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Alligator

Introduction

"Most of the time the market remains stationary. Only for some 15–30% of time the market generates trends, and traders who are not located in the exchange itself derive most of their profits from the trends. My Grandfather used to repeat: "Even a blind chicken will find its corns, if it is always fed at the same time". We call the trade on the trend "a blind chicken market". It took us years, but we have produced an indicator, that lets us always keep our powder dry until we reach the blind chicken market"

Alligator

In principle, Alligator Technical Indicator is a combination of Balance Lines (Moving Averages) that use fractal geometry and nonlinear dynamics.

  • The blue line (Alligator’s Jaw) is the Balance Line for the timeframe that was used to build the chart (13-period Smoothed Moving Average, moved into the future by 8 bars);

  • The red line (Alligator’s Teeth) is the Balance Line for the value timeframe of one level lower (8-period Smoothed Moving Average, moved by 5 bars into the future);

  • The green line (Alligator’s Lips) is the Balance Line for the value timeframe, one more level lower (5-period Smoothed Moving Average, moved by 3 bars into the future).

Lips, Teeth and Jaw of the Alligator show the interaction of different time periods. As clear trends can be seen only 15 to 30 per cent of the time, it is essential to follow them and refrain from working on markets that fluctuate only within certain price periods.

When the Jaw, the Teeth and the Lips are closed or intertwined, it means the Alligator is going to sleep or is asleep already. As it sleeps, it gets hungrier and hungrier — the longer it will sleep, the hungrier it will wake up. The first thing it does after it wakes up is to open its mouth and yawn. Then the smell of food comes to its nostrils: flesh of a bull or flesh of a bear, and the Alligator starts to hunt it. Having eaten enough to feel quite full, the Alligator starts to lose the interest to the food/price (Balance Lines join together) — this is the time to fix the profit.

If all three lines are intertwined, the Alligator is asleep and the market is range-bound. The longer it sleeps, the hungrier it gets. When it wakes up from a long sleep it chases the price much farther, therefore price movements are much stronger. When the Alligator is asleep, stay square. Once the Alligator wakes up, it opens its mouth (Balance lines diverge) and starts hunting. Having eaten enough, it goes to sleep again (Balance Lines converge), so it’s time to fix profits.

If the Alligator is not asleep, the market is either up-trending or down-trending:

  • if the price is above the Alligator’s mouth then it’s an uptrend;
  • if the price is below the Alligator’s mouth then it’s a downtrend.

The Alligator also helps to determine the character of the Elliot waves:

  • if the price is outside the Alligator’s mouth the wave is impulsive;
  • if the price is inside the Alligator’s mouth the wave is corrective.

 

Main Parameters

  • Jaw period: Blue line averaging period (Alligator’s Jaw), default is 13
  • Jaw shift: Blue line shift relative to the chart, default is 8
  • Teeth period: Red line averaging period (Alligator’s Teeth), default is 8
  • Teeth shift: Red line shift relative to the chart, default is 5
  • Lips period: Green line averaging period (Alligator’s Lips), default is 5
  • Lips shift: Green line shift relative to the chart, default is 3
  • MA method:
    • Simple
    • Exponential
    • Smoothed, (default option)
    • Linear weighted
  • Apply to: Applied price
    • Close
    • Open
    • High
    • Low
    • Median Price, (high+low)/2, (default option)
    • Typical Price, (high+low+close)/3
    • Weighted Close, (high+low+close+close)/4

Awesome Oscillator (AO)

Introduction

The Awesome Oscillator is a histogram showing the market momentum of a recent number of periods compared to the momentum of a larger number of previous periods (by default, 5 vs. 34 periods).

This indicator is intended to show what’s happening to the market for the current period (compared to the momentum of a longer period), and some traders use its signals for buying and selling decisions.

Awesome Oscillator (AO) is simply the difference between the 34-period and 5-period simple moving averages of the bar’s midpoints (H+L)/2. Awesome Oscillator (AO) is displayed on the chart as a histogram:

Awesome Oscillator (AO)

 

Calculation

AO is a 34-period simple moving average, plotted through the central points of the bars (H+L)/2, and subtracted from the 5-period simple moving average, graphed across the central points of the bars (H+L)/2.

MEDIAN PRICE = (HIGH+LOW)/2 
AO = SMA(MEDIAN PRICE, 5)-SMA(MEDIAN PRICE, 34)

Where:

 

Signals to buy

Some traders interpret the following trends as signals to buy

  • Saucer – Occurs if (and only if) the bar chart is above the 0-line, and the bar chart has reversed its direction from downward to upward (concave upwards). The saucer occurs if, in any three columns, the second column is lower than the first and colored red and the third column is higher than the second and colored green.
  • Nought line crossing – Occurs when the bar chart crosses the 0-line in a positive direction. That is, it passes from the area of negative values to that of positive values.
  • Two pikes – Occurs when a pike below the 0-line pointing downwards (the lowest minimum) is followed by another downward-pointing pike that is somewhat higher (closer to the 0-line). This is the only signal to buy that falls below the 0-line.

AO-signals

Signals to sell

Some traders use the reverse of the signals to buy as signals to sell. That is:

  • The saucer signal reversed (concave downwards) and below the zero-line.
  • The nought line crossing on the decrease – the first column over the 0-line, the second under it.
  • The two pikes signals above the 0-line and the pikes pointing upwards (the first one higher than the second).

