| Glossary of Technical
Analysis Terms The following information is provided without warranty
of any kind.
Alpha-Beta Trend Channel
The Alpha-Beta Trend Channel study uses the standard
deviation of price variation to establish two trend lines,
one above and one below the moving average of a price
field. This creates a channel (band) where the great
majority of price field values.will occur.
Arms Ease of Movement
Developed by Richard W. Arms, Jr., this analysis routine
expands on Mr. Arms' Equivolume charting tool by quantifying
the shape aspects of the plotted boxes. The purpose of
this quantifying is to determine the ease, or lack thereof,
with which a particular issue is able to move in one
direction or another. The ease with which an issue moves
is a product of a ratio between the height (trading range)
and width (volume) of the plotted box. In general, a
higher ratio results from a wider box and indicates difficulty
of movement. A lower ratio results from a narrower box
and indicates easier movement. This ratio is then related
to a comparison between today's and yesterday's trading-range
midpoint values to determine the ease of movement value
(EMV). A moving average is then applied to the EMV value
- the moving average period can be varied in order to
make the EMV flexible as a trading tool.
Average True Range
True range is the greatest of the following differences:
- Today's high to today's low
- Today's high to yesterday's close
- Today's low to yesterday's close
The range is normally the "high - low". However,
any time the value of yesterday's close is not within
the range of today's bar, rule b) or rule c) applies.
As with most other indicators, the periodic value is
summed and smoothed to create the final indicator.
Bollinger Bands
Bollinger Bands plot trading bands above and below a
simple moving average. The standard deviation of closing
prices for a period equal to the moving average employed
is used to determine the band width. This causes the
bands to tighten in quiet markets and loosen in volatile
markets. The bands can be used to determine overbought
and oversold levels, locate reversal areas, project targets
for market moves, and determine appropriate stop levels.
The bands are used in conjunction with indicators such
as RSI, MACD histogram, CCI and Rate of Change. Divergences
between Bollinger bands and other indicators show potential
action points. As a general guidline, look for buying
opportunities when prices are in the lower band, and
selling opportunities when the price activity is in the
upper band.
Candlestick Charts
Method of drawing stock (or commodity) charts which
originated in Japan. Requires the presence of Open, High,
Low and Close price data to be drawn. There are two basic
types of candels, the white body and the black body.
As with regular bar charts, a vertical line is used to
indicate the periods (normally daily) high to low. When
prices close higher than they opened a white rectangle
is drawn on top of the high-low line. This rectangle
originates at the opening price level and extends up
towards the closing price. A down day is drawn in black.
The combination of several candles results in patterns
(with names like "two crows" or "bullish
englufing patern") which give insight into future
price activity. For other Japanese charting approaches
also see Renko and Kagi charts.
Chaikin Oscillator
The Chaikin Oscillator is created by subtracting a 10
period exponential moving average of the Accumulation/Distribution
line from a 3 period moving average of the Accumulation/Distribution
Line.
Commodity Channel Index (CCI)
The CCI is a timing system that is best applied to commodity
contracts which have cyclical or seasonal tendencies.
CCI does not determine the length of cycles - it is designed
to detect when such cycles begin and end through the
use of a statistical analysis which incorporates a moving
average and a divisor reflecting both the possible and
actual trading ranges. Although developed primarily for
commodities, the CCI could conceivably be used to analyze
stocks as well.
Forumla: CCI=(M-MAVG)/(0.015xDAVG)
M=1/3 (H+L+C) H=Highest price for a period L=Lowest
price for a period C=Closing price for a period MAVG=N-period
simple moving average of M DAVG= 1/n x SUMi=1 to n (ABS(MI-MAVG))
Commodity Selection Index
The Commodity Selection Index is related to the Directional
Movement Index. Whereas the ADXR plot of the DMI is used
to rate contracts from the longer term, trend-following
point of view, the CSI is used to rate items in the more
volatile short term. The Commodity Selection Index takes
into account the ADXR from the Directional Movement Index,
the Average True Range, the value of a one cent move
as well as margin and commission requirements. The higher
the CSI rating, the more attractive an item is for trading.
