TRADING INDICATORS

1.Moving Averages (MA)

The most common applications of moving averages are to identify trend
direction and to determine support and resistance levels.
When asset prices cross over their moving averages, it may generate a trading
signal for technical traders.
When the shorter-term MA crosses above the longer-term MA, it's a buy signal,
as it indicates that the trend is shifting up. This is known as a "golden cross."
Meanwhile, when the shorter-term MA crosses below the longer-term MA, it's
a sell signal, as it indicates that the trend is shifting down. This is known as a
"dead/death cross."
As a general guideline, when the price is above a moving average, the trend is
considered up. So when the price drops below that moving average, it signals a
potential reversal based on that MA.

An MA with a short time frame will react much quicker to price changes than an
MA with a long look back period. In the figure below, the 20-day moving average
more closely tracks the actual price than the 100-day moving average does.

When it comes to the period and the length, there are usually 3 specific moving
averages you should think about using:
9 or 10 period: Very popular and extremely fast-moving. Often used as a
directional filter (more later)
21 period: Medium-term and the most accurate moving average. Good when it
comes to riding trends
50 period: Long-term moving average and best suited for identifying the longer-
term direction
2.Exponential Moving Averages (EMA)
The EMA reacts faster when the price is changing direction, but this also
means that the EMA is also more vulnerable when it comes to giving wrong
signals too early. For example, when price retraces lower during a rally, the EMA
will start turning down immediately and it can signal a change in the direction
way too early. The SMA moves much slower and it can keep you in trades
longer when there are short-lived price movements and erratic behaviour. The
EMA gives you more and earlier signals, but it also gives you more false and
premature signals. The SMA provides less and later signals, but also fewer wrong
signals during volatile times.
A rising EMA indicates that prices are on an upward trend and vice versa. When
the price is above the EMA line, it is likely to rise, and when it is below, it’s likely
to fall.
3.Stochastic Oscillators
The stochastic oscillator is a technical indicator that enables traders to identify
the end of one trend and the beginning of another. is a momentum indicator,
which compares the most recent closing price relative to the previous trading
range over a certain period. Unlike other oscillators, it does not follow price or
volume, but the speed and momentum of the market.
The stochastic oscillator is range-bound, meaning it is always between 0 and
100. If there is a reading over 80, the market would be considered overbought,
while a reading under 20 would be considered oversold conditions. This makes it
a useful indicator of overbought and oversold conditions. Stochastic oscillator
charting generally consists of two lines:
a) The actual value of the oscillator for each session {the indicator line (%K)}.
b) Its three-day simple moving average {a signal line (%D)}.
Because price is thought to follow momentum, the intersection of these two lines
is considered to be a signal that a reversal may be in the works, as it indicates a
large shift in momentum from day to day.
The stochastic oscillator is shown as two lines on the chart,
the %K (the black line on the chart below)
the %D (the red dotted line below).
When these two lines cross, it is a sign that a change in market direction is
approaching. If %K rises above %D, it would be a buying signal – unless the
values are above 80. And if %K falls lower than %D, then it’s seen as a selling
signal – unless the values are below 20.

It is always important to remember that overbought and oversold readings are

not completely accurate indications of a reversal. The stochastic oscillator might
show that the market is overbought, but the asset could remain in a strong
uptrend if there is sustained buying pressure. This is often seen during market
bubbles – periods of increased speculation that cause an asset’s price to reach
consistently higher highs.
Divergence between the stochastic oscillator and trending price action is also
seen as an important reversal signal. For example--x
A bull set-up is the opposite of a bullish divergence. It occurs when the market
price forms a lower high, but the stochastic oscillator reaches a higher high. Even
though the asset itself did not reach a new high, the optimism from the indicator
is a sign that the upward momentum is strengthening.
A bear set-up is the inverse of a bearish divergence. It happens when the market
price forms a higher low, but the stochastic oscillator falls to a lower low. Even
though the asset held its price, the indicator shows there is increasing downward
momentum.
Stochastics are more useful in sideways or choppy markets.
4.Moving Average Convergence Divergence (MACD)
MACD is an indicator that detects changes in momentum by comparing two
moving averages. It can help traders identify possible buy and sell opportunities
around support and resistance levels.
‘Convergence’ means that two moving averages are coming together, while
‘divergence’ means that they’re moving away from each other. If moving
averages are converging, it means momentum is decreasing, whereas if the
moving averages are diverging, momentum is increasing.
The MACD indicator is made up of three components:
The MACD line, which measures the distance between two moving averages
The signal line, which identifies changes in price momentum and acts as a
trigger for buy and sell signals
The histogram, which represents the difference between the MACD and the
signal line
When calculating the MACD, only two lines are taken into consideration: the
MACD line and the signal line. The MACD line is created by subtracting the 26-
period moving average from the 12-period moving average. The signal line is the
9-period moving average of the MACD.
The histogram is positive when the MACD is above its nine-day EMA and negative
when the MACD is below its nine-day EMA. If prices are rising, the histogram
grows larger as the speed of the price movement accelerates, and contracts as
price movement decelerates. The same principle works in reverse as prices are
falling.

