Technical Indicator Overview
Our 4x Charts system allows the individual trader, with a click of the mouse, the ability to insert any/all of the below 44 indicators to any chart for personalized technical analysis.
Leading Indicators (outperforming) & Lagging Indicators (underperforming)
ADXR (Average Directional Index Rating) : ADXR i = (ADX i + ADX (i - n)) / 2 An oscillator that assesses the strength of current trends, and can also be used to identify potential changes in a market from trending to non-trending. Based on the spread between the +DI and -DI lines from that same system.
ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.
ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and/or moves above 20, it is a sign that the trading range is ending and a trend could be developing.
Andrews Pitchfork - this concept that uses three parallel lines drawn from three points that you select. The points selected to begin the pitchfork are usually three consecutive major peaks or troughs. The three parallel lines extending out to the right are used as normal support and resistance points.
ATR ( Average True Range ) - An indicator that measures a security's volatility, but gives no indication of price direction or duration. High ATR values indicate high volatility and may be an indication of panic selling or panic buying. Low ATR readings indicate sideways movement by the currency.
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Bollinger
- Bollinger Bands - An indicator that allows users to compare volatility and relative price levels over a period of time. It consists of three bands designed to encompass the majority of a currency pair's price action. Prices will often meet resistance at the upper band and support at the lower band.
- Simple moving average (SMA) in the middle (recommended by Bollinger as a 20-day SMA).
- An upper band (SMA plus 2 standard deviations±)
- A lower band (SMA minus 2 standard deviations±)
- ± Standard deviation is a statistical term that provides a good indication of volatility. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility. Sharp price increases (or decreases), and hence volatility, will lead to a widening of the bands.
Even though Bollinger Bands can help generate buy and sell signals, they are not designed to determine the future direction of a currency pair. The bands were designed to augment other analysis techniques and indicators. By themselves, Bollinger Bands serve two primary functions:
To identify periods of high and low volatility
To identify periods when prices are at extreme, and possibly unsustainable, levels.
CCI (Commodity Channel Index) : (CCI= Typical Price-SMA Typical Price/0.15† * Mean Deviation) - An oscillator used to identify changes and strength in trend, and find buy or sell signals. Traders and investors use the CCI to help identify price reversals, price extremes and trend strength. As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment.
Trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell signals. Because about 70 to 80 percent of the CCI values are between +100 and -100, a buy or sell signal will be in force only 20 to 30 percent of the time. When the CCI moves above +100, a currency pair is considered to be entering into a strong uptrend and a buy signal is given. The position should be closed when the CCI moves back below +100. When the CCI moves below -100, the security is considered to be in a strong downtrend and a sell signal is given. The position should be closed when the CCI moves back above -100.
† For scaling purposes set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100. The CCI fluctuates above and below zero. The percentage of CCI values that fall between +100 and -100 will depend on the number of periods used. A shorter CCI will be more volatile with a smaller percentage of values between +100 and -100. Conversely, the more periods used to calculate the CCI, the higher the percentage of values between +100 and -100.
Traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.
CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back below +100.
As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below -100 would increase the robustness of a signal based on a move back above -100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100.
Trendline breaks can be used to generate signals. Trendlines can be drawn connecting the peaks and troughs. From oversold levels, an advance above -100 and trendline breakout could be considered bullish. From overbought levels, a decline below +100 and a trendline break could be considered bearish.
Chaos
Chaos Fractal
Chaos Awesome Oscillator
Cycle Lines
DMI/ADX (Directional Movement Indicator/Average Directional Index) - An oscillator that assesses the strength of the current trend, be it up or down. It's important to determine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other. For more information and tips, refer to ADXR above. EGI
Fibinacci - The Fibonacci number sequence (1,2,3,5,8,13,21,34,55,89,144,...) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8 percent, which is a popular Fibonacci retracement‡ number. The inverse of 61.8 percent is 38.2 percent, also used as a Fibonacci retracement number. It is the ratio of the Fibonacci sequence that is important and valuable, not the actual numbers in the sequence.
‡A decline that retraces a portion of a previous advance, or an advance that retraces a portion of a previous decline. Retracements typically cover 1/3 to 2/3 of the previous move, and a retracement of more than 2/3 typically signals a trend reversal
Gann Lines
Gravity
Heikin Ashi - The heikin-ashi method (heikin means "average" or "balance" in Japanese, while ashi means "foot" or "bar") is a visual technique that eliminates irregularities from a normal chart, offering a better picture of trends and consolidations. Just by looking at a candlestick chart created with this method, you get a good idea of the market's status and its strength.