Williams’ Percent Range (%R)

Introduction

Developed by Larry Williams, Williams %R is a momentum indicator that is the inverse of the Fast Stochastic Oscillator. Also referred to as %R, Williams %R reflects the level of the close relative to the highest high for the look-back period. In contrast, the Stochastic Oscillator reflects the level of the close relative to the lowest low. %R corrects for the inversion by multiplying the raw value by -100. As a result, the Fast Stochastic Oscillator and Williams %R produce the exact same lines, only the scaling is different. Williams %R oscillates from 0 to -100. Readings from 0 to -20 are considered overbought. Readings from -80 to -100 are considered oversold. Unsurprisingly, signals derived from the Stochastic Oscillator are also applicable to Williams %R.

Williams’ Percent Range (%R)

Williams’ Percent Range Technical Indicator (%R) is a dynamic technical indicator, which determines whether the market is overbought/oversold. Williams’ %R is very similar to the Stochastic Oscillator. The only difference is that %R has an upside down scale and the Stochastic Oscillator has internal smoothing.

To show the indicator in this upside down fashion, one places a minus symbol before the Williams Percent Range values (for example -30%). One should ignore the minus symbol when conducting the analysis.

Indicator values ranging between 80 and 100% indicate that the market is oversold. Indicator values ranging between 0 and 20% indicate that the market is overbought.

As with all overbought/oversold indicators, it is best to wait for the security’s price to change direction before placing your trades. For example, if an overbought/oversold indicator is showing an overbought condition, it is wise to wait for the security’s price to turn down before selling the security.

An interesting phenomenon of the Williams Percent Range indicator is its uncanny ability to anticipate a reversal in the underlying security’s price. The indicator almost always forms a peak and turns down a few days before the security’s price peaks and turns down. Likewise, Williams Percent Range usually creates a trough and turns up a few days before the security’s price turns up.

 

Calculation

Below is the formula of the %R indicator calculation, which is very similar to the Stochastic Oscillator formula:

%R = (HIGH(i-n)-CLOSE)/(HIGH(i-n)-LOW(i-n))*100

Where:

  • CLOSE — is today’s closing price;
  • HIGH(i-n) — is the highest high over a number (n) of previous periods;
  • LOW(i-n) — is the lowest low over a number (n) of previous periods.

 

Interpretation

As with the Stochastic Oscillator, Williams %R reflects the level of the close relative to the high-low range over a given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high-low range is 10 (110 – 100), which is the denominator in the %R formula. The highest high less the close equals 2 (110 – 108), which is the numerator. 2 divided by 10 equals .20. Multiply this number by -100 to get -20 for %R. Williams %R would equal -30 if the close was 103 (.30 x -100).

The centerline, -50, is an important level to watch. Williams %R moves between 0 and -100, which makes -50 the midpoint. Think of it as the 50 yard line in football. The offense has a higher chance of scoring when it crosses the 50 yard line. The defense has an edge as long as it prevents the offense from crossing the 50 yard line. A Williams %R cross above -50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that the cup is half full. Conversely, a cross below -50 means prices are trading in the bottom half of the given look-back period. This suggests that the cup is half empty.

Low readings (below -80) indicate that price is near its low for the given time period. High readings (above -20) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. Williams %R equals -9 when the close was at the top of the range. The Williams %R equals -87 when the close was near the bottom of the range. The close equals -43 when the close was in the middle of the range.

 

Overbought Oversold

As a bound oscillator, Williams %R makes it easy to identify overbought and oversold levels. The oscillator ranges from 0 to -100. No matter how fast a security advances or declines, Williams %R will always fluctuate within this range. Traditional settings use -20 as the overbought threshold and -80 as the oversold threshold. These levels can be adjusted to suit analytical needs and security characteristics. Readings above -20 for the 14-day Williams %R would indicate that the underlying security was trading near the top of its 14-day high-low range. Readings below -80 occur when a security is trading at the low end of its high-low range.

Before looking at some chart examples, it is important to note that overbought readings are not necessarily bearish. Securities can become overbought and remain overbought during a strong uptrend. Closing levels that are consistently near the top of the range indicate sustained buying pressure. In a similar vein, oversold readings are not necessarily bullish. Securities can also become oversold and remain oversold during a strong downtrend. Closing levels consistently near the bottom of the range indicate sustained selling pressure.

The chart below shows Arch Coal (ACI) with 14-day Williams %R hitting overbought and oversold levels on a regular basis. The red dotted lines mark a move below -50 that occurs after an overbought reading. The green dotted lines mark a move above -50 that occurs after an oversold reading. As noted above, overbought is not necessarily bearish and oversold is not necessarily bullish. Top and bottom pickers can act when overbought or oversold, but it is often prudent to wait for a confirmation move. A move below -50 confirms a downturn after an overbought reading. A move above -50 confirms an upturn after an oversold reading.

WPR-Overbought-Oversold

 

Momentum Failure

The failure to move back into overbought or oversold territory signals a change in momentum that can foreshadow a significant price move. The ability to consistently move above -20 is a show of strength. After all, it takes buying pressure to push %R into overbought territory. Once a security shows strength by pushing into overbought territory more than once, a subsequent failure to exceed this level shows weakening momentum that can foreshadow a decline.

