Technical Analysis: STI 23rd Jan 2008

Venus: Just to share something I read from my email box this morning.

Eight Items That Impact Daily Trades

There are a number of things that can impact an investor's entry (buy) into or exit (sell) out of a given stock and/or sector. Depending on the investor and his or her goals and investing time frame, the importance of timing the entry will differ. Obviously, the shorter the time frame the more important the entry; specific entries matter little to long-term (five years or more) investors.

Eight items that can materially impact the average day's trading.

1. Overseas Market/Economic Action

The US market.

2. Economic Data

Ex, Interest Rate, Exchange Rate

3. Futures Data

They start trading before the stock market and are a very good indicator of what the stock market opening will look like.

Investors should check to see if futures contracts are trading higher or lower in pre-market trading. This will give them a better feel for where the index they are tracking might be headed "after the open".

4. Buying at the Open

Buying or selling stock at the open of the market might not be a good idea.

The opening hour of trading is basically the first time that most market participants have to enter or exit the stock, which can easily produce higher-than-average trading volume. These market participants are reacting to the myriad of news stories that came out between yesterday's close and today's open, which includes major market news events like economic reports and political changes.

5. Midday Trading Lull

There is typically a drop off in trading (meaning the volume of transaction) at noon as most of the major news events are out in the market. During this lull, stock prices can often lose some ground.

When this happens, stocks can be purchased at a cheaper price at 1pm than they could at, say, 11am. Again, this is important to know, as this can affect both entry and exit points.

6. Analyst Upgrades/Downgrades

An analyst may disseminate an intraday note that can have a significant impact on a given stock and/or sector. As a tip, remember to scan financial websites or watch business reports on television.

If a large company has just been upgraded or downgraded, try to judge the potential impact on certain industries and the market as a whole.

For example, if a major semiconductor stock were downgraded by a well-known analyst due to slackening demand for that company's products, it might be reasonable to assume that other smaller players may be experiencing similar trends. It might also be logical to assume that shares of computer makers (which purchase large numbers of semiconductors) might be impacted as well.

7. Web-Related Articles

All investors should try to peruse the web and visit major news portals throughout the day, to see if there are any potentially market-moving news stories in the public domain. Be careful to avoid sites that give recommendations based on the stocks they own.

8. Friday Trading

Even if you're a "buy and hold" investor, a significant number of retail and institutional traders typically liquidate their equities on Friday (usually in the afternoon), so they don't have to hold their positions and assume risk through the weekend.

It means that stocks can and often sell off Friday afternoon during the last few hours of the trading day, if for no other reason than traders are looking to go home "flat" (without positions on their books). Keep this in mind on Fridays if you are trying to find a favorable time to enter or exit a stock position.

Bottom Line

While company-specific events can have an impact on equity prices, there are a number of other factors that can affect your shares as well. Savvy investors should be aware of them.

From Investopedia

Mars

MACD Histogram

说完了MACD，就要说MACD Histogram了。

MACD Histogram是由Thomas Aspray在1986年开发出来的。

Definition of MACD Histogram

MACD Histogram: MACD minus MACD signal line.



Hence,
MACD histogram is positive (above zero) when MACD is above its 9-day EMA.
MACD histogram is negative (below zero) when MACD is below its 9-day EMA.
MACD histogram is zero when MACD crosses over its 9-day EMA.

Further increases or decreases in the gap between MACD and its trigger line will be reflected in the MACD-Histogram. Sharp increases in the MACD-Histogram indicate that MACD is rising faster than its 9-day EMA and bullish momentum is strengthening. Sharp declines in the MACD-Histogram indicate that MACD is falling faster than its 9-day EMA and bearish momentum is increasing.

MACD Histogram Divergence

Usually, but not always, a move in the MACD is preceded by a corresponding divergence in the MACD-Histogram.

Divergences between MACD and the MACD-Histogram are the main tool used to anticipate moving average crossovers.

A Positive Divergence (MACD Histogram increases but MACD decreases) in the MACD-Histogram indicates that the MACD is strengthening and could be on the verge of a Bullish Moving Average Crossover.

A Negative Divergence (MACD Histogram decreases but MACD increases) in the MACD-Histogram indicates that the MACD is weakening, and it foreshadows a Bearish Moving Average Crossover in the MACD.

