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Technical analysis
Mathematical indicators
The MACD is simple and reliable. It uses moving averages to include trend-
following characteristics. These lagging indicators are turned into a momentum
oscillator and plotted as a line that moves above and below zero with no upper or
lower limits. The MACD proves most effective in studying wide-swinging trading
markets.
MACD(2lines)
MACD (2-lines) shows the relationship between a 26-day and 12-day Exponential
Moving Average with a 9-day Exponential Moving Average (the "signal" or
"trigger") line plotted on top to show buy/sell opportunities.
-Overbought/OversoldConditions:
The MACD is also can be used as an overbought/oversold indicator. If the shorter moving average pulls
away dramatically from the longer moving average and the MACD rises it is likely that the security price is
overextended and will soon return to more realistic levels.
-Divergences:
Expect the end a current trend may be near when the MACD diverges from the price of a security. A bearish
divergence occurs when the MACD is making new lows while prices fail to match these lows. Likewise, a
bullish divergence occurs when the MACD is making new highs while prices fail to follow suit. Both of these
divergences are most significant when they occur at relatively overbought/oversold levels.
MACDHistogram
Signals from the MACD Indicator can tend to lag behind price movements. The MACD
Histogram is an attempt to address this situation showing the divergence between the
MACD and its reference line (the 9-day Exponential Moving Average) by normalizing the
reference line to zero. As a result, the histogram signals can show trend changes well in
advance of the normal MACD signal.
A buy signal is generated as the histogram crosses above the zero point. A sell signal is
generated as the histogram crosses below zero.
Chart Formations
The RSI often forms chart patterns such as head and shoulders or triangles that may or may not be
visible on the price chart;
Divergences
As discussed above, divergences occur when the price makes a new high (or low) that is not
confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in
the direction of the RSI.
Calculation:
RSI = 100-(100/(1+U/D))
Where:
U — is the average number of positive price changes;
D — is the average number of negative price changes.
Rate of change (ROC): ROC is an oscillator that measures the
relationship between the current price of a share with the price
prevailing a few days earlier. ROC measures the rate of change in
prices over a specific period of days on a regular and continuous
basis. The ROC value can be zero,positive or negetive. These values
are plotted on graph with time on X-axis and ROC values on the Y-
axis. The ROC values oscillate around zero. ROC above zero
indicates that prices are increasing and ROC below zero indicates
that prices are decreasing.
Ease of Movement
High Ease of Movement values occur when prices are moving upward with
light volume. Low values occur when prices are moving downward on light
volume. If prices are not moving or if heavy volume is required to move
prices then the indicator will read near zero.
A buy signal is produced when it crosses above zero (an indication that
prices are more easily moving upward ). A sell signal is produced when the
indicator crosses below zero (prices are moving downward more easily).
Developed by Richard Arms, Jr., perhaps better known for the Arms Index
(TRIN), the formula is as follows:
Where:
H = Today's high
L = Today's low
Hp = the previous day's high price
Lp = the previous day's low price
V = current day's volume
Aroon Indicator
When the Aroon Down line rises above the Aroon Up line, potential weakness is indicated
and expect prices to begin trending lower. When the Aroon Up line crosses the Aroon Down
line, potential strength is indicated and prices should begin to trend higher.
When the Aroon Up and Aroon Down Lines move parallel with each other then consolidation
is indicated. Expect further consolidation until a directional move is indicated either by an
extreme level or a crossover.
Aroon is a Sanskrit word meaning "dawn's early light" or the change from night to day.
Aronoscillator
Developed by Tushar Chande, the Aroon Oscillator is based upon his Aroon Indicator. Much
like the Aroon Indicator, the Aroon Oscillator measures the strength of a trend.
The Aroon Oscillator is constructed by subtracting Aroon Down from Aroon Up. Since Aroon
Up and Aroon Down oscillate between 0 and +100, the Aroon Oscillator oscillates between
-100 and +100 with zero as the center crossover line. The Aroon Oscillator signals an
uptrend if it is moving towards its upper limit. It signals a downtrend when it is moving
towards the lower limit. The closer the Aroon Oscillator value is to either extreme the
stronger the trend.