Cutler's RSI
Cutler's RSI is a slight variation of Welles Wilder's
original Relative Strength Index. The RSI is a momentum
oscillator used to identify overbought and oversold conditions
by keying on specific levels, generally 30 and 70, on
a chart scaled from 0 to 100. The study can also be used
to detect the following:
- Movement which might not be as readily apparent on
the bar chart
- Failure swings above 70 or below 30 which indicate
reversals
- Support and resistance
- Divergences between RSI and price
Cutler's RSI is calculated as follows:
- RSI = 100 - (100 / ( 1 + RS ) )
-
- RS = UPAV:x / DNAV:x, and . . .
- UPAV:x = (E, period's Closes UP) / period
- DNAV:x = (z: period's Closes DOWN) / period
- A Close UP (or DOWN) = CLOSE - CLOSE previous
If the difference is positive, it is a Close UP. If
the difference is negative, the sign is changed and it
is a Close DOWN.
Demand Aggregate
The Demand Aggregate is used similarly as the Demand
Index but adds Open Interest as a consideration in the
formula. In its simplest terms, the system confirms price
trends by analyzing concurrent Volume and Open Interest
trends. For example, a rise in price, coupled with rising
Volume and Open Interest figures, is considered a bullish
indicator. Interpretations are made with respect to the
relationship between the movement of Volume, Open Interest,
and Price.
Demand Index
The Demand Index is a leading indicator which combines
volume and price data in such a way as to indicate a
change in price trend. It is designed so that at the
very least it is a coincidental indicator, never a lagging
one. The calculation of this index is relatively complex.
This analysis is based on the general observation that
volume tends to peak before prices peak, both in the
commodity and stock markets.
Detrend
Detrend is simply another interpretation of a moving
average. It provides a means of identifying underlying
cycles not apparent when the moving average is viewed
in its original form by effectively hiding the major
cycles from view. The moving average line is drawn as
a straight, horizontal basis line on the Detrend chart.
Price bars are then re-positioned along this line depending
on their relation to the moving average line.
Directional Movement Index
Directional Movement uses a rather complicated set of
calculations designed to rate the directional movement
of commodities or stocks on a scale from 0 to 100. For
those traders who employ trend-following methods, commodities
or stocks rating in the upper end of the scale would
be attractive. Those using non-trending methods, commodities
or stocks rating at the lower end of the scale should
be considered for trading. At its most basic, the Directional
Movement would affect trading in the following manner:
Long positions would be taken when the "+DI" line
crosses over the "-DI" line. Short positions
would be taken when the "-DI" line crosses
over the "+DI" line. Further components of
this index are the ADX and ADXR lines.
Elliott Wave
Elliott wave theory goes beyond traditional charting
techniques by providing an overall view of market movement
that helps explain why and where certain chart patterns
develop. The three major aspects of wave analysis are
pattern, time and ratio. The basic Elliott pattern consits
of a 5 wave uptrend followed by a three wave correction.
Each "leg" of a wave in turn consists of smaller
waves. Elliott waves can be used to successfully define
where the market currently is in relation to "the
big picture" but is usually to unreliable for short
term trading.
Fibonacci Ratios and Retracements
They can be applied both to price and time, although
it is more common to use them on prices. The most common
levels used in retracement analysis are 61.8%, 38% and
50%. When a move starts to reverse the 3 price levels
are calculated (and drawn using horizontal lines) using
a movements low to high. These retracement levels are
then interpreted as likely levels where counter moves
will stop. It is interesting to note that the Fibonacci
ratios were also known to Greek and Egyptian mathematicians.The
ratio was known as the Golden Mean and was applied in
music and architecture. A Fibonacci spiral is a logarithmic
spiral that tracks natural growth patterns.
Gann Square
The Gann Square is a mathematical system for finding
support and resistance based upon a commodity or stock's
extreme low or high price for a given period. Attainment
of a particular price level in a square tells you the
next probable price peak or valley of future movement.