The main signal generated by the MACD-Histogram is a divergence followed by a moving average crossover.

A bullish signal is generated when a Positive Divergence forms and there is a Bullish Centerline Crossover.

A bearish signal is generated when there is a Negative Divergence and a Bearish Centerline Crossover.

Keep in mind that a centerline crossover for the MACD-Histogram represents a moving average crossover for the MACD.


1 & 3: Positive Divergence followed by a bullish centerline cross-over of the histogram.
2 & 4: Negative Divergence followed by a bearish centerline cross-over of the histogram.

Types of Divergence

There are 2 types of divergence:

1) Slant Divergence: forms when there is a continuous and relatively smooth move in one direction (up or down) to form the divergence. Slant Divergences generally cover a shorter time frame than divergences formed with two peaks or two troughs.



2) Peak-trough Divergence: occurs when at least two peaks or two troughs develop in one direction to form the divergence. A series of two or more rising troughs (higher lows) can form a Positive Divergence and a series of two or more declining peaks (lower highs) can form a Negative Divergence. Peak-trough Divergences usually cover a longer time frame than slant divergences. On a daily chart, a peak-trough divergence can cover a time frame as short as two weeks or as long as several months.



John Murphy's Two-tiered Approach

In Technical Analysis of the Financial Markets, John Murphy advocates two-tiered approach to investing in order to avoid making trades against the major trend. The weekly MACD-Histogram can be used to generate a long-term signal in order to establish the tradable trend. Then only short-term signals that agree with the major trend would be considered.



If the long-term trend were bullish, only negative divergences with bearish centerline crossovers would be considered valid for the MACD-Histogram. If the long-term trend were bearish, only positive divergences with bullish centerline crossovers would be considered valid.

MACD Histogram's Drawbacks

1) The MACD-Histogram is an indicator of an indicator or a derivative of a derivative. The MACD is the first derivative of the price action of a security, and the MACD-Histogram is the second derivative of the price action of a security. As the second derivative, the MACD-Histogram is further removed from the actual price action of the underlying security. The further removed an indicator is from the underlying price action, the greater the chances of false signals. Keep in mind that this is an indicator of an indicator. The MACD-Histogram should not be compared directly with the price action of the underlying security.

2) Because MACD-Histogram was designed to anticipate MACD signals, there is a temptation to jump the gun. The MACD-Histogram should be used in conjunction with other aspects of technical analysis. This will help to alleviate the temptation for early entry. Another means to guard against early entry is to combine weekly signals with daily signals. Of course, there will be more daily signals than weekly signals. However, by using only the daily signals that agree with the weekly signals, there will be fewer daily signals to act on. By acting only on those daily signals that are in agreement with the weekly signals, you are also assured of trading with the longer trend and not against it.

3) Be careful of small and shallow divergences. While these may sometimes lead to good signals, they are also more apt to create false signals. One method to avoid small divergences is to look for larger divergences with two or more readily identifiable peaks or troughs. Compare the peaks and troughs from past action to determine significance. Only peaks and troughs that appear to be significant should warrant attention.





Venus

ps: The content and pictures of this article are excerpted from StockCharts.

MACD

之前概括了几篇关于MA的文章，今天要详细概括一下MACD，还有MACD Histogram。MACD是一个相当重要的TA indicator，所以，非要认识不可。

MACD是由一个名位Gerald Appel的人开发出来的，全名是Moving Average Convergence Divergence。

Definition of MACD

MACD: 12-day EMA minus 26-day EMA.
Hence,
MACD is positive (above zero) when 12-day EMA is above 26-day EMA.
MACD is negative (below zero) when 12-day EMA is below 26-day EMA.
MACD is at zero when 12-day EMA equals 26-day EMA, ie. when the two EMA cross-over.

MACD signal line: 9-day EMA of the MACD.




If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing, indicating a bullish period for the price plot.

If MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average is expanding. Downward momentum is accelerating, indicating a bearish period of trading.

MACD Bullish Signal

MACD generates bullish signal from 3 main sources:

1) Positive Divergence (of MACD and price)
MACD uptrend, price downtrend. MACD can either form as a series of higher Lows or a second Low that is higher than the previous Low. Positive Divergences are probably the least common of the three signals, but are usually the most reliable, and lead to the biggest moves.



