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8) Technical Indicators

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27 views16 pages

8) Technical Indicators

Uploaded by

Shruti Patel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TECHNICAL

INDICATORS
DEFINITION:

• Technical indicators mathematical calculations based on the price, volume, or open


interest of a security or contract used by traders who follow technical analysis.
• Technical analysts or chartists look for technical indicators in historical price data to
judge entry and exit points for trades.
• There are several technical indicators that fall broadly into two main categories:
overlays and oscillators.
OVERLAYS:
• Technical indicators that use the same scale as prices are plotted over the top of the
prices on a stock chart.
OSCILLATORS:
• Technical indicators that oscillate between a minimum and maximum value are plotted
above or below a price chart. Examples include the MACD or RSI.
IMPORTANT INDICATORS:

• RSI
• Moving Average (Exponential)
• MACD (Moving Average Convergence Divergence)
RSI (RELATIVE STRENGTH INDEX)

• The relative strength index (RSI) is a momentum indicator used in technical analysis that
measures the magnitude of recent price changes to evaluate overbought or oversold
conditions in the price of a stock.
• The RSI is displayed as an oscillator (a line graph that moves between two extremes) and
can have a reading from 0 to 100.
• Traditional interpretation and usage of the RSI are that values of 70 or above indicate
that a security is becoming overbought or overvalued and may be primed for a
trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an
oversold or undervalued condition.
• During trends, the RSI readings may fall into a band or range. During an uptrend, the RSI
tends to stay above 30 and should frequently hit 70. During a downtrend, it is rare to see
the RSI exceed 70, and the indicator frequently hits 30 or below. These guidelines can help
determine trend strength and spot potential reversals. For example, if the RSI can’t reach
70 on a number of consecutive price swings during an uptrend, but then drops below 30,
the trend has weakened and could be reversing lower.
• The opposite is true for a downtrend. If the downtrend is unable to reach 30 or below and
then rallies above 70, that downtrend has weakened and could be reversing to the upside.
Trend lines and moving averages are helpful tools to include when using the RSI in this
way.
RSI OVERBOUGHT
RSI OVERSOLD
EXPONENTIAL MOVING AVERAGE (EMA)

• Moving Averages are useful only when there’s a good trend in price. In flat market it
tends generate many falls signals.
• The simplest form of a moving average, known as a simple moving average (SMA), is
calculated by taking the arithmetic mean of a given set of values over a specified
period of time.
• The exponential moving average (EMA) is a type of moving average that gives more
weight to recent prices in an attempt to make it more responsive to new information.
Hence our focus will be on EMA rather than SMA.
20 Period Exponential Moving Average (EMA)
• Moving averages are a totally customizable indicator, which means that an investor can
freely choose whatever time frame they want when calculating an average. The most
common time periods used in moving averages are 10, 20, 50 and 200 days.
• 10 EMA: It indicates the stronger momentum when price is bouncing from it. Only
works when it’s close to 20 EMA.
• 20 EMA: It’s a mean value of a current price. When price is stretched and went far from
20 EMA, it acts like a rubber band and price snaps back on it. In slow and steady
momentum, the first bounce happen on 20 EMA.
• 50 EMA: It acts as a short term support or resistance on and on going trend. Price
usually respects 50 EMA before giving a possible trend reversal.
• 200 EMA: It is called as LAST LINE OF DEFENCE. Trend is bullish above and bearish below
it.
• Investors may choose different time periods of varying lengths to calculate moving
averages based on their trading objectives. Shorter moving averages are typically used
for short-term trading, while longer-term moving averages are more suited for long-
term investors.
• There is no correct time frame to use when setting up your moving averages. The best
way to figure out which one works best for you is to experiment with a number of
different time periods until you find one that fits your strategy.
MOVING AVERAGE CONVERGENCE
DIVERGENCE
(MACD)
• Moving average convergence divergence (MACD) is a trend-following momentum indicator that
shows the relationship between two moving averages of a security’s price. The MACD is
calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period
EMA.
• The result of that calculation is the MACD line. A nine-day EMA of the MACD called the "signal
line," is then plotted on top of the MACD line, which can function as a trigger for buy and sell
signals. Traders may buy the security when the MACD crosses above its signal line and sell—or
short—the security when the MACD crosses below the signal line. Moving average convergence
divergence (MACD) indicators can be interpreted in several ways, but the more common
methods are crossovers, divergences, and rapid rises/falls.
MACD HISTOGRAM

• MACD is often displayed with a histogram which graphs the distance between the
MACD and its signal line. If the MACD is above the signal line, the histogram will be
above the MACD’s baseline. If the MACD is below its signal line, the histogram will be
below the MACD’s baseline. Traders use the MACD’s histogram to identify when bullish
or bearish momentum is high.
MACD

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