The probable price levels tend to be more reliable if
they are extrapolated from Gann Square values along one
of the major axes of the Gann Square. The Gann Square
is generated from a central value, normally a all-time
or cyclical high or low. If a low is used, the numbers
are incremented by a constant amount to generate the
Gann Square. If a high is used, the numbers are decremented
during the square generation.
Haurlan Index
This indicator is calculated daily from the plurality
of NYSE advances over declines. There are three components
of the Haurlan index: Short Term, Long Term and Intermediate
Term.
1) Short Term. A 3-day exponential moving average is
taken of the net NYSE advances over declines, measuring
the short term condition of the market. When this index
moves above +100, a market short term buy signal is generated.
The signal is in effect until the market drops below
-150 at which time a sell signal is generated. The sell
signal remains in effect until the index moves above
+100 again.
2) Intermediate Term. Same as above but with a 20-day
exponential moving average. This index is considered
the most important of the three. Market buys and sells
are determined in this index by the crossing of trend
lines or support/resistance levels depending on the particular
market in question. For example, when the market is basing
out in preparation for an uptrend, a resistance level
may be set up. Once its value is determined, buy and
sell signals could be generated for that market.
3) Long Term. Same as above except for a 200-day exponential
moving average. Useful for determining trends but not
for signals.
Also can be inverted.
A reversal pattern that is one of the more common and
reliable patterns. It is comprised of a rally which
ends a fairly extensive advance. It is followed by
a reaction on less volume. This is the left shoulder.
The head is comprised of a rally up on high volume
exceeding the price of the previous rally. And the
head is comprised of a reaction down to the previous
bottom on light volume. The right shoulder is comprised
of a rally up which fails to exceed the height of the
head. It is then followed by a reaction down. this
last reaction down should break a horizontal line drawn
along the bottoms of the previous lows from the left
shoulder and head. This is the point in which the major
decline begins. The major difference between a head
and shoulder top and bottom is that the bottom should
have a large burst of activity on the breakout.
Herrick Payoff Index
This is a commodity trading tool, useful for the early
spotting of changes in price trend direction. The Payoff
Index is best used to distinguish trends that are destined
to continue from those that will most likely be short-lived.
The Payoff Index is a commodity trading tool that is
useful in the early identification of changes in the
direction of price trends. The Payoff Index frequently
helps distinguish between a rally in a trend that is
destined to continue and a significant trend change that
will provide a worthwhile trading opportunity. The Payoff
Index tends to give coincident signals within a day or
two before a significant change in price trend. This
advance action is accomplished through use of trading
volume and contract open interest to modify the price
action. Analysts have observed that volume trends often
change before a price-trend change. There are also generally
accepted relationships between the price trend and the
trend of open interest.
Kagi Chart
Like Candlestick and Renko charts, Kagi charts come
from Japan and were made popular in the USA by Steve
Nison. Kagi charts display a series of connecting vertical
lines where the thickness and direction of the lines
are dependent on the price action. If closing prices
continue to move in the direction of the prior vertical
Kagi line, then that line is extended. However, if the
closing price reverses by a pre-determined "reversal" amount,
a new Kagi line is drawn in the next column in the opposite
direction. An interesting aspect of the Kagi chart is
that when closing prices penetrate the prior column's
high or low, the thickness of the Kagi line changes.
MACD (Moving Average Convergence/Divergence)
The MACD is used to determine overbought or oversold
conditions in the market. Written for stocks and stock
indices, MACD can be used for commodities as well. The
MACD line is the difference between the long and short
exponential moving averages of the chosen item. The signal
line is an exponential moving average of the MACD line.
Signals are generated by the relationship of the two
lines. As with RSI and Stochastics, divergences between
the MACD and prices may indicate an upcoming trend reversal.
McClellan Oscillator
This index is based on New York Stock Exchange net advances
over declines. It provides a measure of such conditions
as overbought/oversold and market direction on a short-to-
intermediateterm basis. The McClellan Oscillator measures
a bear market selling climax when it registers a very
negative reading in the vicinity of -150. A sharp buying
pulse in the market would be indicated by a very positive
reading, well above 100.
