. With more data points than standard candlestick charts this provides a clearer picture of potential price action. The key components of the ichimoku chart Tenkan-sen: Used as a signal line and a minor support/resistance line. (Highest high + lowest low)/2 for the last 9 periods. Kijun-sen: Generally used as a confirmation line, a support/resistance line, and can be used as a trailing stop line. (Highest high + lowest low)/2 for the past 26 periods. Senkou span A: Also referred to as a leading span 1, this line forms one edge of the kumo, or cloud (Tenkan-sen + kijun-sen)/2 plotted 26 periods ahead. Senkou span B: Also referred to as leading span 2, this line forms the other edge of the kumo (highest high + lowest low)/2 calculated over the past 52 time periods and plotted 26 periods ahead. Kumo: The space between senkou span A and B. The cloud edges identify current and potential future support and resistance points. Chikou span: Also referred to as the lagging span it is used as a support/resistance guide. It based on the calculation of today's closing price projected back 26 days on the chart.

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The Relative Strength Index (RSI) – (Oscillator Indicator) Developed by J. Welles Wilder, as a momentum oscillator measuring the velocity and magnitude of

directional price movements. The RSI calculates momentum as the ratio of higher closes to lower

closes or in simple terms measures recent trading strength. The slope of the RSI is directly

proportional to the velocity of a change in the trend.

It is typically used on a 14 day timeframe measured on a scale from 0 to 100. When RSI goes to 70 or

above this would indicate overbought territory and RSI readings lower than the 30 level are

considered to be in oversold territory. In between the 30 and 70 level is considered neutral, with the

50 level a sign of no trend.

Another way of using the RSI is looking for divergence between RSI and price action. This would

indicate a market turning point in momentum and a change in momentum will occur. Bearish

divergence occurs when price makes a new high but the RSI makes a lower high, thus failing to

confirm. Bullish divergence occurs when price makes a new low but RSI makes a higher low.

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MACD (Moving Average Convergence/Divergence) - (Oscillator

Indicator) Developed by Gerald Appel in the late 1970s, the MACD (Moving Average Convergence/Divergence) is a popular technical indicator used to spot changes in the strength, direction, momentum, and duration of a trend. The MACD is a representation that shows the relationship between the two exponential moving averages (EMAs) of closing prices. This difference is charted over time, alongside a moving average of the difference. The divergence between the two is shown as a histogram graph. The histogram simply plots the difference between the fast and slow moving average. When the two moving averages separate a divergences occurs, the histogram gets bigger. This is caused from the faster moving average is diverging away from the slower moving average. On the other hand, a convergences occurs as faster moving average get closer to the slower moving average and the histogram gets smaller. The faster moving average will react first and in many instance eventually crossing over the slower moving average. When this occurs, and faster moving average starts to diverge away from the slower moving average often indicating a new trend has started. The MACD is less useful during non-trending or erratic trading environments, it is a lagging indicator and works will in conjunction with a leading indicator, like the Relative Strength Index (RSI). By pairing the two indicators this can reduce false signals.

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Parabolic SAR – (Trending Indicator) Developed by J.Welles Wilder Jr, the Parabolic SAR (SAR - stop and reverse) gets its name because the stops resemble a parabola. This indicator helps identify trends and also can be used as a trailing stop loss based on prices tending to stay within a parabolic curve during a strong up or down trend. The Parabolic SAR indicator generally works well in trending market. Non-trending or sideway consolidation conditions the Parabolic SAR doesn’t perform well and will highly likely produce false signals making it difficult to enter and exit trades. Parabolic SAR is a good indicator in conjunction with another indicator that identifies the strength and direction of the trend such as the Average Directional Index (ADX). The Parabolic SAR is an easy concept to follow, when the price is in an uptrend, the SAR appears below the price and converges upwards towards it. Similarly, on a downtrend, the SAR appears above the price and converges downwards towards the price. Default Settings