2) Bullish Moving Average Crossover
Occurs when MACD moves above its signal line (its 9-day EMA). It's probably the most common signals and as such are the least reliable, therefore must be used in conjunction with other technical analysis tool.



Bullish Moving Average Crossovers are used occasionally to confirm a positive divergence. The second Low or higher Low of a positive divergence can be considered valid when it is followed by a Bullish Moving Average Crossover. Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days. The buy signal would then commence at the end of the third day.

3) Bullish Centerline Crossover
Occurs when MACD moves above the zero line and into positive territory. It's a clear indication that momentum has changed from negative to positive, or from bearish to bullish. After a Positive Divergence and Bullish Centerline Crossover, the Bullish Centerline Crossover can act as a confirmation signal. Of the three signals, moving average crossover are probably the second most common signals.





MACD Bearish Signal

MACD generates bearish signal from 3 main sources:

1) Negative Divergence (of MACD and price)
MACD downtrend, price uptrend. The Negative Divergence in MACD can take the form of either a lower High or a straight decline. Negative Divergences are probably the least common of the three signals, but are usually the most reliable, and can warn of an impending peak.



2) Bearish Moving Average Crossover
Occurs when MACD moves below its signal line (its 9-day EMA). It's probably the most common signals and as such are the least reliable, therefore must be used in conjunction with other technical analysis tool.



3) Bearish Centerline Crossover
Occurs when MACD moves below the zero line and into negative territory. It's a clear indication that momentum has changed from positive to negative, or from bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once MACD crosses into negative territory, momentum, at least for the short term, has turned bearish.





MACD Drawbacks

1) MACD is a lagging indicator, one way to overcome this is to use a MACD histogram.

2) MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels that historically represent overbought and oversold levels, MACD does not have any upper or lower limits to bind its movement. MACD can continue to overextend beyond historical extremes.

3) MACD calculates the absolute difference between two moving averages and not the percentage difference. MACD is calculated by subtracting one moving average from the other. As a security increases in price, the difference (both positive and negative) between the two moving averages is destined to grow. This makes its difficult to compare MACD levels over a long period of time, especially for stocks that have grown exponentially.

An alternative is to use the Price Oscillator, which shows the percentage difference between two moving averages:

(12 day EMA - 26 day EMA) / (26 day EMA)

The resulting percentage difference can be compared over a longer period of time. For the short term, MACD and the Price Oscillator are basically the same. The shape of the lines, the divergences, moving average crossovers and centerline crossovers for MACD and the Price Oscillator are virtually identical.






Venus

ps: The content and pictures of this article are excerpted from StockCharts and wikipedia.

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.






Venus

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

TA: Indicators and Oscillators

Indicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum.

Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals.

While some traders use a single indicator solely for buy and sell signals, they are best used in conjunction with price movement, chart patterns and other indicators.

Two main types of indicators

1) leading-strongest during periods of sideways of non-trending trading ranges
2) lagging-useful during trending periods

Two types of indicator constructions

1) fall in a bounded range-are called oscillators
2) do not fall in a bounded range

Two main ways indicators used to form buy and sell signals

1) crossovers
2) divergence - when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. This signals to indicator users that the direction of the price trend is weakening.




Venus

ps: Content in this article are excerpted from Investopedia.

TA: MA - disadvatages and strategies to tackle them

Downsides of MA

No Average is Foolproof

One of the major disadvantages of using moving averages is that they are relatively useless when an asset is trending sideways, compared to the times when a strong trend is present.

Responsiveness to Price Action

Short-term moving averages can be useful in identifying changing trends before a large move occurs, but the downside is that this technique can also lead to being whipsawed in and out of a position because these averages respond very quickly to changing prices. Because the quality of the transaction signals can vary drastically depending on the time periods used in the calculation, it is highly recommended to look at other technical indicators for confirmation of any move predicted by a moving average.

Beware of the Lag

Because moving averages are a lagging indicator, transaction signals will always occur after the price has moved enough in one direction to cause the moving average to respond. This lagging characteristic can often work against a trader and cause him or her to enter into a position at the least opportune time.