The chart below shows Cisco with 14-day %R. The stock was strong with numerous overbought readings from February to April. Even after the plunge below -80 in early April, %R surged back above -20 to show continuing strength. After a few more weeks of overbought readings, %R plunged to oversold levels in early May. This deep plunge showed strong selling pressure. The subsequent recovery fell short of -20 and did not reach overbought territory. This provided the second sign of weakness. After failing below -20, the decline below -50 signaled a downturn in momentum and the stock declined rather sharply. Another failure just below -20 in mid June also resulted in a sharp decline.

WPR-Momentum-Failure

The chart below shows TJX Companies (TJX) with 28-day Williams %R. Chartists can adjust the look-back period to suite their analysis objectives. A longer time frame makes the indicator less sensitive. After becoming overbought in October, the indicator moved lower and became oversold twice in December. The January surge carried %R into overbought territory and the stock broke channel resistance. These were promising signs. On the subsequent pullback, %R held above -80 and did not become oversold. This showed underlying strength. The subsequent move above -50 foreshadowed a sharp advance over the next few months.

WPR-Momentum-Failure-chart2

 

Conclusions

Williams %R is a momentum oscillator that measures the level of the close relative to the high-low range over a given period of time. In addition to the signals mentioned above, chartists can use %R to gauge the six month trend for a security. 125-day %R covers around 6 months. Prices are above their 6-month average when %R is above -50, which is consistent with an uptrend. Readings below -50 are consistent with a downtrend. In this regard, %R can be used to help define the bigger trend (six months). Like all technical indicators, it is important to use the Williams %R in conjunction with other technical analysis tools. Volume, chart patterns and breakouts can be used to confirm or refute signals produced by Williams %R.

WPR-Conclusions

 

Main Parameters

  • Period: Number of periods for calculation, default is 14

Ichimoku Kinko Hyo, Ichimoku Clouds

Introduction

The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a versatile indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals. Ichimoku Kinko Hyo translates into "one look equilibrium chart". With one look, chartists can identify the trend and look for potential signals within that trend. The indicator was developed by Goichi Hosoda, a journalist, and published in his 1969 book. Even though the Ichimoku Cloud may seem complicated when viewed on the price chart, it is really a straight forward indicator that is very usable. It was, after all, created by a journalist, not a rocket scientist! Moreover, the concepts are easy to understand and the signals are well-defined.

Ichimoku Kinko Hyo Technical Indicator is predefined to characterize the market Trend, Support and Resistance Levels, and to generate signals of buying and selling. This indicator works best at weekly and daily charts.

Ichimoku-line

When defining the dimension of parameters, four time intervals of different length are used. The values of individual lines composing this indicator are based on these intervals:

  • Tenkan-sen shows the average price value during the first time interval defined as the sum of maximum and minimum within this time, divided by two;

  • Kijun-sen shows the average price value during the second time interval;

  • Senkou Span A shows the middle of the distance between two previous lines shifted forwards by the value of the second time interval;

  • Senkou Span B shows the average price value during the third time interval shifted forwards by the value of the second time interval.

  • Chinkou Span shows the closing price of the current candle shifted backwards by the value of the second time interval.

 

The distance between the Senkou lines is hatched with another color and called "cloud". If the price is between these lines, the market should be considered as non-trend, and then the cloud margins form the support and resistance levels:

  • If the price is above the cloud, its upper line forms the first support level, and the second line forms the second support level;

  • If the price is below cloud, the lower line forms the first resistance level, and the upper one forms the second level;

  • If the Chinkou Span line traverses the price chart in the bottom-up direction it is signal to buy. If the Chinkou Span line traverses the price chart in the top-down direction it is signal to sell.

 

Kijun-sen is used as an indicator of the market movement. If the price is higher than this indicator, the prices will probably continue to increase. When the price traverses this line the further trend changing is possible.

Another kind of using the Kijun-sen is giving signals. Signal to buy is generated when the Tenkan-sen line traverses the Kijun-sen in the bottom-up direction. Top-down direction is the signal to sell.

Tenkan-sen is used as an indicator of the market trend. If this line increases or decreases, the trend exists. When it goes horizontally, it means that the market has come into the channel.

 

Analyzing the Cloud

The Cloud (Kumo) is the most prominent feature of the Ichimoku Cloud plots. The Leading Span A (green) and Leading Span B (red) form the Cloud. The Leading Span A is the average of the Conversion Line and the Base Line. Because the Conversion Line and Base Line are calculated with 9 and 26 periods, respectively, the green Cloud boundary moves faster than the red Cloud boundary, which is the average of the 52-day high and the 52-day low. It is the same principle with moving averages. Shorter moving averages are more sensitive and faster than longer moving averages.

There are two ways to identify the overall trend using the Cloud. First, the trend is up when prices are above the Cloud, down when prices are below the Cloud and flat when prices are in the Cloud. Second, the uptrend is strengthened when the Leading Span A (green cloud line) is rising and above the Leading Span B (red cloud line). This situation produces a green Cloud. Conversely, a downtrend is reinforced when the Leading Span A (green cloud line) is falling and below the Leading Span B (red cloud line). This situation produces a red Cloud. Because the Cloud is shifted forward 26 days, it also provides a glimpse of future support or resistance.