Momentum
Momentum provides an analysis of changes in prices (as
opposed to changes in price levels). Changes in the rate
of ascent or descent are plotted. The Momentum line is
graphed positive or negative to a straight line representing
time. The position of the time- line is determined by
price at the beginning of the Momentum period. Traders
use this analysis to determine overbought and oversold
conditions. When a maximum positive point is reached,
the market is said to be overbought and a downward reaction
is imminent. When a maximum negative point is reached,
the market is said to be oversold and an upward reaction
is indicated.
Moving Averages
The moving average is probably the best known, and most
versatile, indicator in the analysts tool chest. It can
be used with the price of your choice (highs, closes
or whatever) and can also be applied to other indicators,
helping to smooth out volatility. As the name implies,
the Moving Average is the average of a given amount of
data. For example, a 14 day average of closing prices
is calculated by adding the last 14 closes and dividing
by 14. The result is noted on a chart. The next day the
same calculations are performed with the new result being
connected (using a solid or dotted line) to yesterday’s.
And so forth. Variations of the basic Moving Average
are the Weighted and Exponential moving averages.
Norton High/Low Indicator
The Norton High/Low Indicator uses results from the
Demand Index and the Stochastic study and is designed
to pick tops and bottoms on long term price charts. Two
lines are generated: the NLP line and the NHP line. The
system also uses level lines at -2 and -3. The NLP line
crossing -3 to the downside is the signal that a new
bottom will occur in 4-6 periods, using daily, weekly,
or mnthly data. Similarly, the NHP line crossing -3 to
the downside indicates a new top in the same time frame.
The indicator tends to be more reliable using longer
term data (weekly or monthly). When either indicator
drops below the - 3 level, a reversal may be imminent.
The reversal (or hook) is the signal to enter the market.
For greater reliability, use the Norton High/Low Indicator
together with other studies for confirmation.
Notis %V
A way to measure volatility is to measure the daily
ranges between the high and the low. Volatility is high
when the daily range is large and low when the daily
range is small. The Notis %V study contains two separate
indicators. It divides market volatility into upward
and downward components (UVLT and DVLT). Both are plotted
separately in the same window, and can be plotted as
an oscillator. The upward component is also compared
to the total volatility (UVLT + DVLT) and expressed as
a percentage; thus the name, %V. Volatility can be a
key to options trading. A good sense of market volatility
can help you avoid those frustrating times when the market
moves your way but your option still loses value.
On Balance Volume (OBV)
OBV is one of the most popular volume indicators and
was developed by Joseph Granville. Constructing an OBV
line is very simple: The total volume for each day is
assigned a positive or negative value depending on whether
prices closed higher or lower that day. A higher close
results in the volume for that day to get a positive
value, while a lower close results in negative value.
A running total is kept by adding or subtracting each
day's volume based on the direction of the close. The
direction of the OBV line is the thing to watch, not
the actual volume numbers.
Formula: OBV=SUM(C-CP)/(ABS(C-CP)xV)
C=Today's Close CP=Yesterday's Close V=Today's Volume
Parabolic (SAR)
The Parabolic is a Time/Price system for the automatic
setting of stops. The stop is both a function of price
and of time. The system allows a few days for market
reaction after a trade is initiated after which stops
begin to move in more rapid incremental daily amounts
in the direction the trade was initiated. For example,
when a long position is taken the stop will move up regardless
of price direction. However, the distance that the stop
moves up is determined by the favorable distance the
price has moved. If the price fails to move favorably
within a certain period of time, the stop reverses the
position and begins a new time period.
Point & Figure Charts
The Point and Figure (PF) charting method is a technique
that has been used for many years in analyzing the variations
in prices of stocks and commodities. There are several
types of PF charting methods. Some employ trend lines,
resistance levels, and various other additions to the
chart. In this study, we shall be concerned with only
daily reversal type charts. The principal advantage of
a PF chart is that it is much easier to read and interpret
than other types of charts. All the small, and often
confusing, price movements are eliminated, and only the
most important features of the price action remain. It
would be reasonable to think of this method as a filter
that (hopefully) allows only meaningful information to
enter the chart and ultimately the decision process.