For example, the only way for a short-term moving average to cross above a long-term moving average is for the price to have recently moved higher - many traders will use this bullish crossover as a buy signal.

One major problem that often arises is that the price may have already experienced a large increase before the transaction signal is presented.As you can see in the figure above, the large price gap creates a buy signal in late August, but this signal is too late because the price has already moved up by more than 25% over the past 12 days and is becoming exhausted.

Strategies to using MA to overcome to tackle downside of MA

1) Crossovers
The most basic type of crossover is when the price of an asset moves from one side of a moving average and closes on the other. Price crossovers are used by traders to identify shifts in momentum and can be used as a basic entry or exit strategy.


The second type of crossover occurs when a short-term average crosses through a long-term average. This signal is used by traders to identify that momentum is shifting in one direction and that a strong move is likely approaching. A buy signal is generated when the short-term average crosses above the long-term average, while a sell signal is triggered by a short-term average crossing below a long-term average.


2) Triple Crossover and the Moving Average Ribbon
Additional moving averages may be added to the chart to increase the validity of the signal. Many traders will place the five-, 10-, and 20-day moving averages onto a chart and wait until the five-day average crosses up through the others ━ this is generally the primary buy sign.

Waiting for the10-day average to cross above the 20-day average is often used as confirmation, a tactic that often reduces the number of false signals. Increasing the number of moving averages, as seen in the triple crossover method, is one of the best ways to gauge the strength of a trend and the likelihood that the trend will continue.

The moving average ribbon: As you can see from the chart below, many moving averages are placed onto the same chart and are used to judge the strength of the current trend. When all the moving averages are moving in the same direction, the trend is said to be strong. Reversals are confirmed when the averages cross over and head in the opposite direction.


3) Filters
A filter is any technique used in technical analysis to increase one's confidence about a certain trade. For example, many investors may choose to wait until a security crosses above a moving average and is at least 10% above the average before placing an order. This is an attempt to make sure the crossover is valid and to reduce the number of false signals. The downside about relying on filters too much is that some of the gain is given up and it could lead to feeling like you've "missed the boat".

4) Moving Average Envelope
This strategy involves plotting two bands around a moving average, staggered by a specific percentage rate. For example, in the chart below, a 5% envelope is placed around a 25-day moving average. Traders will watch these bands to see if they act as strong areas of support or resistance. Notice how the move often reverses direction after approaching one of the levels. A price move beyond the band can signal a period of exhaustion, and traders will watch for a reversal toward the center average.


Moving Averages: Different Flavors

1) Moving Average Convergence Divergence (MACD)
It is used by traders to monitor the relationship between two moving averages. It is generally calculated by subtracting a 26-day exponential moving average from a 12-day EMA.

When the MACD has a positive value, the short-term average is located above the long-term average. As mentioned earlier, this stacking order of the averages is an indication of upward momentum. A negative value occurs when the short-term average is below the long-term average - a sign that the current momentum is in the downward direction. Many traders will also watch for a move above or below the zero line because this signals the position where the two averages are equal (crossover strategy applies here). A move above zero would be used as a buy sign, while a cross below zero can be used as a sell signal.

2) Signal/Trigger Line
Moving averages aren't limited to just stock prices; MAs can be created for any form of data that changes frequently. It is even possible to take a moving average of a technical indicator such as the MACD.

For example, a nine-period EMA of the MACD values is added to the chart in the figure below in an attempt to form transaction signals. As you can see, buy signals are generated when the value of the indicator (MACD) crosses above the signal line (dotted line), while short signals are generated from a cross below the signal line. It is important to note that regardless of the indicator being used, a move beyond a signal line is interpreted in the same manner; the only thing that varies is the number of time periods used to create it.


3) Bollinger Band
A Bollinger band technical indicator looks similar to the moving average envelope, but differs in how the outer bands are created. The bands of this indicator are generally placed two standard deviations away from a simple moving average.

In general, a move toward the upper band can often suggest that the asset is becoming overbought, while a move close to the lower band can suggest the asset is becoming oversold. Since standard deviation is used as a statistical measure of volatility, this indicator adjusts itself to market conditions. The tightening of the bands is often used by traders as an early indication that overall volatility may be about to increase and that a trader may want to wait for a sharp price move.