The heikin-ashi candlestick technique uses modified open-high-low-close (OHLC) values and displays them as candlesticks. The modified values are computed using these definitions:
haClose = (O+H+L+C)/4
haOpen = (haOpen (previous bar) + haClose (previous bar))/2
haHigh = Maximum(H, haOpen, haClose)
haLow = Minimum(L, haOpen, haClose)
The "open," "high," "low," and "close" referred to are of the current bar. The prefix ha- indicates the corresponding heikin-ashi modified values. I have used daily data throughout this article, so one bar represents one trading day. Depending on the trading time frame, you may employ other data, such as intraday, weekly, or monthly.
The value haOpen is always set to the midpoint of the body of the previous bar, while haClose is computed as the average price of the current bar. The modified high, haHigh, is chosen as the highest value of the set {real high (H), modified open (haOpen), and modified close (haClose)}. The same logic applies to the definition of the modified low: It is the lowest value in the set {real low (L), modified open (haOpen), and modified close (haClose)}.
Ichimoku - Ichimoku charts are trend-following indicators that identify support and resistance levels and generate trading signals in a way similar to moving averages. A key difference between moving averages and Ichimoku charts is that Ichimoku chart lines are shifted forward in time. This creates wider support and resistance zones and decreases the risk of trading false breakouts.
How are they calculated?
The Ichimoku study conveys a great deal of information on trend existence, direction, support and resistance. It comprises four main lines:
Turning Line = (Highest High + Lowest Low) / 2, for the past 9 days
Standard Line = (Highest High + Lowest Low) / 2, for the past 26 days
Leading Span 1 = (Standard Line + Turning Line) / 2, plotted 26 days ahead of today
Leading Span 2 = (Highest High + Lowest Low) / 2, for the past 52 days, plotted 26 days ahead of today
How are they used?
Much like a moving average crossover strategy, Ichimoku charts generate a buy signal when the Turning Line crosses the Standard Line from below. They generate a sell signal when the Turning Line crosses the Standard Line from above.
Additionally, the shaded area that is formed between Leading Spans 1 and 2 is known as a cloud and defines support or resistance. Clouds not only act as support or resistance, they also help to identify trend direction. When prices are above the cloud, the trend is up. Similarly, when prices are below the cloud, the trend is likely down.
Keltner Channel
Key Ind
Linear Regression
MACD ( Moving Average Convergence Divergence) - Measures the difference between two moving averages. A positive MACD indicates that the shorter (slower) EMA is trading above the longer (faster) EMA. A negative MACD indicates that the slower EMA is trading below the faster EMA. If MACD is positive and rising, then the gap between the slower EMA and the faster EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing and this would be considered bullish. If MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average is expanding. Downward momentum is accelerating and this would be considered bearish. MACD centerline crossovers occur when the faster moving average crosses the slower moving average.
The most popular formula for the "standard" MACD is the difference between a currency pair's 26-day and 12-day exponential moving averages (EMA). This is the formula that is quoted in most technical analysis books on the subject. Traders have since tinkered with these original settings to come up with a MACD that is better suited for faster or slower currency pairs. Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator, less prone to whipsaws. For our purposes in this article, the traditional 12/26 MACD will be used for our explanations.
Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line. A bullish crossover occurs when MACD moves above its 9-day EMA and a bearish crossover occurs when MACD moves below its 9-day EMA.
The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.
Momentum - A leading indicator measuring a currency pair's rate-of-change. The ongoing plot forms an oscillator that moves above and below 100. Bullish and bearish interpretations are found by looking for divergences, centerline crossovers and extreme readings.
Momentum can also refer to a particular investing or trading style. The rational is that the hot get hotter and the cold get colder. Bullish momentum players buy currency pairs that are heavily traded or that they believe will become heavily trader. Price acceleration is the same as an increase in momentum.
Moving Average - one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays. An average of data for a certain number of time periods. It "moves" because for each calculation, by using the latest x number of time periods' data. By definition, a moving average lags the market. The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
Simple Moving Average (SMA) - A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. For example: (10 + 11 + 12 + 13 + 14 = 60, 60 / 5 = 12).
The calculation is repeated for each price bar on the chart. The averages are then joined to form a smooth curving line - the moving average line. Continuing our example, if the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day simple moving average would be calculated as (11 + 12 + 13 + 14 + 15 = 65, 65 / 5 = 13).
