Candlestick

Candlestick History Candlestick charting can be traced back to the 1700’s as a tool used for rice trading. One of the great rice traders of the 1800’s, Homma is widely credited for developing the candlestick charting basics used today. In the west, Candlestick Charting has grown in popularity and use,…

Zig Zag

Zig Zag

The Zig-Zag indicator is extremely useful for determining price trends, support and resistance areas, and classic chart patterns like head and shoulders, double bottoms and double tops. The Zig-Zag indicators uses both swing highs and swing lows in its calculation:

Swing Highs:

When a price (usually close) is both higher than the price previous to it and after it.

 

Swing Lows:

When a price is both lower than the price prior to it and lower than the price following it.

The Zig-Zag indicator can use both percentages or points in its construction. To construct the Zig-Zag indicator, there must be a certain percentage or number of points between a swing high and a swing low before a line will be drawn. The chart below of the E-mini Nasdaq 100 Futures contract visually illustrates the difference between a price retracement Zig-Zag of 3% and a price retracement Zig-Zag of 5%:

Notice how in the chart above that a Zig-Zag with a retracement percentage of 3% makes more distinct lines than the Zig-Zag with a retracement percentage of 5%. The purpose of using a Zig-Zag with a larger retracement percentage is to help eliminate price noise that is not significant for the trader’s analysis. As will be shown on the next page, the Zig-Zag indicator is extremely effective at uncovering stock cycles while screening out short-term price noise.

Accumulative Swing Index

Accumulative Swing Index Developed by Welles Wilder in his popular technical analysis book New Concepts in Technical Trading Systems, the Accumulative Swing Index (ASI) is mainly used as a divergence and confirmation tool, but can be used for buy and sell signals as well. It was designed to be used…

Williams %R Oscillator

Williams %R Oscillator Implication Bullish: %R rises back above -80 and continues to cross above the -50 line within 14 days. We identify an event at the -50 line crossover. Bearish: %R falls back below -20 and continues to cross below the -50 line within 14 days. We identify an…

Weighted Moving Average

Weighted Moving Average The Weighted Moving Average places more importance on recent price moves; therefore, the Weighted Moving Average reacts more quickly to price changesthan the regular Simple Moving Average (see: Simple Moving Average). A basic example (3-period) of how the Weighted Moving Average is calculated is presented below: Prices for…

Volume Accumulation

Volume Accumulation   Volume Accumulation Defined Volume Accumulation Divergences   The Volume Accumulation indicator combines volume and a price-weighting that shows the strength of conviction behind a trend; the Volume Accumulation indicator is a helpful tool in uncovering divergences. The formula for the Volume Accumulation formula is shown below:   Volume…

Volume

Volume Volume Defined Volume Spikes & Blow-offs Volume is one of the most important technical analysis tools to learn and understand how to apply to price movements. Volume increases every time a buyer and seller transact their stock or futures contract. If a buyer buys one share of stock from…

Ultimate Oscillator

Ultimate Oscillator Developed by Larry Williams and first described in a 1985 article for Technical Analysis of Stocks and Commodities magazine, the “Ultimate” Oscillator combines a stock’s price action during three different time frames into one bounded oscillator. Values range from 0 to 100 with 50 as the center line.…

Ulcer Index

Ulcer Index Comparing Investments Using the Ulcer Index The Ulcer Index measures the “stress” of holding a trade or investment by measuring price retracements. The Ulcer Index is based on the notion that downward volatility is bad, but upward volatility is good. Unlike standard deviation, the financial industry’s benchmark way…

Triangular Moving Average

Triangular Moving Average The Triangular Moving Average is a Simple Moving Average that has been averaged again (i.e. averaging the average); this creates an extra smooth Moving Average line. The chart below of the E-mini Nasdaq 100 Futures contract shows the relation between a 10-day Simple Moving Average and a…

Simple Moving Average

Simple Moving Average The Simple Moving Average is arguably the most popular technical analysis tool used by traders. The Simple Moving Average (SMA) is used mainly to identify trend direction, but is commonly used to generate buy and sell signals. The SMA is an average, or in statistical speak –…