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TRIX (Triple Exponential) - (Oscillator Indicator) Developed in the 1980s by Jack Hutson, editor of Technical Analysis of Stocks and Commodities magazine, TRIX (or Triple Exponential) is a oscillator used to identify oversold and overbought markets, filter out short-term noise, can be used as a momentum indicator as well as give buy and sell signals. The use of the TRIX varies widely among traders. One way of applying the TRIX is using it as an oscillator and/or a momentum indicator. High positive values above the zero indicate overbought conditions and can also indicate strong momentum. Low negative values suggest oversold conditions and could indicate momentum is decreasing. Some traders interpret buy signals when the TRIX crosses above the zero line and a sell signal when the TRIX closes below the zero line. The TRIX also can indicate divergences between price and TRIX can indicate significant turning points in the market. Default Settings

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Average True Range (ATR) – (Volatility Indicator) Average True Range (ATR) also referred to as the trading range, is a volatility indicator originally developed by J. Welles Wilder, Jr. for commodities. ATR does not provide an indication of price trend like the other technical indicators mentioned, it is used to help traders identify how far a price is expected to move, this in turn can assist traders in placing stop orders at an optimal range avoiding any market noise. The higher the ATR value, the higher the level of volatility is expected. To help illustrate this, if the ATR is indicating a value of 150 points on a daily chart and currently the market price has moved at 140 points, then this would signal a high probability the price movement is coming to its true range or the end of the movement. Default Settings

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Bollinger Bands – (Volatility Indicator) Developed by John Bollinger in 1980, Bollinger Bands is a technical indicator used to measure a market’s volatility. Bollinger bands are applied to the price area of a chart with a configuration showing an upper band, lower band and centre band. The centre band is usually a 20 day simple moving average, though it can be an EMA or SMA of any value. The upper and lower bands respectively represent a specified standard deviation from the centre band, with +2/-2 as the typically used values The use of Bollinger Bands varies widely among traders. Some traders use Bollinger bands to measure price extremes. If the price hits the upper Bollinger Band then it would indicate that the price is at an unsustainable level, and possibly a reversal could occur alerting the trader a sell trade. If the prices touches the lower Bollinger Band then this might signal a potential buy. Another method would be to buy when price touches the lower Bollinger Band and exit when price touches the moving average in the centre of the bands, vice versa. Or buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. Bollinger bands will narrow or tighten at times of low volatility where there is periods of decreased price movement. This can generally mean there is a potential breakout in play either upside or downside in the trend.

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Stochastic Oscillator - (Oscillator Indicator) The stochastic oscillator is a momentum indicator brought about its popularity in the 1950s by Dr.

George Lane in the attempts to predict turning points based on the theory that prices move in

cycles, between overbought and oversold levels.

The indicator consists of two lines, %K compares the latest closing price to the recent trading range

and the %D is a signal line calculated by smoothing %K.

A buy signal is indicated when the stochastic line %K crosses above the signal line %D, and enter a

sell signal occurs when the stochastic line %K crosses below the signal line %D.

Another variation used by traders is when the %K line climbs into the 80 and above region of the

stochastic scale, this would signal an overbought condition and potentially indicating a sell.

In turn, when the %K line falls below 20 on the stochastic scale, the market may be considered to be

oversold. This would signal an oversold condition and potentially indicating a buy.

The stochastic oscillator is adaptable in both trending and ranging markets, it is also suitable in short

and long term timeframes.

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Ultimate Oscillator - (Oscillator Indicator) The creator Larry Williams, designed the Ultimate Oscillator on the concept of buying or selling pressure and its relationship with the true range of the market. The method it uses is by combining three separate time periods into one oscillator that smooths out erratic price movements and produces fewer false signals. The time periods of the oscillators uses is typically short-term (7-period), intermediate-term (14-period), and long-term (28-period). The indicator fluctuates between 0 and 100. Crosses above the 70 line indicate prices are potentially overbought. Moves below the 30 line indicate oversold. A cross above 50 is considered positive and below 50 as negative. Divergences between the oscillator and price can indicate buy and sell signals. Bullish divergence occurs when prices make new lows but the oscillator is rising after having dipped below the 30 level. This can signify that selling pressure is losing momentum and a potential reversal in prices is due. This is also true on the other hand, when the oscillator crosses over 70 it may be used as a sell signal.

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