This simple illustration highlights the fact that all moving averages are lagging indicators and will always be "behind" the price. The price of EK is trending down, but the simple moving average, which is based on the previous 10 days of data, remains above the price. If the price were rising, the SMA would most likely be below. Because moving averages are lagging indicators, they fit in the category of trend following indicators. When prices are trending, moving averages work well. However, when prices are not trending, moving averages can give misleading signals
Exponential Moving Average (EMA) - In order to reduce the lag in simple moving averages, technicians often use exponential moving averages (also called exponentially weighted moving averages). EMA's reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the specified period of the moving average. The shorter the EMA's period, the more weight that will be applied to the most recent price. For example: a 10-period exponential moving average weighs the most recent price 18.18% while a 20-period EMA weighs the most recent price 9.52%. The calculating and EMA is much harder than calculating an SMA. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average.
Exponential Moving Averages can be specified in two ways - as a percent-based EMA or as a period-based EMA. A percent-based EMA has a percentage as it's single parameter while a period-based EMA has a parameter that represents the duration of the EMA. The formula for an exponential moving average is EMA(current) = ( (Price(current) - EMA(prev) ) x Multiplier) + EMA(prev). For a percentage-based EMA, "Multiplier" is equal to the EMA's specified percentage. For a period-based EMA, "Multiplier" is equal to 2 / (1 + N) where N is the specified number of periods. For example, a 10-period EMA's Multiplier is calculated like this: 2/10 + 1= 0.1818 or 18.18%, meaning that a 10-period EMA is equivalent to an 18.18% EMA.
Note that, in theory, every previous closing price in the data set is used in the calculation of each EMA that makes up the EMA line. While the impact of older data points diminishes over time, it never fully disappears. This is true regardless of the EMA's specified period. The effects of older data diminish rapidly for shorter EMA's. than for longer ones but, again, they never completely disappear.
Oscillator - An indicator that determines when a market is in an overbought or oversold condition. When the oscillator reaches an upper extreme, the market is overbought. When the oscillator line reaches a lower extreme, the market is oversold. Oscillators can remain at extreme levels (overbought or oversold) for extended periods, but they cannot trend for a sustained period.
There are many different types of oscillators and some belong to more than one category. The breakdown of oscillator types begins with two types: centered oscillators which fluctuate above and below a center point or line, and banded oscillators which fluctuate between overbought and oversold extremes. Generally, centered oscillators are best suited for analyzing the direction of price momentum, while banded oscillators are best suited for identifying overbought and oversold levels.
Centered oscillators fluctuate above and below a central point or line. These oscillators are good for identifying the strength or weakness, or direction, of momentum behind a currency pair's move. In its purest form, momentum is positive (bullish) when a centered oscillator is trading above its center line and negative (bearish) when the oscillator is trading below its center line. MACD (Moving Averages Convergence Divergence and ROC (Rate of Change) are both examples of centered oscillators.
Banded oscillators fluctuate above and below two bands that signify extreme price levels. The lower band represents oversold readings and the upper band represents overbought readings. These set bands are based on the oscillator and change little from currency pair to currency pair, allowing the users to easily identify overbought and oversold conditions. The Relative Strength Index (RSI) and the Stochastic Oscillator are two examples of banded oscillators. (Note: The formulas and rationale behind RSI and the Stochastic Oscillator are more complicated than those for MACD and ROC.
Detrend Price Oscillator
Elliott Wave Oscillator
Ultimate Oscillator
Parabolic SAR (Stop and Reversal) - sets trailing price stops for long or short positions. Also referred to as the stop-and-reversal indicator (SAR stands for "stop and reversal"), Parabolic SAR is more popular for setting stops than for establishing direction or trend. It is recommended establishing the trend first, and then trading with Parabolic SAR in the direction of the trend. If the trend is up, buy when the indicator moves below the price. If the trend is down, sell when the indicator moves above the price.
The formula is quite complex and beyond the scope of this definition, but interpretation is relatively straightforward. The dotted lines below the price establish the trailing stop for a long position and the lines above establish the trailing stop for a short position. At the beginning of the move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop. As the move gets underway, the distance between the price and the indicator will shrink, thus making for a tighter stop-loss as the price moves in a favorable direction.
There are two variables: the step and the maximum step. The higher the step is set, the more sensitive the indicator will be to price changes. If the step is set too high, the indicator will fluctuate above and below the price too often, making interpretation difficult. The maximum step controls the adjustment of the SAR as the price moves. The lower the maximum step is set, the further the trailing stop will be from the price. Wilder recommends setting the step at .02 and the maximum step at .20.
Percent Change Pivot Lines - The point at which resistance disintegrates and the currency pair price begins to rise past the prior resistance level. This point can be considered the optimal time to buy as the bulls are gaining strength.