Venus

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

TA: Moving Average Cont'd

为什么叫"MOVING Average"？

Why technical traders call this tool a "moving" average and not just a regular mean?

Example of 10-day SMA:
Sum of 10-days data divided by 10=11 (10-day SMA)

However, as new values become available, the oldest data points must be dropped from the set and new data points must come in to replace them. Thus, the data set is constantly "moving" to account for new data as it becomes available. This method of calculation ensures that only the current information is being accounted for.

In the figure above, once the new value of 5 is added to the set, the red box (representing the past 10 data points) moves to the right and the last value of 15 is dropped from the calculation. Because the relatively small value of 5 replaces the high value of 15, you would expect to see the average of the data set decrease, which it does, in this case from 11 to 10.

What Do the Different Days Mean?

The most common time periods used in moving averages are 15, 20, 30, 50, 100 and 200 days. The shorter the time span used to create the average, the more sensitive it will be to price changes. The longer the time span, the less sensitive, or more smoothed out, the average will be.

Main Uses of MA:

1. Identify trend
Moving averages are lagging indicators, which means that they do not predict new trends, but confirm trends once they have been established.

As you can see in figure above, a stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend.

2. Measure momentum
In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 20 days or less. Looking at moving averages that are created with a period of 20 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.

One of the best methods to determine the strength and direction of an asset's momentum is to place three moving averages onto a chart and then pay close attention to how they stack up in relation to one another. The three moving averages that are generally used have varying time frames in an attempt to represent short-term, medium-term and long-term price movements.

In figure above, strong upward momentum is seen when shorter-term averages are located above longer-term averages and the two averages are diverging. Conversely, when the shorter-term averages are located below the longer-term averages, the momentum is in the downward direction.

3. Determine Support Level
Falling price of an asset will often stop and reverse direction at the same level as an important average.

4. Determine Resistance Level
Once the price of an asset falls below an influential level of support, such as the 200-day moving average, it is not uncommon to see the average act as a strong barrier that prevents investors from pushing the price back above that average. Many short sellers will also use these averages as entry points because the price often bounces off the resistance and continues its move lower.

5. Set stop-loss order
As you can see in figure below, traders who hold a long position in a stock and set their stop-loss orders below influential averages can save themselves a lot of money.

Venus

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

TA: Moving Average

A moving average is the average price of a security over a set amount of time.

By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favor.

3 most important MAs:

1. Simple Moving Average (SMA)
-most common
-takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation
-For example, in a 10-day moving average, the last 10 closing prices are added together and then divided by 10.


-increasing the number of periods used in the calculation of MA makes the average less responsive to changing prices, and by doing so, it's one of the best ways to gauge the strength of the long-term trend and the likelihood that it will reverse.

2. Linear Weighted Average
-least common
-is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods.
-For example, in a five-day linear weighted average, today's closing price is multiplied by five, yesterday's by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers.
-is used to address the problem of the equal weighting. ( Because many individuals argue that the usefulness of SMA is limited because each point in the data series has the same impact on the result regardless of where it occurs in the sequence. The critics argue that the most recent data is more important and, therefore, it should also have a higher weighting. Hence the invention of linear moving weighted average. )

3. Exponential Moving Average (EMA)
-uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average
-complex calculation method which is not necessary for normal users to understand
-important point: it is more responsive to new information relative to the simple moving average, and hence it's preferable over SMA by most users.


As you can see in Figure above, a 15-period EMA rises and falls faster than a 15-period SMA. This slight difference doesn’t seem like much, but it is an important factor to be aware of since it can affect returns.

Major Uses of Moving Averages

-to identify current trends and trend reversals
-to set up support and resistance levels.
-to quickly identify whether a security is moving in an uptrend or a downtrend depending on the direction of the moving average
-to look at the order of a pair of moving averages: When a short-term average is above a longer-term average, the trend is up. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend.


As in the above figure, when a moving average is heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend.

Moving Average Reversal:
formed in 2 ways

1. when the price moves through a moving average
For example, when the price of a security that was in an uptrend falls below a 50-period moving average, like in the figure below, it is a sign that the uptrend may be reversing.