The chart below  shows IBM with a focus on the uptrend and the Cloud. First, notice that IBM was in an uptrend from June to January as it traded above the Cloud. Second, notice how the Cloud offered support in July, early October and early November. Third, notice how the Cloud provides a glimpse of future resistance. Remember, the entire Cloud is shifted forward 26 days. This means it is plotted 26 days ahead of the last price point to indicate future support or resistance.

Ichimoku-Analyzing-chart1

 

Trend and Signals

Price, the Conversion Line and the Base Line are used to identify faster, and more frequent, signals. It is important to remember that bullish signals are reinforced when prices are above the cloud and the cloud is green. Bearish signals are reinforced when prices are below the cloud and the cloud is red. In other words, bullish signals are preferred when the bigger trend is up (prices above green cloud), while bearish signals are preferred when the bigger trend is down (prices are below red cloud). This is the essence of trading in the direction of the bigger trend. Signals that are counter to the existing trend are deemed weaker. Short-term bullish signals within a long-term downtrend and short-term bearish signals within a long-term uptrend are less robust.

 

Conversion-Base Line Signals

The chart below shows Kimberly Clark (KMB) producing two bullish signals within an uptrend. First, the trend was up because the stock was trading above the Cloud and the Cloud was green. The Conversion Line dipped below the Base Line for a few days in late June to enable the setup. A bullish crossover signal was triggered when the Conversion Line moved back above the Base Line in July. The second signal occurred as the stock moved towards Cloud support. The Conversion Line moved below the Base Line in September to enable the setup. Another bullish crossover signal was triggered when the Conversion Line moved back above the Base Line in October. Sometimes it is hard to determine exact Conversion Line and Base Line levels on the price chart. For reference, these numbers are displayed in the upper left hand corner of each Sharpchart. As of the January 8 close, the Conversion Line was 62.62 (blue) and the Base Line was 63.71 (red).

Ichimoku-Conversion-Base-Line-Signals

 

Price-Base Line Signals

The chart below shows Disney producing two bullish signals within an uptrend. With the stock trading above the green cloud, prices moved below the Base Line (red) to enable the setup. This move represented a short-term oversold situation within a bigger uptrend. The pullback ended when prices moved back above the Base Line to trigger the bullish signal.

Ichimoku-Price-Base-Line-Signals

 

Signal Summary

This article features four bullish and four bearish signals derived from the Ichimoku Cloud plots. The trend-following signals focus on the Cloud, while the momentum signals focus on the Turning and Base Lines. In general, movements above or below the cloud define the overall trend. Within that trend, the Cloud changes color as the trend ebbs and flows. Once the trend is identified, the Conversion Line and Base Line act similar to MACD for signal generation. And finally, simple price movements above or below the Base Line can be used to generate signals.

Bullish Signals:

  • Price moves above Cloud (trend)
  • Cloud turns from red to green (ebb-flow within trend)
  • Price Moves above the Base Line (momentum)
  • Conversion Line moves above Base Line (momentum)

Bearish Signals:

  • Price moves below Cloud (trend)
  • Cloud turns from green to red (ebb-flow within trend)
  • Price Moves below Base Line (momentum)
  • Conversion Line moves below Base Line (momentum)

 

Conclusions

The Ichimoku Cloud is a comprehensive indicator designed to produce clear signals. Chartists can first determine the trend by using the Cloud. Once the trend is established, appropriate signals can be determined using the price plot, Conversion Line and Base Line. The classic signal is to look for the Conversion Line to cross the Base Line. While this signal can be effective, it can also be rare in a strong trend. More signals can be found by looking for price to cross the Base Line (of even the Conversion Line).

It is important to look for signals in the direction of the bigger trend. With the Cloud offering support in an uptrend, traders should also be on alert for bullish signals when prices approach the Cloud on a pullback or consolidation. Conversely, in a bigger downtrend, traders should be on alert for bearish signals when prices approach the Cloud on an oversold bounce or consolidation.

The Ichimoku Cloud can also be used in conjunction with other indicators. Traders can identify the trend using the Cloud and then use classic momentum oscillators to identify overbought or oversold conditions.

 

Main Parameters

  • Mode:
    • Tenkan-sen
    • Kijun-sen
    • Senkou Span A(Up Kumo)
    • Senkou Span B(Down Kumo)
    • Chinkou Span
  • Tenkan-sen: Tenkan Sen averaging period, default is 9
  • kijun-sen: Kijun Sen averaging period, default is 26
  • Senkou Span B: Senkou SpanB averaging period, default is 52

Force Index

Introduction

The Force Index is an indicator that uses price and volume to assess the power behind a move or identify possible turning points. Developed by Alexander Elder, the Force Index was introduced in his classic book, Trading for a Living. According to Elder, there are three essential elements to a stock’s price movement: direction, extent and volume. The Force Index combines all three as an oscillator that fluctuates in positive and negative territory as the balance of power shifts. The Force Index can be used to reinforce the overall trend, identify playable corrections or foreshadow reversals with divergences.

This index measures the Bulls Power at each increase, and the Bulls Power at each decrease. It connects the basic elements of market information: price trend, its drops, and volumes of transactions. This index can be used as it is, but it is better to approximate it with the help of Moving Average. Approximation with the help a short moving average (the author proposes to use 2 intervals) contributes to finding the best opportunity to open and close positions. If the approximations is made with long moving average (period 13), the index shows the trends and their changes.

