Technical Analysis – Learning Notes

On-Balance Volume

First up, use the on-balance volume indicator (OBV) to measure the positive and negative flow of volume in a security over time. On Balance Volume (OBV) is useful for identifying or confirming overall market trends. Many people believe that buying and selling pressure precede changes in price, making this indicator valuable

When OBV is rising, it shows that buyers are willing to step in and push the price higher. When OBV is falling, the selling volume is outpacing buying volume, which indicates lower prices. In this way, it acts like a trend confirmation tool. If price and OBV are rising, that helps indicate a continuation of the trend.

Traders who use OBV also watch for divergence. This occurs when the indicator and price are going in different directions. If the price is rising but OBV is falling, that could indicate that the trend is not backed by strong buyers and could soon reverse.

  • Bullish OBV Divergence occurs when price declines but OBV advances.
  • Bearish OBV Divergence occurs when price advances but OBV declines.

Accumulation/Distribution Line

The different calculations means that OBV will work better in some cases and A/D will work better in others.

If the indicator line is trending up, it shows buying interest, since the stock is closing above the halfway point of the range. This helps confirm an uptrend. On the other hand, if A/D is falling, that means the price is finishing in the lower portion of its daily range, and thus volume is considered negative. This helps confirm a downtrend.

Traders using the A/D line also watch for divergence. If the A/D starts falling while the price is rising, this signals that the trend is in trouble and could reverse. Similarly, if the price is trending lower and A/D starts rising, that could signal higher prices to come.

Average Directional Index

The average directional index (ADX) is a trend indicator used to measure the strength and momentum of a trend.

The ADX is the main line on the indicator, usually colored black. There are two additional lines that can be optionally shown. These are DI+ and DI-. These lines are often colored red and green, respectively. All three lines work together to show the direction of the trend as well as the momentum of the trend.

  • ADX above 20 and DI+ above DI-: That’s an uptrend.
  • ADX above 20 and DI- above DI+: That’s a downtrend.

ADX below 20 is a weak trend or ranging period, often associated with the DI- and DI+ rapidly crisscrossing each other.

Aroon Indicator


Aroon is a technical indicator used to measure whether a security is in a trend, and more specifically if the price is hitting new highs or lows over the calculation period (typically 25).

When the Aroon-up crosses above the Aroon-down, that is the first sign of a possible trend change. If the Aroon-up hits 100 and stays relatively close to that level while the Aroon-down stays near zero, that is positive confirmation of an uptrend.

The reverse is also true. If Aroon-down crosses above Aroon-up and stays near 100, this indicates that the downtrend is in force.

MACD

The moving average convergence divergence (MACD) indicator helps traders see the trend direction, as well as the momentum of that trend. It also provide a number of trade signals.

When the MACD is above zero, the price is in an upward phase. If the MACD is below zero, it has entered a bearish period.

When MACD crosses below the signal line, it indicates that the price is falling. When the MACD line crosses above the signal line, the price is rising.

Looking at which side of zero the indicator is on aids in determining which signals to follow. For example, if the indicator is above zero, watch for the MACD to cross above the signal line to buy. If the MACD is below zero, the MACD crossing below the signal line may provide the signal for a possible short trade.

Relative Strength Index

When RSI moves above 70, the asset is considered overbought and could decline. When the RSI is below 30, the asset is oversold and could rally. However, making this assumption is dangerous; therefore, some traders wait for the indicator to rise above 70 and then drop below before selling, or drop below 30 and then rise back above before buying.

Divergence is another use of the RSI. When the indicator is moving in a different direction than the price, it shows that the current price trend is weakening and could soon reverse.

A third use for the RSI is support and resistance levels. During uptrends, a stock will often hold above the 30 level and frequently reach 70 or above. When a stock is in a downtrend, the RSI will typically hold below 70 and frequently reach 30 or below.

Stochastic Oscillator

Values above 80 are considered overbought, while levels below 20 are considered oversold

For example, during an uptrend, when the indicator drops below 20 and rises back above it, that is possible buy signal. But rallies above 80 are less consequential because we expect to see the indicator to move to 80 and above regularly during an uptrend. During a downtrend, look for the indicator to move above 80 and then drop back below to signal a possible short trade. The 20 level is less significant in a downtrend.

VWAP :
it is best suited for intraday analysis

When price is above the VWAP, the trend is up and when it is below the VWAP, the trend is down

Directional Movement (DMI)

Directional Movement (DMI) is actually a collection of three separate indicators combined into one. Directional Movement consists of the Average Directional Index (ADX), Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI)

DMI has a value between 0 and 100 and is used to measure the strength of the current trend. +DI and -DI are then used to measure direction.

