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- Trading Indicators
Trading is mostly based on technical analysis of chart patterns for an indicator we are trading. This can be price or any other value being traded. This is especially true when dealing with Contracts for Difference as they can represent any value (price, probability, etc.). There are some common and widely used indicators that make chart analysis easier.
My most commonly used trading indicators include: Price (with Bollinger Bands) • Volume • MACD, simplified • Smoothed Stochastic • RSI • Stochastic Momentum Index • Average True Range • Moving Average (30 week or 200 days)
Price, Volume
This indicator of volatility measures selling pressure and buying pressure.
When the ATR rises there is more and more pressure and a strong volatility of
the stock.
When the ATR decreases there is less and less pressure and a low volatility.
MACD is an excellent trend indicator, and partly minimises the delays
obtained with the usage of simple moving averages.
There are 2 basic ways to use MACD:
Crossings:
A buy opportunity appears when MACD crosses upwards its signal line.
A sell signal may be triggered when MACD crosses downwards its signal line.
The divergences between the MACD histogram and the price quote identify major
reversal points and give strong buy/sell signals.
A bullish divergence occurs when stock prices make new lows while the MACD
histogram fails to make new lows.
A bearish divergence occurs when the stock price makes new highs while the MACD
histogram fails to make new highs.
The bullish and bearish divergences are more significant when the MACD is in an
overbought or oversold level.
The opportunities appearing in longer time horizons (weekly, monthly..) generate
larger price movements.
Note:
There are three common methods used to interpret the MACD:
1. Crossovers - As shown in the chart above, when the MACD falls below the
signal line, it is a bearish signal, which indicates that it may be time to
sell. Conversely, when the MACD rises above the signal line, the indicator gives
a bullish signal, which suggests that the price of the asset is likely to
experience upward momentum. Many traders wait for a confirmed cross above the
signal line before entering into a position to avoid getting getting "faked out"
or entering into a position too early, as shown by the first arrow.
2. Divergence - When the security price diverges from the MACD. It signals the
end of the current trend.
3. Dramatic rise - When the MACD rises dramatically - that is, the shorter
moving average pulls away from the longer-term moving average - it is a signal
that the security is overbought and will soon return to normal levels.
Traders also watch for a move above or below the zero line because this signals
the position of the short-term average relative to the long-term average. When
the MACD is above zero, the short-term average is above the long-term average,
which signals upward momentum. The opposite is true when the MACD is below
zero. As you can see from the chart above, the zero line often acts as an area
of support and resistance for the indicator.
Interpretation:
As in the case of MACD, it is possible to use this indicator in 2 different
ways:
A buy opportunity appears when the MACD crosses upwards its signal line.
A sell opportunity appears when the MACD crosses downwards its signal line.
The divergence between the MACD histogram and the price quote identifies
major reversal points and give strong buy/sell signals.
A bullish divergence occurs when the stock price makes new lows while the MACD
histogram fails to make new lows.
A bearish divergence occurs when the stock price makes new highs while the MACD
histogram fails to make new highs.
The bullish and bearish divergences are more significant when the MACD is in
overbought or oversold levels. The opportunity that appears in longer time
horizons (weekly, monthly...) generate larger price movements.
The SMI gives good divergence signals.
A sell signal is given when a bearish divergence appears. A bearish divergence
occurs when the stock price makes new highs while the smoothed stochastic fails
to make new highs.
A buy signal is given when a bullish divergence appears. A bullish divergence
occurs when the stock price makes new lows while the smoothed stochastic fails
to make new lows.
When %k and %d are under the 20 level, there is a bullish signal when %k
rises above %d and when the two indicators rise above the 20 level.
When %k and %d are above the 80 level, it is a bearish signal when %k falls
below %d and when the two indicators fall below the 80 level.
RSI is an overbought/oversold indicator. Buy signals occur generally when
crossing the 30 level and sell signals when crossing the 70 level.
RSI is always scaled between 0 and 100.
Note:
A trader using RSI should be aware that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals. The RSI is best used as a valuable complement to other stock-picking tools.
links: investopedia
This indicator represents the position of the close relative to the median
point whereas the traditional stochastic represents the position of the close
relative to the highest and lowest points. We use a double smoothing with an
exponential moving average so that the signals are more consistent.
The SMI gives good divergence signals.
A sell signal is given when a bearish divergence appears. A bearish divergence
occurs when the stock price makes new highs while the SMI fails to make new
highs.
A buy signal is given when a bullish divergence appears.
A bullish divergence occurs when the stock price makes new lows while the SMI
fails to make new lows.
