1. OVERLAY ANALYSIS
The security prices tend to stay on one side of the moving average. Buy when price rises above moving average, sell when price falls below moving average.
The prices tend to stay within the upper- and lower- bands. The space between the bands varies based on the volatility of the prices. Sharp price changes tend to occur after the bands tighten. When prices move outside the bands, it implies a
continuation of the current trend. Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands imply a reversal in the trend. A move that originates at one band tends to go all the way to the other band.
Envelopes define the upper and lower boundaries of a security’s normal trading range. Buy when security price reaches the lower band, sell when it reaches the upper band. The band width is depends on the volatility of the security, the more volatile, the larger the percentage.
The Price Channel is a simple trend following breakout system. it works well in trending market, not in a sideways market.
Buy when price closes above the channel. Sell when price closes below the channel.
2. PRICE ANALYSIS
Balance of Power
Measures the strength of the bulls vs. bears by assessing the ability of each to push price to an extreme level. BOP often reach the upper limit and never reach the bottom level during bull markets, and the picture is reversed in bear markets. A change in the BOP trend is a warning signal and should be confirmed by a change in the price direction.
MACD & Histogram
The MACD proves most effective in wide-swinging trading markets. Buy when the MACD rises above its signal (or zero) line, Sell when the MACD falls below its signal (or zero) line – also look for overbought/oversold and divergence between MACD and security price. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.
This is a momentum indicator. The higher the ROC, the more overbought the security, the lower the ROC, the more oversold the security. As with all ob/os indicators, you need to wait for the market to begin to correct before placing your trade. A market that appears overbought may remain overbought for some time. In fact, extremely ob/os readings usually imply a continuation of the current trend.
Relative Strength Index
Looking for a divergence (impending reversal) and waiting for the RSI to complete a “failure swing” to confirm the reversal. The RSI usually tops above 70 and bottoms below 30. The RSI often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart. The RSI shows, sometimes more clearly than prices themselves, levels of support and resistance.
The Oscillator compares where a security’s price closed relative to its price range over a given time period. Buy when the Oscillator falls below a specific level (20) and then rises above that level. Sell when the Oscillator rises above a specific level (80) and then falls below that level. Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line. Also look for divergences between price and indicator.
Ultimate Oscillator uses weighted sums of three oscillators, each of which uses a different time period. Buy on positive divergence where the low of the oscillator has dipped below 30. Sell on negative divergence where the high has exceeded 50.
Close long positions when the oscillator exceeds 70. Close short positions when the oscillator goes below 30.
The interpretation of Williams’ %R is very similar to that of the STOC Oscillator. As with all ob/os indicators, you need to wait for the security’s price to change direction before placing your trades. It is not unusual for overbought/oversold indicators to remain in an ob/os condition for a long time period as the security’s price continues to climb/fall.
3. VOLUME ANALYSIS
Chaikin Money Flow
A positive CMF value signals accumulation, a negative CMF value signals distribution. CMF > 0 is an indication of buying pressure and accumulation. The longer the oscillator can remain above zero, the stronger the evidence of accumulation. The more positive the reading is, the more evidence of buying pressure and accumulation.
Ease of Movement
The EOM shows the relationship between volume and price change. High EOM values occur when prices are moving upward on light volume. Low EOM 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 be near zero. Buy when EOM crosses above zero, because prices are moving upward more easily. Sell when EOM crosses below zero, because prices are moving downward more easily.
Elders Force Index
EFI uses volume and price change from previous close to determine the momentum behind a price move in a given direction.
An increasing EFI is indicative of strong interest in the direction of the price move, while a decreasing EFI suggests that price is moving counter to the major trend.
Money Flow Index
MFI is a momentum indicator that measures the strength of money flowing in and out of a security. Looking for divergence between price and indicator. If the price trends higher and the MFI trends lower (or vice versa), a reversal may be imminent. Market tops usually occur when the MFI is above 80, market bottoms usually occur when the MFI is below 20.
Positive Volume Index
The PVI displays what the not-so-smart-money is doing. The PVI is not a contrarian indicator, it still trends in the same direction as prices.
Negative Volume Index
The NVI displays what the smart money is doing.
