Technical Analysis Indicators

Technical Analysis IndicatorsMajor Technical Analysis Indicators

  • What is a Technical Analysis Indicator?

Technical analysis indicators are mathematical calculations based on price volatility and volume activity. These indicators are used to evaluate the price trend but also to generate trade signals through price crossovers and divergences.

  • Oscillators

Indicators formed in a bounded range are called oscillators. Usually, an oscillator ranges between 0 and 100.

Here is some key information about MACD, RSI, and some other commonly used technical indicators.

1) MACD (Moving Average Convergence Divergence)

Type: Momentum Oscillator & Trade Signals Machine

□ Asset Classes: All Asset Classes

Chart: M30 and above

MACD is one of the most important technical analysis tools used for the analysis of a wide variety of financial assets (Forex pairs, Stocks, Indices, Commodities, Cryptocurrencies, etc.). MACD is a trend-following momentum oscillator which transforms two trend-following moving averages into a single momentum oscillator by subtracting the longer moving average to the shorter moving average.

Tips when trading with MACD:

(i) Prefer to use the MACD using its standard settings (12,26,9)

(ii) Divergences between the price chart and the MACD histogram can provide very important price reversal signals

(iii) MACD signals are more reliable in longer timeframes (H1 and above)

 

 

2) Relative Strength Index (RSI)

□ Type: Momentum Oscillator

□ Asset Classes: All Asset Classes

□ Chart: H4 and D1

The Relative Strength Index (RSI) is a Momentum Oscillator that measures the internal strength of a price trend. As in the case of MACD, RSI can be used in every major financial market (Forex, Equities, Commodities, Cryptocurrencies, etc.) The oscillator ranges between 0 and 100.

  • If RSI is above 70, the asset is considered overbought (preferably use the 80)
  • If RSI is below 30, the asset  is considered oversold (preferably use the 20)

Tips when trading with RSI:

(i) Use RSI(21) instead of the standard settings of 14-periods 

(ii) Divergences between the price chart and the RSI chart can provide powerful reversal signals

(iii) For evaluating key price reversal/continuation you can use RSI(21) on the H4 and D1 charts

(iv) When evaluating short-term overbought/oversold levels you can use RSI(21) on the 5-Minutes chart

(v) In order to perfectly time your trades, wait for RSI(21) to reverse after reaching an overbought/oversold level (20/80) 

3) Simple & Exponential Moving Averages

□ Type: Evaluating the Master Trend & Trade Signals (Crossovers)

□ Asset Classes: All Asset Classes

□ Chart: All timeframes

Moving averages can instantly define the master trend and/or generate some reversal signals. A simple moving average (SMA) refers to the average price of an asset over a particular period. An exponential moving average (EMA) apply less weight to old prices and more weight to recent prices. 

Tips when trading with MAs:

(i) For generating reversal trade signals, focus on the crossovers between the price, and EMA(50), EMA(100), EMA(200)

(ii) You can use the Fibonacci numbers as the periods of moving averages (8, 13, 21, 34, 55, 89, 144, 233)

(iii) Moving averages cannot create an independent technical analysis forecasting system. Combine MAs with other technical analysis tools

4) Bollinger Bands

□ Type: Measuring Volatility & Evaluating the Strength of the Trend

□ Asset Classes: All Asset Classes

Developed by John Bollinger, Bollinger bands consist of three bands which encompass the activity of a particular asset price. If the price of an asset moves to the upper band, it is a sign of strength, while If the price moves to the lower band, it is a sign of weakness.

The three bands:

a. The upper band (20-day moving average plus 2 standard deviations)

b. The lower band (20-day moving average minus 2 standard deviations)

c. A middle moving average (20-day moving average)

5) Stochastic Oscillator

□ TypeMomentum Oscillator

□ Asset Classes: All Asset Classes

Stochastic is a momentum oscillator that indicates overbought and oversold levels. It presents the current close price level relative to the high/low range over a number of periods.

6) Average Directional Index (ADX)

□ Type: Price Trend Evaluation

□ Asset Classes: All Asset Classes

The Average Directional Index aims to evaluate the strength of a price trend. High ADX readings indicate a strong price trend, and low readings a weak price trend. ADX uses a scale of 1 to 100 and the standard measurement is set for 14 days.

  • If ADX readings are above 30 it is a signal of a strong price trend
  • If ADX readings are below 20 its is a signal of a changing trend

7) William %R

□ Type: Momentum Indicator

□ Asset Classes: All Asset Classes

Williams %R is a momentum indicator that evaluates the current price levels relative to the highest high and lowest low, for the look-back period.

  • William %R = {(Highest High - Close) / (Highest High - Lowest Low)} X ( -100)

 

 

8) Accumulation/Distribution

□ Type: Volume-based Indicator {Stocks & Indices}

□ Asset Classes: Equities

Accumulation/Distribution measures the dynamics of Demand/Supply by indicating whether investors are buying (accumulation) or selling (distribution) an asset.

  • Accumulation/Distribution = {(Close Price – Low Price) – (High Price – Close Price)} / {(High Price– Low Price) X Volume Activity}.

9) Volume-Weighted Average Price (VWAP)

□ Type: Volume-based Indicator {Stocks & Indices}

□ Asset Classes: Equities

The Volume-Weighted Average Price (VWAP) is formed by dividing the total dollar value of all trades in a day by the total trading volume.

10) Balance Volume - OBV

□ Type: Volume-based Indicator {Stocks & Indices}

□ Asset Classes: Equities

The on-balance volume (OBV) is a cumulative total of the daily volume numbers. The OBV line presents graphically the flow of volume activity by adding volume on days when the closing price moving up and deducting volume when the closing price is moving down.

  

■ Major Technical Analysis Indicators

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