Force Index

  • It is better to buy when the forces become minus (fall below zero) in the period of indicator increasing tendency;
  • The force index signalizes the continuation of the increasing tendency when it increases to the new peak;
  • The signal to sell comes when the index becomes positive during the decreasing tendency;
  • The force index signalizes the Bears Power and continuation of the decreasing tendency when the index falls to the new trough;
  • If price changes do not correlate to the corresponding changes in volume, the force indicator stays on one level, which tells you the trend is going to change soon.

 

Calculation

The force of every market movement is characterized by its direction, scale and volume. If the closing price of the current bar is higher than the preceding bar, the force is positive. If the current closing price if lower than the preceding one, the force is negative. The greater the difference in prices is, the greater the force is. The greater the transaction volume is, the greater the force is.

FORCE INDEX (i) = VOLUME (i) * ((MA (ApPRICE, N, i) - MA (ApPRICE, N, i-1))

Where:

  • FORCE INDEX (i) — Force Index of the current bar;
  • VOLUME (i) — volume of the current bar;
  • MA (ApPRICE, N, i) — any Moving Average of the current bar for N period: Simple, Exponential, Weighted or Smoothed;
  • ApPRICE — applied price;
  • N — period of the smoothing;
  • MA (ApPRICE, N, i-1) — any Moving Average of the previous bar.

 

Interpretation

As noted above, there are three elements to the Force Index. First, there is either a positive or negative price change. A positive price change signals that buyers were stronger than sellers, while a negative price change signals that sellers were stronger than buyers. Second, there is the extent of the price change, which is simply the current close less the prior close. The "extent" shows us just how far prices moved. A big advance shows strong buying pressure, while a big decline shows strong selling pressure. The third and final element is volume, which, according to Elder, measures commitment. Just how committed are the buyers and sellers? A big advance on heavy volume shows a strong commitment from buyers. Likewise, a big decline on heavy volume shows a strong commitment from sellers. The Force Index quantifies these three elements into one indicator that measures buying and selling pressure.

 

Trend Identification

The Force Index can be used to reinforce or determine the trend. The trend in question, short-term, medium-term or long-term, depends on the Force Index parameters. While the default Force Index parameter is 13, chartists can use a higher number for more smoothing or a lower number for less smoothing. The chart below shows Home Depot with a 100-day Force Index and a 13-day Force Index. Notice how the 13-day Force Index is more volatile and jagged. The 100-day Force Index is smoother and crosses the zero line fewer times. In this regard, the 100-day Force Index can be used to determine the medium or long-term trend. Notice how a resistance breakout on the price chart corresponds to a resistance breakout on the 100-day Force Index. The 100-day Force Index moved into positive territory and broke resistance in mid February. The indicator remained positive during the entire uptrend and turned negative in mid May. The early June support break on the price chart was confirmed with a support break in the Force Index.

ForceIndex-trend-identification

 

Divergences

Bullish and bearish divergence can alert chartists of a potential trend change. Divergences are classic signals associate with oscillators. A bullish divergence forms when the indicator moves higher as the security moves lower. The indicator is not confirming weakness in price and this can foreshadow a bullish trend reversal. A bearish divergence forms when the indicator moves lower as the security moves higher. Even though the security is moving higher, the indicator shows underlying weakness by moving lower. This discrepancy can foreshadow a bearish trend reversal.

Confirmation is an important part of bullish and bearish divergences. Even though the divergences signal something is amiss, confirmation from the indicator or price chart is needed. A bullish divergence can be confirmed with the Force Index moving into positive territory or a resistance breakout on the price chart. A bearish divergence can be confirmed with the Force Index moving into negative territory or a support break on the price chart. Chartists can also use candlesticks, moving average crosses, pattern breaks and other forms of technical analysis for confirmation.

ForceIndex-Divergences

The chart above shows Best Buy (BBY) with the Force Index (39) sporting a series of divergences. The green lines show bullish divergences, while the red lines show bearish divergences. A bullish divergence is confirmed when the Force Index (39) crosses into positive territory (green dotted lines). A bearish divergence is confirmed when the Force Index (39) crosses into negative territory (red dotted lines). Chartists can also use trendline breaks on the price chart for confirmation.

This chart shows two versions of the Force Index. The Force Index (13) captures short-term fluctuations and is more sensitive. The Force Index (39) captures medium-term fluctuations and is smoother. The 39-day Force Index produces fewer zero line crossovers and these crossovers last longer. There is no right or wrong answer for these settings. It depends on trading objectives, time horizon and analytical style.

 

Identifying Corrections

The Force Index can be used in conjunction with a trend following indicator to identify short-term corrections within that trend. A pullback from overbought levels represents a short-term correction within an uptrend. An oversold bounce represents a short-term correction within a downtrend. Yes, corrections can be up or down, it depends on the direction of the bigger trend. Alexander Elder recommends using a 22-day EMA for trend identification and a 2-day Force Index to identify corrections. The trend is up when the 22-day EMA is moving higher, which means the 2-day Force Index would be used to identify short-term pullbacks for buying. The trend is down when the 22-day EMA is moving lower, which means the 2-day Force Index would be used to identify short-term bounces for selling. This is an aggressive strategy best suiting for active traders. The timeframe can be adjusted by using a longer moving average and timeframe for the Force Index. For example, medium-term traders might experiment with a 100-day EMA and 10-day Force Index.