Two basic symbols are used:
X Denotes the continuance of an increase in price
and is always "stacked" in the vertical direction.
O Denotes the continuance of a decrease in price
and is always "stacked" in the vertical direction.
While prices are rising X's are used. When falling,
O's are used. They are always plotted on rectangular
grid graph paper such that columns of X's and O's alternate.
A Point and Figure chart is characterized by the specification
of two parameters: box size and reversal number. The
box size dictates the price range associated with a particular
box (cubical area within the grid), while the reversal
number specifies the conditions which terminate a column
of X's and begin a column of O's and vice-versa.
Price Patterns
Price Patterns are formations which appear on commodity
and stock charts which have shown to have a certain degree
of predictive value. Some of the most common patterns
include: Head & Shoulders (bearish), Inverse Head & Shoulders
(bullish), Double Top (bearish), Double Bottom (bullish),
Triangles, Flags and Pennants (can be bullish or bearish
depending on the prevailing trend).
Randow Walk Index
This indicator is defined as the ratio of an acutal
price move to the expected random walk. If the move is
greater than a random walk, and thus a trend is present,
its index will be larger that 1.0
Rate of Change
Rate of Change is used to monitor momentum by making
direct comparisons between current and past prices on
a continual basis. The results can be used to determine
the strength of price trends. Note: This study is the
same as the Momentum except that Momentum uses subtraction
in its calculations while Rate of Change uses division.
The resulting lines of these two studies operated over
the same data will look exactly the same - only the scale
values will differ.
RSI - Relative Strength Index
This indicator was developed by Welles Wilder Jr. Relative
Strength is often used to identify price tops and bottoms
by keying on specific levels (usually "30" and "70")
on the RSI chart which is scaled from from 0-100. The
study is also useful to detect the following:
- Movement which might not be as readily apparent on
the bar chart
- Failure swings above 70 or below 30 which can warn
of coming reversals
- Support and resistance levels
- Divergence between the RSI and price which is often
a useful reversal indicator
The Relative Strength Index requires a certain amount
of lead-up time in order to operate successfully.The
formula for calculating the RSI is:
- rsi=100-(100/1-rs)
- rs= average of x day’s up closes divided by
average of x day’s down closes
Renko Chart
The Renko charting method probably got its name from "renga",
which is the Japanese word for bricks. Introduced by
Steve Nison, a well-known authority on the Candlestick
charting method, Renko charts are similar to Three Line
Break charts except that in a Renko chart, a line is
drawn in the direction of the prior move only if a fixed
amount (i.e., the box size) has been exceeded. The bricks
are always equal in size. Example: With a five unit Renko
chart, a 20 point rally is displayed as four equally
sized, five unit high Renko bricks.
Stochastic
The Stochastic Indicator is based on the observation
that as prices increase, closing prices tend to accumulate
ever closer to the highs for the period. Conversely,
as prices decrease, closing prices tend to accumulate
ever closer to the lows for the period. Trading decisions
are made with respect to divergence between % of "D" (one
of the two lines generated by the study) and the item's
price. For example, when a commodity or stock makes a
high, reacts, and subsequently moves to a higher high
while corresponding peaks on the % of "D" line
make a high and then a lower high, a bearish divergence
is indicated. When a commodity or stock has established
a new low, reacts, and moves to a lower low while the
corresponding low points on the % of "D" line
make a low and then a higher low, a bullish divergence
is indicated. Traders act upon this divergence when the
other line generated by the study (K) crosses on the
right-hand side of the peak of the % of "D" line
in the case of a top, or on the right-hand side of the
low point of the % of "D" line in the case
of a bottom. Two variations of the Stochastic Indicator
are in use: Regular and Slow. When the Regular plot of
the Stochastic too choppy, the "Slow" version
can often clarify the results by reducing the sensitivity
of the calculations. The formula is:
Note: 5 Days is the most commonly used value for %K
%K=100 {(C-L5)/(H5-L5)}
The %D line is a 3 day smoothed version of the %K line
%D=100(H3/L3) where H3 is the 3 day sum of (C-L5) and L3 is the 3 day
sum of (H5-L5)
Stoller STARC Bands
STARC bands create a channel surrounding a simple moving
average. The width of the created channel varies with
a period of the average range; thus the name ('ST' for
Stoller, plus 'ARC' for Average Range Channel). STARC
Bands, in a fashion similar to Bollinger Bands, will
tighten in steady markets and loosen in volatile markets.