A typical divergence trade using a MACD Histogram. At the right-hand circle on

the price chart, the price movements make a new swing high but at the end
corresponding circled point on the MACD histogram, the MACD histogram is
unable to exceed its previous high of 0.3307.(The histogram reached this high at
the point indicated by the lower left-hand circle) The divergence is a circle that
the price is about to reverse at the new high and , as such, it is signal for the
trader to enter into a short position.
Unfortunately, the divergence trade is not very accurate, as it fails more times
than it succeeds. Prices frequently have several final bursts up or down that
trigger stops and force traders out of position just before the move actually
makes a sustained turn and the trade becomes profitable.
One of the reasons traders often lose with this setup is that they enter a trade on
a signal from the MACD indicator but exit it based on the move in price. Since
the MACD histogram is a derivative of price and is not price itself, this approach
is, in effect, the trading version of mixing apples and oranges.
To resolve the inconsistency between entry and exit, a trader can use the MACD
histogram for both trade entry and trade exit signals. To do so, the trader trading
the negative divergence takes a partial short position at the initial point of
divergence, but instead of setting the stop at the nearest swing high based on
price, he or she instead stops out the trade only if the high of the MACD
histogram exceeds its previous swing high, indicating that momentum is actually
accelerating and the trader is truly wrong on the trade. If, on the other hand, the
MACD histogram does not generate a new swing high, the trader then adds to his
or her initial position, continually achieving a higher average price for the short.

5.Bollinger Bands
Bollinger Bands® consist of a centreline and two price channels (bands) above
and below it. The centreline is an exponential moving average; the price
channels are the standard deviations of the stock being studied. The bands will
expand and contract as the price action of an issue becomes volatile (expansion)
or becomes bound into a tight trading pattern (contraction).
When the price of the asset breaks below the lower band of the Bollinger
Bands®, prices have perhaps fallen too much and are due to bounce. On the
other hand, when price breaks above the upper band, the market is perhaps
overbought and due for a pullback. As long as prices do not move out of this
channel, the trader can be reasonably confident that prices are moving as
expected.
When the upper and lower Bollinger Bands are moving towards each other, or
the distance between the upper and lower bands is narrow (on a relative basis),
it is a suggestion that the market under review is consolidating.
A consolidation phase suggests that the market is non-directional for the time
being and now rangebound in nature. It is at this stage that breakout traders
might pay attention.

The highs and lows of a consolidation may be marked with trend lines. A price
moves above the high of the consolidation would consider an upside breakout,
while a price close below the low of the consolidation would consider a downside
breakout.

It is also preferable to see the upper and lower band starting to widen in a
breakout scenario. The widening of the bands suggests an increase in volatility
to confirm the move out of a consolidation and into a new trend.
6.Relative Strength Index (RSI)
When the RSI indicator value approaches the lower end of the 0 to 100 range
i.e., below 30, it is said to be 'oversold'.
When the RSI indicator value approaches upper end of this range ie above 70, it
is said to be 'overbought'.
Positive/bullish RSI divergence
For a positive divergence we look at the lows of both the price and the indicator.
If the price is making higher lows, and the indicator is making lower lows, a
positive or bullish divergence signal is considered. It is preferable to witness this
occurrence when the RSI is in oversold territory.

A positive or bullish divergence suggests short-term gains in the securities price

to follow. A positive divergence signal in conjunction with an oversold signal is
considered by many market technicians to be a more powerful 'buy' signal than
an oversold signal in isolation.
Negative/bearish RSI divergence
For a negative divergence we look at the highs of both the price and the
indicator. If the price is making higher highs, and the indicator is making lower
highs, a negative or bearish divergence signal is considered. It is preferable to
witness this occurrence when the RSI is in overbought territory.

A negative or bearish divergence suggests a short-term decline in the securities

price to follow. A negative divergence signal in conjunction with an overbought
signal is considered by many market technicians to be a more powerful 'sell'
signal.

7.Fibonacci Retracement
Fibonacci Retracement is a method of technical analysis for determining support
and resistance levels. It is named after the use of the Fibonacci sequence series.
It is also based on the idea that markets will retrace a predictable portion of a
move, after which they will continue to move in the original direction.
The Fibonacci retracement levels were .7955 (23.6%), .7764 (38.2%), .7609
(50.0%*), .7454 (61.8%), and .7263 (76.4%). The 50.0% ratio is not officially a
Fibonacci ratio, but it was able to sneak into the group and has never left.
In an upward trend, you can select the Fibonacci line tool, select the low price
and drag the cursor up to the high price. The indicator will mark key ratios such
as 61.8%, 50.0% and 38.2% on the chart.
Similarly, in a downward trend, you can select the Fibonacci line tool, choose the
high price and drag the cursor down to the low price. The indicator will mark key
ratios on the chart. To improve accuracy, traders can also use double tops or
double bottoms as the high and low points.
8.Ichimoku Cloud
The Ichimoku Cloud is a technical analysis indicator that defines support and
resistance levels, gauges momentum and provides trading signals. The Ichimoku
Kinko Hyo, or equilibrium chart, isolates higher probability trades in
the forex market. The application offers multiple tests and combines three
indicators into one chart, allowing a trader to make the most informed decision.