There are two-schools of thought regarding the correction play. Traders can either act as soon as the correction is evident or act when there is evidence the correction has ended. Let’s look at an example with the 22-day EMA and 2-day Force Index. Keep in mind that this is designed to identify very short corrections within a bigger trend. The chart below shows Texas Instruments (TXN) with the 22-day EMA turning up in mid September.

ForceIndex-Identifying-Corrections

With the 22-day EMA rising, traders are looking for very short-term pullbacks when the 2-day Force Index turns negative. Traders can act when the Force Index turns negative or wait for it to move back into positive territory. Acting when negative may improve the reward-to-risk ratio, but the correction could extend a few more days. Waiting for the Force Index to turn positive again shows some strength that could signal the correction has ended. The green dotted lines show when the 2-day Force Index turns negative.

 

Conclusions

The Force Index is uses both price and volume to measure buying and selling pressure. The price portion covers the trend, while the volume portion determines the intensity. At its most basic, chartists can use a long-term Force Index to confirm the underlying trend. The bulls have the edge when the 100-day Force Index is positive. The bears have the edge when the 100-day Force Index is negative. Armed with this information, traders can then look for short-term setups in harmony with the larger trend, such as bullish setups in a larger uptrend or bearish setups within a larger downtrend. As with all indicators, traders should use the Force Index in conjunction with other indicators and analysis techniques.

 

Main Parameters

  • Period: Averaging period for calculation, default is 13
  • MA method:
    • Simple
    • Exponential
    • Smoothed
    • Linear weighted
  • Apply to: Applied price
    • Close
    • Open
    • High
    • Low
    • Median Price, (high+low)/2
    • Typical Price, (high+low+close)/3
    • Weighted Close, (high+low+close+close)/4

Bear Power, Bulls Power

Introduction

Elder-Rays Technical Indicator combine the properties of trend following indicators and oscillators. They use Exponential Moving Average indicator (EMA, the best period is 13) as a tracing indicator. The oscillators reflect the power of bulls and bears.To plot the Elder-Rays three charts should be used: on one side, the price chart and Exponential Moving Average will be plotted, on two other sides bulls power oscillator (Bulls Power) and bears power oscillator (Bears Power) will be plotted.

Elder-rays are used both individually and together with other methods. If using them individually, one should take into account that the Exponential Moving Average slope determines the trend movement, and position should be opened in its direction. Bulls and bears power oscillators are applied for defining the moment of positions opening/closing.

Bear Power

Bulls Power

 

Trading rule

Buy if:

  • there is an increasing trend (determined with the Exponential Moving Average movement);
  • the Bears Power oscillator is negative, but increasing at the same time;
  • the last peak of the Bulls Power oscillator is higher than the previous one;
  • the Bears Power oscillator increases after the Bulls divergence.

    At the positive values of the Bears Power oscillator, it is better to keep back.

Sell if:

  • there is a decreasing trend (determined with the Exponential Moving Average movement);
  • the Bulls Power oscillator is positive, but decreases gradually;
  • the last trough of the Bulls Power oscillator is lower than the previous one;
  • the Bulls Power oscillator decreases leaving the Bears’ divergence.

    Do not open short positions when the Bulls Power oscillator is negative.  Divergence between the Bulls and Bears Power and prices is the best time for trading.

 

Main Parameters

  • Period: Averaging period for calculation, default is 13
  • Apply to: Applied price
    • Close
    • Open
    • High
    • Low
    • Median Price, (high+low)/2
    • Typical Price, (high+low+close)/3
    • Weighted Close, (high+low+close+close)/4

ATR, Average True Range

Introduction

Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. As with most of his indicators, Wilder designed ATR with commodities and daily prices in mind. Commodities are frequently more volatile than stocks. They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this "missing" volatility. It is important to remember that ATR does not provide an indication of price direction, just volatility.

ATR, Average True Range

Average True Range Technical Indicator (ATR) is an indicator that shows volatility of the market. It was introduced by Welles Wilder in his book "New concepts in technical trading systems". This indicator has been used as a component of numerous other indicators and trading systems ever since.

Average True Range can often reach a high value at the bottom of the market after a sheer fall in prices occasioned by panic selling. Low values of the indicator are typical for the periods of sideways movement of long duration which happen at the top of the market and during consolidation. Average True Range can be interpreted according to the same principles as other volatility indicators. The principle of forecasting based on this indicator can be worded the following way: the higher the value of the indicator, the higher the probability of a trend change; the lower the indicator’s value, the weaker the trend’s movement is.

 

Calculation

True Range is the greatest of the following three values:

  • difference between the current maximum and minimum (high and low);
  • difference between the previous closing price and the current maximum;
  • difference between the previous closing price and the current minimum.

The indicator of Average True Range is a moving average of values of the true range.

 

ATR Analysis Basics

  • The greater the oscillator value, the greater the possibility for trend reversal.
  • The smaller the value the weaker the trend.