However, rather than being based on closes, the STARC
Bands are based on the average true range, thus giving
a more in depth picture of the market volatility. While
the penetration of a Bollinger Band may indicate a continuation
of a price move, the STARC Bands define upper and lower
limits for normal price action.
Swing Index
The Swing Index (primarily for use with commodity trading)
attempts to determine real market direction, and changes
in direction, by making use of the most significant comparisons
between the results (Open-High-Low-Close) of the current
and previous days' trading.
Time Cycles
Some analysts believe that price analysis alone only
offers half the information needed for successful trading.
The other part is time, more exactly time cycles, which
give actual insight into understanding the movements
of markets. Common cycles are the seasonal cycles apparent
in many commodity markets, but cylces can be detected
on intra-day charts as well.
Trading Index
This index (also kown as the "Arms" index,
or "TRIN") measures the relative strength of
volume associated with advancing stocks against the strength
of volume associated with declining stocks. When used
as a short term indicator, readings below 1.0 are considered
bullish while readings above 1.0 are considered bearish.
An extreme bearish reading would be 1.5 or higher; an
extreme bullish reading would be .5 and lower. Readings
of 2.0 or .3 would be considered "climactic".
For the intermediate term, a bearish sign is an index
over 1.0, bullish under 1.0. For the long term, the Trading
Index can be viewed as an overbought / oversold indicator.
Trix
Single linear exponential smoothing was developed in
the early 1950s as a means of prediction along a straight
line whose slope was based on previous data. The Triple
Exponential Smoothing Oscillator (Trix) has now been
developed to act on trends of a higher order than linear.
Trix uses a one-day momentum of a triple exponential
smoothed price series to produce an indicator which is
cycle dependent. Changes in the Trix direction are less
prone to whipsaws than standard cycle-momentum indicators.
The period is chosen to filter out any insignificant
cycles shorter than the period. Fourier Analysis or visual
observation may be used to find the proper cycle length
of a given market. Raising the number of days will remove
more small cycles and smooth out the oscillator, but
at the loss of sensitivity. The more smoothing that is
applied to the data, the more of a lag in the oscillator,
but not nearly the lag of a normal moving average.
Volume Accumulation
This volume indicator addresses some of On Balance Volume's
shortcomings and was developed by Marc Chaikin. Where
OBV assigns all of a day's volume a positive or negative
value, Volume Accumulation counts only a percentage of
the volume as positive or negative, depending on where
the close is in relation to the average price of the
day. The only time the entire day's volume is assigned
a positive value is when the close is the same as the
day's high. The opposite applies for a close at the day's
low.
Volatility
This analysis is based on the idea that stocks bottom
from "panic" selling, after which a rebound
is imminent. One way of measuring this phenomenon is
to observe a widening range between high and low prices
each day. In general a progressively wider range, observed
over a relatively short period of time, can indicate
that a bottom is near. Price tops are generally reached
at a more leisurely pace and can be characterized by
a narrowing of the price range. This measure of the trading
range takes place over a specified period in order to
determine whether or not an issue is being "dumped" and
is approaching a bottom. A pre-requisite to a valid bottom
is an increase in the volatility line above the reference
line. In a similar manner, an indication of an imminent
top would be a decrease in the volatility line below
the reference line. As long as volatility is rising,
in all probability a stock will not approach a top. It
should be noted that this study should be used in conjunction
with trend following analyses and momentum oscillators
for confirmation and accuracy. |
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