TA: Indicators and Oscillators Cont'd

Some common indicators and oscillators

1) Accumulation/Distribution Line

-non-bounded indicator.
-measures money flows in a security.
-measure the ratio of buying to selling by comparing the price movement of a period to the volume of that period.
-If a security has an accumulation/distribution line that is trending upward, it is a sign that there is more buying than selling.

2) Average Directional Index (ADX)

-a trend indicator that is used to measure the strength of a current trend, not direction
-is seldom used to identify the direction of the current trend, but can identify the momentum behind trends (or strength).
-is a combination of two price movement measures: the positive directional indicator (+DI) and the negative directional indicator (-DI).
-The +DI measures the strength of the upward trend while the -DI measures the strength of the downward trend. These two measures are also plotted along with the ADX line. Measured on a scale between zero and 100, readings below 20 signal a weak trend while readings above 40 signal a strong trend.

3) Aroon Indicator

-is a trending indicator used to measure whether a security is in an uptrend or downtrend and the magnitude of that trend.
-used to predict when a new trend is beginning.
-is comprised of two lines, an "Aroon up" line (blue line) and an "Aroon down" line (red dotted line).
-The Aroon up line measures the amount of time it has been since the highest price during the time period. The Aroon down line, on the other hand, measures the amount of time since the lowest price during the time period. The number of periods that are used in the calculation is dependent on the time frame that the user wants to analyze.

4) Aroon Oscillator

-plots the difference between the Aroon up and down lines by subtracting the two lines
-This line is then plotted between a range of -100 and 100. The centerline at zero in the oscillator is considered to be a major signal line determining the trend.
-The higher the value of the oscillator from the centerline point, the more upward strength there is in the security; the lower the oscillator's value is from the centerline, the more downward pressure.
-A trend reversal is signaled when the oscillator crosses through the centerline. For example, when the oscillator goes from positive to negative, a downward trend is confirmed.
-Divergence is also used in the oscillator to predict trend reversals. A reversal warning is formed when the oscillator and the price trend are moving in an opposite direction.


5) Moving average convergence divergence (MACD)

-is comprised of two exponential moving averages, which help to measure momentum in the security.
-is simply the difference between these two moving averages plotted against a centerline.
-The centerline is the point at which the two moving averages are equal.
-Along with the MACD and the centerline, an exponential moving average of the MACD itself is plotted on the chart.

MACD= shorter term moving average - longer term moving average

-When the MACD is positive, it signals that the shorter term moving average is above the longer term moving average and suggests upward momentum. The opposite holds true when the MACD is negative - this signals that the shorter term is below the longer and suggest downward momentum

-When the MACD line crosses over the centerline, it signals a crossing in the moving averages.
-The most common moving average values used in the calculation are the 26-day and 12-day exponential moving averages. The signal line is commonly created by using a nine-day exponential moving average of the MACD values.

-For more volatile securities, shorter term averages are used while less volatile securities should have longer averages.
-MACD histogram: is plotted on the centerline and represented by bars. Each bar is the difference between the MACD and the signal line or, in most cases, the nine-day exponential moving average. The higher the bars are in either direction, the more momentum behind the direction in which the bars point.


As you can see in the figure above, one of the most common buy signals is generated when the MACD crosses above the signal line (EMA of MACD, blue dotted line), while sell signals often occur when the MACD crosses below the signal.

6) Relative strength index (RSI)

-signals overbought and oversold conditions in a security
-The indicator is plotted in a range between zero and 100.
-A reading above 70 is used to suggest that a security is overbought, while a reading below 30 is used to suggest that it is oversold
-The standard calculation for RSI uses 14 trading days as the basis, which can be adjusted to meet the needs of the user. If the trading period is adjusted to use fewer days, the RSI will be more volatile and will be used for shorter term trades.


7) On-balance Volume (OBV)

-reflect movements in volume
-is calculated by taking the total volume for the trading period and assigning it a positive or negative value depending on whether the price is up or down during the trading period
-When price is up during the trading period, the volume is assigned a positive value, while a negative value is assigned when the price is down for the period
-The positive or negative volume total for the period is then added to a total that is accumulated from the start of the measure.
-The trend in the OBV is more important than the actual value of the OBV measure. This measure expands on the basic volume measure by combining volume and price movement.

8) Stochastic Oscillator

-in an uptrend, the price should be closing near the highs of the trading range, signaling upward momentum in the security. In downtrends, the price should be closing near the lows of the trading range, signaling downward momentum.
-The stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions above 80 and oversold conditions below 20.

-The stochastic oscillator contains two lines.
-The first line is the %K, which is essentially the raw measure used to formulate the idea of momentum behind the oscillator.
-The second line is the %D, which is simply a moving average of the %K.
-The %D line is considered to be the more important of the two lines as it is seen to produce better signals. The stochastic oscillator generally uses the past 14 trading periods in its calculation but can be adjusted to meet the needs of the user.






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ps: Content and pictures in this article are excerpted from Investopedia.