 

Conclusions

ATR is not a directional indicator, such as MACD or RSI. Instead, ATR is a unique volatility indicator that reflects the degree of interest or disinterest in a move. Strong moves, in either direction, are often accompanied by large ranges, or large True Ranges. This is especially true at the beginning of a move. Uninspiring moves can be accompanied by relatively narrow ranges. As such, ATR can be used to validate the enthusiasm behind a move or breakout. A bullish reversal with an increase in ATR would show strong buying pressure and reinforce the reversal. A bearish support break with an increase in ATR would show strong selling pressure and reinforce the support break.

 

Main Parameters

  • Period: Averaging period for calculation, default is 14

RVI, Relative Vigor Index

Introduction

The Relative Vigor Index (RVI) calculation is based on the idea that in a rising market the closing price is usually higher than the opening price, and in a bearish market the closing price is usually below the opening price.

The main point of Relative Vigor Index Technical Indicator (RVI) is that on the bull market the closing price is, as a rule, higher, than the opening price. It is the other way round on the bear market. So the idea behind Relative Vigor Index is that the vigor, or energy, of the move is thus established by where the prices end up at the close. To normalize the index to the daily trading range, divide the change of price by the maximum range of prices for the day. To make a more smooth calculation, one uses Simple Moving Average. 10 is the best period. To avoid probable ambiguity one needs to construct a signal line, which is a 4-period symmetrically weighted moving average of Relative Vigor Index values. The concurrence of lines serves as a signal to buy or to sell.

RVI,Relative Vigor Index

 

Calculation

RVI = (CLOSE-OPEN)/(HIGH-LOW) 

Where:

  • OPEN — is the opening price;
  • HIGH — is the maximum price;
  • LOW — is the minimum price;
  • CLOSE — is the closing price.

 

Signals of Relative Vigor Index (RVI)

The Relative Vigor Index indicator is composed of two fluctuating curves – the “Green” line, which is the smoother RVI values, and the “Red” signal line. The Relative Vigor Index oscillator is viewed as a “leading” indicator, in that its signals foretell that a change in trend is imminent, especially when lines cross into extreme regions or when values diverge from current pricing behavior. The weakness in the indicator is timing and that it often gives counter-intuitive values that confuse rather than assist traders. Using an additional indicator may reduce the propensity for false signals.

  • Bullish divergence / bearish convergence – the main signal pointing to the weakness of the current trend;
  • A good moment to open a sell / buy position is the crossing of the RVI line by the signal line from above/below once the bullish divergence / bearish convergence has appeared on the chart;
  • In a flat market an exit from the overbought / oversold area is a signal to sell / buy.

RVI-Divergence

 

Main Parameters

  • Mode:
    • Main:  Main line
    • Signal : Signal line
  • Period: Number of periods for calculation, default is 10

Moving Average of Oscillator(OsMA)

Introduction

Moving Average of Oscillator, Sometimes called MACD Histogram in some systems

Developed by Thomas Aspray in 1986, the MACD-Histogram measures the distance between MACD and its signal line (the 9-day EMA of MACD). Like MACD, the MACD-Histogram is also an oscillator that fluctuates above and below the zero line. Aspray developed the MACD-Histogram to anticipate signal line crossovers in MACD. Because MACD uses moving averages and moving averages lag price, signal line crossovers can come late and affect the reward-to-risk ratio of a trade. Bullish or bearish divergences in the MACD-Histogram can alert chartists to an imminent signal line crossover in MACD. See article for more on MACD.

Moving Average of Oscillator is the difference between the oscillator and oscillator smoothing. In this case, Moving Average Convergence/Divergence base-line is used as the oscillator, and the signal line is used as the smoothing.

Moving Average of Oscillator(OsMA)

 

Standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used to form the moving averages so MACD. A 9-day EMA of MACD is plotted along side to act as a signal line to identify turns in the indicator. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

 

Calculation

MACD: (12-day EMA - 26-day EMA) 

Signal Line: 9-day EMA of MACD

MACD Histogram: MACD - Signal Line

 

Interpretation

As with MACD, the MACD-Histogram is also designed to identify convergence, divergence and crossovers. The MACD-Histogram, however, is measuring the distance between MACD and its signal line. The histogram is positive when MACD is above its signal line. Positive values increase as MACD diverges further from its signal line (to the upside). Positive values decrease as MACD and its signal line converge. The MACD-Histogram crosses the zero line as MACD crosses below its signal line. The indicator is negative when MACD is below its signal line. Negative values increase as MACD diverges further from its signal line (to the downside). Conversely, negative values decrease as MACD converges on its signal line.

 

Peak-Trough Divergence

The MACD-Histogram anticipates signal line crossovers in MACD by forming bullish and bearish divergences. These divergences signal that MACD is converging on its signal line and could be ripe for a cross. There are two types of divergences: peak-trough and slant. A peak-trough divergence forms with two peaks or two troughs in the MACD-Histogram. A peak-trough bullish divergence forms when MACD forges a lower low and the MACD-Histogram forges a higher low. Well-defined troughs are important to the robustness of a peak-trough divergence. The below chart shows Caterpillar with a bullish divergence in the MACD-Histogram. Notice that MACD moved to a lower low in June-July, but the MACD-Histogram formed a higher low (trough). There are two distinct troughs. This bullish divergence foreshadowed the bullish signal line crossover in mid July and a big rally.