Price Channels - Similar to Bollinger Bands, form boundaries above and below the price line and can be used as indicators of volatility. Price channels are created by specifying a number of periods that will chart an n-period high or low around the price line. For example, a 20-day price channel will chart the level of the highest close in the last 20 days above the price line, and will chart the level of the lowest close in the last 20 days below the price line. If the most recent price is a new n-period high or low, it will be charted outside of the price channel. Price channels differ from Bollinger Bands in that they use maximum and minimum price values instead of moving averages as boundaries. Price channels can be used on daily, weekly, or monthly charts and can generate buy/sell signals at points of breakouts. When the price line breaks above or below the upper or lower price channel respectively, a new high or low becomes present. When the price breaks above a 20-day price channel, the price has reached a 20-day high and could potentially begin an uptrend. In this situation, the upper price channel breakout may signify that it is a good time to buy the currency pair. Rate of Change (ROC) - A very simple yet effective momentum oscillator that measures the percent change in price from one period to the next. Calculation compares the current price with the price n periods ago. For example, a 10 period rate of change would be calculated as follows: ROC = 100 * (Today's close - Close 10 periods ago) / (Close 10 periods ago)
The plot forms an oscillator that fluctuates above and below the zero line as the rate-of-change moves from positive to negative. The oscillator can be used as any other momentum oscillator by looking for higher lows, lower highs, positive and negative divergences, and crosses above and below zero for signals. Relative Vigor Index
Relative Strength Index (RSI) - an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a currency pair's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. Most traders use 14 periods. Calculation is conducted as follows:
To simplify the formula, the RSI has been broken down into its basic components which are the Average Gain , the Average Loss , the First RS , and the subsequent Smoothed RS's .
For a 14-period RSI, the Average Gain equals the sum total all gains divided by 14. Even if there are only 5 gains (losses), the total of those 5 gains (losses) is divided by the total number of RSI periods in the calculation (14 in this case). The Average Loss is computed in a similar manner.
Calculation of the First RS value is straightforward: divide the Average Gain by the Average Loss. All subsequent RS calculations use the previous period's Average Gain and Average Loss for smoothing purposes.
Schaff Trend Cycle (STC) - Like price movement, trends exhibit repeating high and low patterns, or cycles. This indicator runs a MACD through a reworked stochastic algorithm to produce the STC.
The Schaff Trend Cycle uses three inputs:
TC Period: Set at half the cycle length. Default: 10 periods.
MA1 Period: Shorter-term Exponential Moving Average. Default: 23.
MA2 Period: Longer-term Exponential Moving Average. Default: 50.
The Schaff Trend Cycle shows:
Direction a Trend Cycle is moving.
Tops and Bottoms within a Trend Cycle.
Trade Entry and Exit Points.
The yellow STC line in the lower chart panel identifies Trend Cycle highs and lows.
When the Schaff Trend Cycle Indicator is falling, a Trend Cycle is falling and prices tend to stabilize or follow the cycle down. When the STC is rising, the Trend Cycle is rising and prices tend to stabilize or follow the cycle higher.
Dotted buy and sell lines are drawn in the lower chart panel. The indicator rising above the buy line can be used to confirm trend cycle lows. The indicator falling below the sell line can be used to confirm trend cycle peaks.
STARC
Stochastic - A momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure). The indicator oscillates between 0 and 100, with readings below 20 considered oversold and readings above 80 considered overbought. A 14-period Stochastic Oscillator reading of 30 would indicate that the current price was 30% above the lowest low of the last 14 days and 70% below the highest high. The Stochastic Oscillator can be used like any other oscillator by looking for overbought/oversold readings, positive/negative divergences and centerline crossovers. There are two types of Stochastic Oscillators: Fast and Slow.
%K = 100 * (Recent Close- Lowest Low (n)/Highest High (n) – Lowest Low (n))
%D = 3-period moving average of %K
(n) = Number of periods used in calculation
Fast Stochastic
Slow Stochastic
Trend Line - Straight lines drawn on a chart below reaction lows (in an uptrend) or above rally peaks (in a downtrend) that determine the steepness of the current trend. The breaking of a trendline usually signals a trend reversal. Trix - A momentum indicator showing the percent rate-of-change of a triple exponentially smoothed moving average. Like other oscillators, TRIX oscillates around a zero line. Its triple exponential smoothing makes it an excellent filter of market noise and it functions well as a leading indicator of market trends.
William %R – A momentum indicator much like the Stochastic Oscillator and is especially popular for measuring overbought and oversold levels. The scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold. Typically, Williams %R is calculated using 14 periods and can be used on intraday, daily, weekly or monthly data. |
