Charting Indicators

8/7/2019 Charting Indicators

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Charting Indica tor s


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Simple and Exponential MovingAverage

Perhaps the most basic and understandable of indicators is

the Moving Average, commonly referred to as the MA, but

also called the DMA for daily moving average, and the SMA

for simple moving average. The moving average is a trend

following indicator, meaning it helps you see the underlyingpast price movement of the currency. It does this by averaging

the last (X) candles and plotting a point with that average

value. To come up with a line that follows the chart this

calculation is repeated for all the bars and a continuous line is

drawn through the candles on the chart. You must specify the

number of intervals that the moving average corresponds to

when you describe it, but the actual interval can be anything

from weeks to minutes.


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Conve ntional Trading Wis dom for

Moving Averages

The size of the Moving Average Interval

depends on what type of market trend you

are attempting to identify. Generally there are

three possible time frames recognised: Short,intermediate, or primary long term. There is

no perfect length (time frame) for a Moving

Average, different currencies have slightly

different cycles within the trading session.


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Simple Moving Average


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MACD

The MACD is one of the most famous and well-knownindicators, trailing in significance only after the movingaverage. Invented by Gerald Appel, who publishesSystems and Forecasts, MACD stands for Moving

Average Convergence Divergence, a mouthful that canbe boiled down to one thingcrossovers. MACD looksfor when moving averages crossover each other. Whattends to make MACD more complicated is that thereare a number of moving averages and they are

connected in a more abstract way than most peopleare accustomed to but its really not a big deal.


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Conve ntional Trading Wis dom forT rading the MACD

The basic rule is to sell when the MACD drops below itssignal line and buy when the MACD rises above thesignal line. In other words when the Histogram risesabove the zero line in a positive direction its a buy and

when it drops from above to below the line its a sell.This is a crossover signal. Another signal can beproduced if the MACD is viewed as an oversold oroverbought signal. When the MACD rises (shortermoving average pulls away from the longer moving

average) it is a sign the security is overextended andwill eventually return to a more normal level.


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Di Napoli MACD


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RSI

(Re lative Strength Indica tor ) Like the Momentum and Rate of Change indicators, RSI is a

momentum-based oscillator that has a range of 0 to 100. The namedoes not make very good sense, because this indicator does notcompare the strengths of currency pairs, rather it measures theinternal strength of a single currency and should have been calledInternal Strength Index or ISI. There is another indicator that

compares the strengths of two currencies but its called theComparative Strength Index. An oscillator reaches a top when itreaches a high level associated with tops in the past. Overboughtmeans too high and ready to turn down. When the RSI in a stockreaches a value above 80 it is considered overbought. An oscillatorbecomes oversold however when it reaches a level associated withbottoms in the past. Oversold means too low and ready to turn up.

When the RSI of a market or stock reaches a value below 20 it isconsidered oversold.


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Conve ntional T rading Wisdom

of and RSI

The most popular way of analyzing the RSI of achart is to look for "divergences" (e.g. when thetrend of an indicator does not agree with theprice) in which the currency is making a new high,

but the RSI is failing to surpass a previous high.This divergence becomes evidence of animpending reversal of the trend. Further whenthe RSI falls below the most recent low, its

assumed to have completed a "failure swing" inwhich case the reversal is confirmed.


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RSI (Relative Strength Indicator)


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Stochastics

Perhaps the most difficult thing about the Stochastic is knowinghow to pronounce it. Its spoken like this: "sto-kas-tik". Thedefinition of stochastic is "pertaining to or arising from chance" andin math the idea defines a process where a sequence of values isdrawn from another sequence of jointly distributed random values.In the case of charting, Stochastic is another oscillator that

compares where a currencies closing price is relative to its pricerange over a given time period. The idea is that when a currency istrending upward, prices in a given interval tend to close at theirhighs, and when its trending downward, they tend to close at theirlows. This leads to the idea that as a trend erodes or decays,currencies close further away from their highs. The stochasticoscillator then tries to project when prices are grouping near their

lows in an upward moving market or grouping near their highs in adownward market.


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Stochas tics continued

The Stochastic is made up of two moving lines, themain line is called the %K and the second line, which isa moving average of the %K, is called the %D line. Inthe Stochastic Preferences the %K defaults to anInterval of 14 and the %D defaults to a smoothing of 3.

The %K is colored blue (if you like) while the %D iscolored red (if you like) and the %D is considered themore significant of the two lines. Like the RSI indicator,the Stochastic has bands that the indicator can be inand those are called the Inside band and the Outsideband. These colors are set in the Preferences and areexpressed in actual values.


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Conve ntional T rading Wisdom

for Stochastics The Stochastic can be used several ways to help youbuy and sell currencies. First you can buy when theoscillator falls below 20, then turns and rises from thatlevel. You can in turn sell when the oscillator risesabove 80 and then falls back down. Second, you can

buy when the %K lines rises above the %D line and sellwhen the %K falls below the %D. To make this easy toview you could turn this into a colour study since boththe Stochastics have historical data. Third you can lookfor divergences, for example when prices are makingnew lows and the Stochastic is failing to past itsprevious low.


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Stochastics


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Bollinger Bands

The purpose of Bollinger Bands is to provide a relative definition of high

and low. By definition prices are high at the upper band and low at the

lower band. This definition can aid in pattern recognition and is useful in

comparing price action to the action of indicators to arrive at systematic

trading decisions.

Bollinger Bands consist of a set of three curves drawn in relation to

currency and securities prices. The middle band is a measure of the

intermediate-term trend, usually a simple moving average, that serves as

the base for the upper and lower bands. The interval between the upper

and lower bands and the middle band is determined by volatility, typically

the standard deviation of the same data that were used for the average.

The default parameters, 20 periods and two standard deviations, may be

adjusted to suit your purposes:


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Bollinger Bands cont

Two important tools are derived from the Bollinger Bands: Bandwidth, arelative measure of the width of the bands, and %b, a measure of wherethe last price is in relation to the bands.

Bandwidth = (Upper Bollinger Band - Lower Bollinger Band) / MiddleBollinger Band%b = (Last - Lower Bollinger Band) / (Upper Bollinger Band - LowerBollinger Band)

Bandwidth is most often used to quantify The Squeeze, a volatility-basedtrading opportunity. %b is used to clarify trading patterns and as an input

for trading systems.


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Bollinger Bands

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