Price Volume Trend
PVT is similar to OBV. While OBV adds all volume on days when prices close higher and subtracts all volume on days when prices close lower, the PVT adds/subtracts only a portion of the daily volume. The amount of volume added to the PVT is determined by the amount that prices rose or fell relative to the previous day’s close. The interpretation of the PVT is similar to the interpretation of On Balance Volume and the Volume Accumulation/Distribution.
Volume Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The security is being accumulated when the A/D moves up. The security is being distributed when the A/D moves down. Divergences between the price and A/D imply a change is near. When a divergence does occur, prices usually change to confirm the indicator. For example, if the indicator is moving up and the security’s price is going down, prices will probably reverse.
On Balance Volume
OBV is a momentum indicator, it shows if volume is flowing into or out of a security. OBV usually changes precede price changes. This is because smart money can be seen flowing into the security by a rising OBV, and when the public then moves into the security, both the security and the OBV will move higher. If the security’s price movement precedes OBV movement, a “non-confirmation” has occurred. Non-confirmations can occur at bull market tops or at bear market bottoms. The OBV is in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Likewise, the OBV is in a falling trend when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough. When the OBV is moving sideways and is not making successive highs and lows, it is in a doubtful trend. Once a trend is established, it remains in force until it is broken.
Up/Down Volume Ratio
The Up/Down Volume ratio compares the buyers vs. sellers over a period of time. This indicator oscillates around 1. U/D ratios > 1 is bullish, because there are more buyers than sellers over the study period. U/D ratios < 1 is bearish, because there are more sellers than buyers.
4. VOLATILITY & TREND ANALYSIS
Average True Range
ATR measure a security’s volatility. High ATR values often occur at market bottoms following a “panic” sell-off. Low ATR values are often found during extended sideways periods, such as those found at tops and after consolidation periods.
Bollinger Bands Width
When the BBW increases in value, it indicates that the volatility of the underlying stock has also increased. This is because
the bands widen to become more forgiving during periods of sharp price change, the bands narrow during long sideway movement.
Chaikin Volatility Index
CVI compares the spread between a security’s high and low prices. There are two ways to interpret, 1. The market tops are generally accompanied by increased volatility (as investors get nervous and indecisive) and that the latter stages of a market bottom are generally accompanied by decreased volatility (as investors get bored). 2. An increase in the volatility over a relatively short time period indicates that a bottom is near (a panic sell-off) and that a decrease in volatility over a longer time period indicates an approaching top (a mature bull market).
Avg Directional Move
ADX helps determine if a security is Trend or not. Bullish when the +DI rises above the -DI, bearish when the +DI falls below the -DI. You can use extreme price method to help avoid whipsaws in sideway market. First, identify the extreme price when DI lines cross occurs. If it’s a bullish crossing (+DI cross above -DI), you would wait for the price to rise above this extreme price (the high price on the day the lines crossed). If it’s a bearish crossing (+DI crosses below -DI), the extreme point is defined as the low price on the day’s the lines cross.
Commodity Channel Idx
CCI measures the variation of a security’s price from its statistical mean. High values show that prices are unusually high compared to average prices whereas low values indicate that prices are unusually low. There are two basic methods of interpreting the CCI: looking for divergences and as an overbought/oversold indicator. A divergence is usually followed by a correction in the security’s price. The CCI typically oscillates between 1100. Readings above +100 imply an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally).
ARL have two lines, AroonUp and AroonDown, both oscillate between 0 and 100. AroonUp will be 100 when the security is setting new highs, will be 0 if the security continually dropped throughout the period. AroonDown is calculated similarly. AroonUp and AroonDown are moving lower in close proximity, it signals the consolidation and a sideway market. When AroonUp dips below 50, it indicates that the current trend has lost its upwards momentum. When AroonDown dips below 50, the current downtrend has lost its momentum. Values above 70 indicate a strong trend in the direction of indicator, below 30 indicate a strong trend in the opposite direction.
ARO is the difference between AroonUp and AroonDown lines, Bullish when ARO > 0, bearish when ARO < 0. The farther away the oscillator is from the zero line, the stronger the trend.
Trend Detection Index
TDI is used to detect when a trend has begun and when it has come to an end. The TDI signal a trend if it shows a positive value and a consolidation if it shows a negative value. As a trend-follower, the position should be entered in the direction of the trend when the TDI is positive.