2. when one moving average crosses through another
For example, as in figure below, if the 15-day moving average crosses above the 50-day moving average, it is a positive sign that the price will start to increase.


If the periods used in the calculation are relatively short, for example 15 and 35, this could signal a short-term trend reversal. On the other hand, when two averages with relatively long time frames cross over (50 and 200, for example), this is used to suggest a long-term shift in trend.

Reversal at MA

It is not uncommon to see a stock that has been falling stop its decline and reverse direction once it hits the support of a major moving average. A move through a major moving average is often used as a signal by technical traders that the trend is reversing. For example, if the price breaks through the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing.



Conclusion

The most common time frames that are used when creating moving averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be a good measure of a trading year, a 100-day average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month and 10-day average of two weeks.

Moving averages help technical traders smooth out some of the noise that is found in day-to-day price movements, giving traders a clearer view of the price trend.




Venus

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

TA: Chart Patterns

A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements.

Based on the assumption that history tends to repeat itself, the idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a stock.

There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete.

Below are some common chart patterns:

1. Head and Shoulders
-reversal pattern
-2 versions:
head and shoulders top (formed at the high of an upward movement, signals end of the uptrend)
head and shoulders bottom or inverse head and shoulders (signals a reversal in a downtrend)
-consists of four main parts: two shoulders, a head and a neckline.
-each individual head and shoulder is comprised of a high and a low.
-the neckline is a level of support or resistance.



2. Cup and Handle
-bullish continuation pattern
-in which the upward trend has paused but will continue upward once the pattern is confirmed.
-this price pattern forms what looks like a cup, which is preceded by an upward trend.
-the handle follows the cup formation and is formed by a generally downward/sideways movement.
-once the price movement pushes above the resistance lines formed in the handle, the upward trend can continue.
-wide ranging time frame for this type of pattern, ranging from several months to more than a year.



3. Double Tops and Bottoms
-reversal pattern
-created when a price movement tests support or resistance levels twice and is unable to break through.
-often used to signal intermediate and long-term trend reversals.



4. Triangles
-3 types:
symmetrical triangle, ascending and descending triangle
-last anywhere from a couple of weeks to several months.
-symmetrical triangle: two trendlines converge toward each other, neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction
-ascending triangle: the upper trendline is flat, while the bottom trendline is upward sloping, generally bullish pattern, look for an upside breakout.
-descending triangle, the lower trendline is flat and the upper trendline is descending, generally bearish pattern, look for a downside breakout.



5. Flag and Pennant
-short-term continuation patterns
-formed when there is a sharp price movement followed by a generally sideways price movement.
-then completed upon another sharp price movement in the same direction as the move that started the trend.
-last from one to three weeks.
-difference between a pennant and a flag can be seen in the middle section of the chart pattern.
-in a pennant, the middle section is characterized by converging trendlines, much like what is seen in a symmetrical triangle.
-in a flag, the middle section is characterized by channel pattern , with no convergence between the trendlines.
-in both cases, the trend is expected to continue when the price moves above the upper trendline.



6. Wedge
-either a continuation or reversal pattern.
-similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle generally shows a sideways movement. -the other difference is that wedges tend to form over longer periods, usually between three and six months.
-at the most basic level, a falling wedge (two lines converge downwards) is bullish and a rising wedge is bearish.



7. Gaps
-an empty space between a trading period and the following trading period
-occurs when there is a large difference in prices between two sequential trading periods (eg. if the trading range in one period is between $25 and $30 and the next trading period opens at $40)
-can be found on bar charts and candlestick charts but will not be found on point and figure or basic line charts.
-show that something of significance has happened in the security, such as a better-than-expected earnings announcement.
-3 main types:
breakaway: forms at the start of a trend
runaway (measuring): forms during the middle of a trend
exhaustion: forms near the end of a trend.

8. Triple Tops and Bottoms
-reversal patterns
-are formed when the price movement tests a level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend.
*Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern will look like a double top or bottom, which could lead a chartist to enter a reversal position too soon.



9. Rounding bottom or saucer bottom
-long term reversal pattern
-a shift from a downward trend to an upward trend.
-last anywhere from several months to several years.
-looks similar to a cup and handle pattern but without the handle.
*The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, makes it a difficult pattern to trade.






Venus

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