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Moving Averages are one of the simplest and most effective forms of technical analysis. By keeping a running average of price for a given period, moving averages smooth out the “noise” of daily trading activity. By comparing the averages of multiple time frames (i.e. a 50 day MA and a 200 day MA) an investor can notice changes in trends that might not have been seen otherwise. There are three types of moving averages, Simple, Exponential and Weighted. Moving averages are most effective in trending markets.
Simple Moving Average
Simple Moving Averages are computed by adding up all the closing prices for a chosen time frame then dividing by the number of periods in that time frame. Then, as each successive period is included, the earliest period is dropped so that only the most recent specified number of data points are included.
Exponential Moving Average
Exponential Moving Averages place more emphasis on the most recent period by adding a percentage of the most recent period’s price to prior periods.
Weighted Moving Average
Weighted Moving Averages place greater emphasis on more recent periods and less on earlier periods through a weighting mechanism.
Moving Average Envelope
The Moving Average Envelope captures the general range of a security’s price movements and helps identify extreme overbought or oversold periods. The envelopes are centered on a moving average and are plotted at +/- a given percentage. The moving average and percentage shift may be specified by the user.
John Bollinger developed Bollinger Bands as an improvement to moving average envelopes. Bollinger Bands are plotted at a user defined number of standard deviations above and below a simple moving average in order to show periods of high and low volatility as well as to highlight trading ranges. The default setting uses bands of +/- 2 standard deviations plotted around a 20 period moving average. During periods of low volatility, price may range between the upper and lower bands. However, when price closes outside of the bands, it may signal the start of a new trend.
Parabolic SAR, which was developed by Welles Wilder, is used by many investors to determine where to place stop orders. SAR is short for Stop and Reversal. By this theory, an exit or reversal indicator is seen when the stock price pierces the SAR. The SAR is useful in determining trend reversal and tends to be ineffective in narrow, trendless markets.
Price Channels allow visualization of a stock’s range by plotting the highest high and lowest low for a period. It can also be used to measure volatility as the bands will be wider when prices are fluctuating. By lengthening the period used, an investor can capture a price moves over a greater amount of time.
Last Close is used on intraday charts and draws a horizontal line at the prior day’s closing price.
The Accumulation/Distribution line is a momentum indicator that examines volume to determine how aggressively investors are either buying or selling a stock. It is calculated by adding or subtracting a portion of the day’s volume to a cumulative total based on where the stock closed. The nearer the close was to the extreme high or low, the greater the amount of volume that is added to or subtracted from the total. If the close is in the midpoint of the range, no volume is added to the total.
The Advance/Decline Line is a market indicator illustrating the breadth of the market. It is a running total of each day’s lower closes subtracted from higher closes. Both the level and slope of the indicator provide clues as to investor sentiment. The Advance/Decline Line can be calculated for the NYSE, NASDAQ NMS, NASDAQ Listed and NASDAQ 100.
Advance/Decline Line Breadth
Advance/Decline Breadth is the percentage of stocks that advanced in a period. It is calculated by dividing the day’s advancers by the total stocks that changed in value, both advancers and decliners and is a number between 0 and 1. The Advance/Decline Line Breadth can be calculated for the NYSE, NASDAQ NMS, NASDAQ Listed and NASDAQ 100.
Advance/Decline Line Ratio
The Advance/Decline Line Ratio measures market breadth by calculating the difference between advancing and declining issues and portraying the results as a ratio. The Advance/Decline Ratio can be calculated for the NYSE, NASDAQ NMS, NASDAQ Listed and NASDAQ 100.
The Arms Index was developed by Richard W. Arms and also referred to as the TRIN or Trading Index. It measures market breadth using not only price movement but also volume. A reading below 1 implies that more volume occurred in stocks that are rallying. This is a short-term indicator and many traders will use it as a contrary indicator-when the TRIN is at an extreme level, it is time to go against the trend.
Directional Movement Index (DMI)
The DMI was developed by Welles Wilder and is used to measure the direction and strength of a trend. The indicator includes 3 components, +DI, -DI and the Average Directional Index (ADX). A buy signal is generated when the +DI rises above the -DI and a sell signal is generated when the +DI falls below the -DI. The ADX measures the strength of the trend. A high ADX value correlates with a strong trend.
Dividends are an important part of a security’s total return, for those that pay them, and dividends per share will be plotted on the chart to highlight payouts.