Figure 1. AAPL Daily Chart with Ichimoku Cloud

Ichimoku Cloud Components and Calculations

The Blue line in Figure 1 is Tenkan-Sen (Conversion Line). It’s the midpoint of
the last nine price bars: [(9-period high + 9-period low)/2].
The red line is Kijun-sen (Base Line). It’s the midpoint of the last 26 price bars:
[(26-period high + 26-period low)/2].
The yellow line is Senkou Span A (Leading Span A). It’s the midpoint of the
above two lines: [(Conversion Line + Base Line)/2]. This value is plotted 26
periods into the future.
The blue line is Senkou Span B (Leading Span B). It’s the midpoint of the last 52
price bars: [(52-period high + 52-period low)/2]. This value is plotted 26 periods
into the future.
The green line is the Chickou Span (Lagging Span), and will always lag behind
the price; it’s the most recent price, plotted 26 periods back. This line is not used
in the methods described below, and therefore has been removed in those
associated figures to reduce chart clutter.
How is Ichimoku Cloud Used?
Here are the ways the cloud is used to assess price action.
a)Trend Confirmation: When the price is above the cloud it indicates an
uptrend, when the price is below the cloud it indicates a downtrend.
b)Trend Strength or Weakness:
When Span A (yellow) is moving up and away from Span B (blue) it indicates the
uptrend is gaining momentum.
When Span A is moving down and away from Span B it indicates the downtrend
is accelerating.
In other words, a thickening cloud helps confirm the current trend. A very thin
cloud shows indecision, and a potentially weak or weakening trend.
c)Support and Resistance: The cloud is projected out 26 price bars to the right
of the current price, providing an idea of where support and resistance may
develop in the future.
During an uptrend, the price will often bounce off the cloud during pullbacks and
then resume the uptrend.
During a downtrend, the price will often retrace to the cloud and then continue
lower. Therefore, the cloud presents entry opportunities into the trend.
d)Crossover Signals:
If the trend is up (price above cloud and Span A is above Span B), and the
Conversion line falls below the Base line and then rallies back above it, it signals
a long entry.
If the trend is down (price below cloud and Span A is below Span B), and the
Conversion line rallies above Base line and then drops back below it, it signals a
short entry.
e)Another entry signal involves the price and the Base line (can also use
Conversion line).
If the trend is up and the price drops below the Base line, buy when the price
rallies back above the Base line.
If the trend is down and the price moves above the Base line, short sell when the
price drops back through the Base line.

9.Standard Deviation

Standard deviation is an indicator that measures the size of recent price moves of an asset, to
predict how volatile the price may be in future.

It can help you decide whether the volatility of the price is likely to increase or decrease.

The image below shows how the standard deviation indicator appears on a chart:

The standard deviation is the blue line that goes up and down, indicating whether price
movement in the past is higher or lower than the current price movement.

When the blue line is high, a big change in the price of the asset has usually just occurred
High standard deviation.

Low standard deviation. Notice that in the chart, the price does not move very far until the end
of the green shaded area.
10.Average Direction Index (ADX)
The average directional index (ADX) is used to determine when the price is
trending strongly.
ADX can be used on any trading vehicles such as stocks, mutual
funds, exchange-traded funds and futures.
ADX is plotted as a single line with values ranging from a low of zero to a high of
100. ADX is non-directional; it registers trend strength whether price is trending
up or down.

When the +DMI is above the -DMI, prices are moving up, and ADX measures the
strength of the uptrend. When the -DMI is above the +DMI, prices are moving
down, and ADX measures the strength of the downtrend. The chart above is an
example of an uptrend reversing to a downtrend. Notice how ADX rose during
the uptrend, when +DMI was above -DMI. When price reversed, the -DMI crossed
above the +DMI, and ADX rose again to measure the strength of the downtrend.
ADX Value Trend Strength

0-25 Absent or Weak Trend

25-50 Strong Trend

50-75 Very Strong Trend

75-100 Extremely Strong Trend

The direction of the ADX line is important for reading trend strength. When the
ADX line is rising, trend strength is increasing, and the price moves in the
direction of the trend. When the line is falling, trend strength is decreasing, and
the price enters a period of retracement or consolidation..
Periods of low ADX lead to price patterns. This chart shows a cup and handle
formation that starts an uptrend when ADX rises above 25.

ADX can also show momentum divergence. When price makes a higher high and
ADX makes a lower high, there is negative divergence, or non-confirmation. In
general, divergence is not a signal for a reversal, but rather a warning that
trend momentum is changing.
Price is the single most important signal on a chart. Read price first, and then
read ADX in the context of what price is doing. Breakouts are not hard to spot,
but they often fail to progress or end up being a trap. However, ADX tells you
when breakouts are valid by showing when ADX is strong enough for price to
trend after the breakout.
Cons-