A general interpretation would be that during a strong trend (ADX above 25 but dependent on the analyst’s interpretation), when the +DI is above the -DI, then a Bullish Market is defined. When -DI is above +DI, then a Bearish Market is at hand.

To analyze trend strength, the focus should be on the ADX line and not the +DI or -DI lines. Wilder believed that a DMI reading above 25 indicated a strong trend, while a reading below 20 indicated a weak or non-existent trend. A reading between those two values, would be considered indeterminable.

Bullish DI Cross

  1. ADX must be over 25 (strong trend. The value is determined by trader)
  2. The +DI crosses above the -DI.
  3. Stop Loss should be set at the current day’s low. The signal should not be abandoned, if the low is not breached, even if the -DI crosses above the +DI
  4. The signal strengthens if ADX rises.
  5. If ADX strengthens, trader’s should employ a trailing stop.

Bearish DI Cross

  1. ADX must be over 25 (strong trend. The value is determined by trader)
  2. The -DI crosses above the +DI.
  3. Stop Loss should be set at the current day’s high. The signal should not be abandoned, if the high is not breached, even if the +DI crosses above the -DI
  4. The signal strengthens if ADX rises.
  5. If ADX strengthens, trader’s should employ a trailing stop

 

My Favorite  :

Fibonacci Retracement :

In an uptrend : identify the current swing and apply ‘F.R.’ tool from bottom of current swing upto the top of current swing.

Do this for 2 or 3 more swings . Identify the common lines between these 3-4 swing FR numbers. These common lines will act as strong support or resistance.

If market retraces then support will be on the closest Fibonacci levels

In a downtrend – identify the current swing and apply FR tool from top of current downtrend swing upto the bottom of current swing.

Fibonacci Extension : Use the same FR tool, but inverse the points i.e. in an uptrend swing apply the tool from top of current swing to bottom of current swing. In a downtrend swing apply the FR tool from bottom to top.

Elliott Waves

Parabolic SAR together with  :

  1. EMA 4, 9, 18
  2. Stochastic 
  3. RSI 
  4. OBV
  5. DMI

 

Bollinger Band : 
Default setting is 20EMA and 2 Standard Deviation
When BB contracts then price is in a range ; When BB expands then price is volatile
After BB contracts and stays for some time then it is signal for breakout – either up or down
The upper band of BB acts as resistance and lower band of BB acts as support
BB are used to find out continuation of trend. To be used with RSI to maximize signal
 
Always check for Divergence also : Price vs. RSI or MACD divergence
If prices is going up but RSI is going down then this is divergence – and most likely the price will go down
If prices is going down but RSI is going up then this is divergence – and most likely the price will go up   
If price is within a range (consolidation) then rely on direction of RSI  – if RSI is going up then prices will go up
 
Accumulation Distribution : measures flow of money into and out of security
Go Long with Positive Divergence i.e. Prices coming down but Acc/Dist going up 
Go Short with Negative Divergence
Draw a trend line on Price and when the price breaks up/down this trend line and there is divergence with Acc/Dist then buy/sell accordingly
 
Stochastic RSI
Above 80 is considered as OverBought
Below 20 is considered Over Sold
This is indicator of indicator and is used to identify short term trend
Default setting : 14, 14, 3, 3. 
 
Chaikin Oscillator : 
measures the momentum of Acc/Dist line
This is 3rd level indicator
Go Long with positive divergence and Chaikin is above 0
Go short with Negative Divergence and Chakin is below 0
It should not be used alone . Always use with Stoch RSI
 
Parabolic SAR (SAR is Stop and Reverse)
If the Dot is above candle then it is sell signal
If Dot is below the candel then it is a buy signal
When changes occurs in the position of dot, it indicates a price reversal
As the trend extends , the gap between the dots increases
Use SAR with Moving Averages. 
Use SAR with SMR Ergodic
 
 
SMI Ergodic Indicator
when blue line is above the orange line then it is a buy signal
when blue line cross below the orange line then it is a sell signal
Use with SAR
 
Super Trend :
When supertrend closes below the price , buy signal is created
when supertrend closes above the price, a sell signal is generated
Always use choppiness index indicator with super trend to avoid false signals
 
Choppiness Index :
The range for CI is 0 to 100. Important levels are 61.8% and 38.2%
If CI is above 61.8% it means market is choppy
If CI is below 38.2% it means market is trending
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