Dividend yield can be an important component of total return and the yield will be plotted on the graph to illustrate how the yield changes in relation to price moves.
Earnings per Share (EPS)
Earnings Per Share is an important measure of the health of a company and is plotted on the chart to show the growth in earnings over the time period of the graph.
Moving Avg. Convergence Divergence (MACD)
The MACD is an oscillator made by comparing the difference between a fast and a slow exponential moving average (typically a 26 period EMA and a 12 period EMA). The indicator also compares the movement of the MACD to a signal line (usually a 9 period EMA). MACD generates a buy signal when it crosses above the signal line and a sell signal when it crosses below the signal line. Additionally, many technicians will buy when the MACD is above 0 and sell when it crosses under 0.
The Mass Index is a tool used to identify reversals of trend by measuring the spread between high and low prices. The Mass Index measures the spread between high and low prices to identify trend reversals. The index increases ans decreases in line with the spread. By choosing a longer period, the indicator becomes less sensitive to changes in price.
The Momentum Indicator examines the rate with which a security’s price changes. By lengthening the time period of the indicator, the user can decrease the sensitivity to any one period.
Money Flow Index
The Money Flow Index describes the rate at which money is flowing into or out of a security and uses as inputs both price change and volume. By increasing the number of input periods the user can decrease the sensitivity to price changes.
On Balance Volume
The On Balance Volume indicator was developed by Joe Granville over 40 years ago and measures the strength of buying or selling pressure on a security. OBV keeps a running tally of volume that adds up-day volume to the total and subtracts down-day volume. When the trend of the indicator is increasing, buyers are more aggressive than sellers and when it is decreasing, sell activity is displacing buyers.
P/E Range plots the high and low P/E for each period on the chart. The range gives context to today’s value and highlights trends in investor’s perception of the value of a company.
The P/E Ratio is an important fundamental valuation measure. By plotting it on a chart, trends can be clearly seen, allowing the investor to better understand when the stock is under or over-valued based on its own historical P/E.
Rate of Change
Rate of Change is similar to the Momentum indicator in that it is a ratio that shows the strength of a trend. However, while the Momentum indicator shows the most recent close as a percentage of a prior period’s close, the ROC plots the percent change over the period, gain or loss.
Relative Strength Index (RSI)
The Relative Strength Index was developed by Welles Wilder and examines the strength of a security’s price action relative to other price changes incurred by that security.
Examining the growth in revenues helps to highlight growth in market share and health of a corporation. Revenues are plotted on the chart to show growth trends.
The stochastic oscillator uses two lines, %D and %K, to measure momentum in securities prices and is bounded by 0 and 100. When the indicator touches 0 (or 100), the stock closed at the low (or high) for that period. The stochastic oscillator helps to determine when a trend is overdone. That is what is meant by overbought or oversold. To that end, two horizontal lines are plotted on the indicator, one at 20 and the other at 80. When %K moves above 80, the stock is generally considered overbought. When %K falls below 20 it is generally thought to be oversold. Additionally, crosses between the %D and %K are bullish or bearish signals similar to those provided by moving averages.
The Ultimate Oscillator was developed by Larry Williams who sought to reduce the effect of time on the effectiveness of the oscillator. This indicator uses a weighted average of three different time periods so that no one dominates. The oscillator is then used to provide bullish and bearish signals.
The Up/Down Ratio seeks to provide insight into the overall action in the market and is calculated by dividing the total value of upside volume by the total value of downside volume. When the indicator is above 1, there is greater buying interest than selling pressure.
Chaikin’s Volatility indicator relays information about the daily dispersion of prices. It is centered on 0 and graphically depicts times of greater and lesser volatility. It uses an Exponential Moving Average to examine the daily highs and lows of stock prices.
Volume is the number of shares traded in a given period and is used by many analysts to confirm the validity of a trend. Technical analysts like to see price gains accompanied by high volume.
Volume by Price
Volume by Price helps to visualize whether volume is weighted towards buys or sells. Typically, on periods where price gains occurred, the volume bar will appear in green. When price falls, it will be red.
Williams %R is an indicator that was developed by Larry Williams and is similar to the Stochastic Oscillator. However, the values on the Williams %R are opposite those of the Stochastic. Oversold readings occur when the %R reaches 80 and above while overbought readings appear in the range below 20.