MACD-h-Peak-Trough-Divergence-Bulish

The following chart shows Aeropostale (ARO) with a bearish divergence in August-September 2009. MACD moved to a new high in September, but the MACD-Histogram formed a lower high. Notice that there are two definitive peaks (higher) with a dip in between on the MACD-Histogram (red line). The subsequent bearish signal line crossover foreshadowed a sharp decline in the stock.

MACD-h-Peak-Trough-Divergence-Bearish

 

Slant Divergence

As its name implies, slant divergences form without well-defined peaks or troughs. Instead of two reaction highs, there is simply a slant lower as the MACD-Histogram moves towards the zero line. This slant towards the zero line reflects a convergence between MACD and its signal line. In other words, they are getting closer to each other. Momentum shows strength when MACD is moving away from its signal line and the MACD-Histogram expands. Momentum weakens as MACD moves closer to its signal line and the MACD-Histogram contracts. Contracting MACD-Histogram is the first step towards a signal line crossover.

The below chart shows Boeing with a classic slant divergence in the MACD-Histogram. MACD moved sharply lower after the bearish signal line crossover in June 2009. MACD moved to a new low in mid July, but the MACD-Histogram held well above its prior low. In fact, the MACD-Histogram bottomed towards the end of June and formed a bullish slant divergence. The thick red lines show the distance between MACD and its signal line. It is sometimes hard to gauge distance on the chart so these lines highlight the difference between 26-June and 8-July. This slant divergence foreshadowed the bullish signal line crossover in mid July and a sharp advance in the stock.

MACD-h-Slant-Divergence-Bulish

The following chart Disney (DIS) with a bearish slant divergence in May 2008. Notice how MACD continued to a new high on 16-May, but the MACD-Histogram peaked on 8-May and formed a slant divergence. The advance in MACD was losing momentum and the indicator moved below its signal line to foreshadow a sharp decline in the stock. This chart also shows a nice bullish divergence in March-April.

MACD-h-Slant-Divergence-Bearish

 

Conclusions

The MACD-Histogram is an indicator designed to predict signal line crossovers in MACD. By extension, it is designed as an early warning system for these signal line crossovers, which are the most frequent of MACD signals. Divergences in the MACD-Histogram can be used to filter signal line crossovers, which will reduce the number of signals. Even with a filter, the robustness of MACD-Histogram divergences is still an issue. Short and shallow divergences are much more frequent than long and large divergences. In other words, divergences that develop over a few days with shallow movements are generally less robust than divergences that develop over a few weeks with more pronounced movements. The signal line crossover provides the ultimate confirmation, but aggressive traders may try to improve the reward-to-risk ratio by making their move just before the crossover. This is when the MACD-Histogram is as close to the zero line as it can be without actually making a cross, usually between -.20 and +.20.

 

Main Parameters

  • Fast EMA: Number of periods for fast moving average calculation, default is 12
  • Slow EMA: Number of periods for slow moving average calculation, default is 26  
  • MACD SMA: Number of periods for signal moving average calculation, default is 9
  • Apply to: Applied price
    • Close
    • Open
    • High
    • Low
    • Median Price, (high+low)/2
    • Typical Price, (high+low+close)/3
    • Weighted Close, (high+low+close+close)/4

DeMarker

Introduction

The DeMarker, or “DeM”, indicator is another member of the “Oscillator” family of technical indicators. Tom Demarker created the DeM in an attempt to measure the demand for the underlying currency pair. The DeM indicator relates recent price action to recently closed prices. Traders use the index to determine overbought and oversold conditions, assess risk levels, and time when price exhaustion is imminent.

The DeMarker is classified as an “oscillator” since the resulting curve fluctuates between values of zero and “1”, although some variants of the indicator have a “100” and “-100” scale. The indicator typically has lines drawn at both the “0.30” and “0.70” values as warning signals. Values exceeding either boundary are deemed more risky, while values within are considered low risk. Overbought and oversold conditions are imminent when the curve crosses over these boundary lines, respectively.

DeMarker

Demarker Technical Indicator is based on the comparison of the period maximum with the previous period maximum. If the current period (bar) maximum is higher, the respective difference between the two will be registered. If the current maximum is lower or equaling the maximum of the previous period, the naught value will be registered. The differences received for N periods are then summarized. The received value is used as the numerator of the DeMarker and will be divided by the same value plus the sum of differences between the price minima of the previous and the current periods (bars). If the current price minimum is greater than that of the previous bar, the naught value will be registered.

 

Calculation

The value of the DeMarker for the "i" interval is calculated as follows:

  • The DeMax(i) is calculated:

    If high(i) > high(i-1) , then DeMax(i) = high(i)-high(i-1), otherwise DeMax(i) = 0
  • The DeMin(i) is calculated:

    If low(i) < low(i-1), then DeMin(i) = low(i-1)-low(i), otherwise DeMin(i) = 0
  • The value of the DeMarker is calculated as:

    DMark(N) = SMA(DeMax, N)/(SMA(DeMax, N)+SMA(DeMin, N))

Where:

 

How to Use the DeMarker

When the indicator falls below 30, the bullish price reversal should be expected. When the indicator rises above 70, the bearish price reversal should be expected.

If you use periods of longer duration, when calculating the indicator, you’ll be able to catch the long term market tendency. Indicators based on short periods let you enter the market at the point of the least risk and plan the time of transaction so that it falls in with the major trend.

 

Main Parameters

  • Period: Averaging period for calculation, default is 14
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