RSI

RSI The RSI is best described as an indicator which represents the momentum in a particular Stock or Index when it is reaching extreme levels to the upside (referred to as overbought) or downside (referred to as oversold) and is therefore due for a reversal. RSI Bands are placed at…

Rate of Change

Rate of Change The Rate of Change (ROC) indicator measures the percentage change of the current price as compared to the price a certain number of periods ago. The ROC indicator can be used to confirm price moves or detect divergences; it can also be used as a guide for…

On Balance Volume

On Balance Volume Joe Granville introduced the On Balance Volume (OBV) indicator in his 1963 book, Granville’s New Key to Stock Market Profits. This was one of the first and most popular indicators to measure positive and negative volume flow. The concept behind the indicator: volume precedes price. OBV is…

Price Volume Trend

Price Volume Trend Price Volume Trend combines percentage price change and volume to confirm the strength of price trends or through divergences, warn of weak price moves. Unlike other price-volume indicators, the Price Volume Trend takes into consideration the percentage increase or decrease in price, rather than just simply adding…

Money Flow Index

Money Flow Index The Money Flow Index (MFI) is a momentum indicator that is similar to the Relative Strength Index (RSI) in both interpretation and calculation. However, MFI is a more rigid indicator in that it is volume-weighted, and is therefore a good measure of the strength of money flowing…

Moving Average Convergence Divergence

Moving Average Convergence Divergence Developed by Gerald Appel in the late seventies, Moving Average Convergence-Divergence (MACD) is one of the simplest and most effective momentum indicators available. MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As…

Linear Regression Curve

Linear Regression Curve The Linear Regression Curve plots a line that best fits the prices specified over a user-defined time period. Think of the Linear Regression Curve as numerous lines, but both extreme ends of the lines are hidden, while the center portion is shown and is connected to other…

Keltner Channel

Keltner Channel The Keltner Channel is a moving average band indicator whose upper and lower bands adapt to changes in volatility by using the average true range. The Keltner Channel is used to signal price breakouts, show trend, and give overbought and oversold readings. There are many variations to calculating…

Herrick Payoff Index

Herrick Payoff Index The Herrick Payoff Index (HPI) uses volume, open inerest, and price to signal bullish and bearish divergences in the price of a future or options contract. The use of open interest in the calculation of the HPI means the indicator can only be used with futures and…

Gann Theory

Gann Theory Gann Fans, created by W. D. Gann, are based on prices moving in predictable patterns. Gann’s theory is based on time/price movements with the 1 time unit by 1 price unit (i.e. 1 x 1) being the main angle (45-degrees). However, there are other angles such as the…

Fibonacci Numbers

Fibonacci Numbers Overview Fibonacci numbers are the result of work by Leonardo Fibonacci in the early 1200’s while studying the Great Pyramid of Gizeh. The fibonacci series is a numerical sequence comprised of adding the previous numbers together, i.e., (1,2,3,5,8,13,21,34,55,89,144,233 etc..) An interesting property of these numbers is that as…

Exponential Moving Average

Exponential Moving Average The Exponential Moving Average (EMA) weighs current prices more heavily than past prices. This gives the Exponential Moving Average the advantage of being quicker to respond to price fluctuations than a Simple Moving Average; however, that can also be viewed as a disadvantage because the EMA is…

Elliott Wave

Elliott Wave Elliott Wave Theory interprets market actions in terms of recurrent price structures obedient to the Fibonacci sequence. Basically, Market cycles are composed of two major types of Wave : Impulse Wave and Corrective Wave. For every impulse wave, it can be sub-divided into 5 – wave structure (1-2-3-4-5),…

Directional Movement Index

Directional Movement Index Part of the ADX indicator, the Directional Movement Index (DMI) consists of two lines, the DMI plus line (DMI+) and the DMI minus line (DMI-), which generate buy and sell signals. The chart below of the E-mini Russell 2000 Future shows an example of the DMI: DMI…