# The stochastic indicator is plotted as two lines

The stochastic indicator is plotted as two lines, %K and %D. The range of the stochastic oscillator is between 0 and 100. The lower reversal zone is the area of the indicator that is below 20. When %K is above 80, it shows the prices may be overbought and may be reversing trend shortly. When %K is below 20, it shows the prices may be oversold and may be reversing trend shortly. When %K line crosses above %D line , buy signal is generated and When %K line crosses below %D line , a sell signal is generated.

Calculations:

% K = 100 {C – L (n)} / {H (n) – L (n)} where C is the current close,

L (n) is the low of the (n) period, and H (n) is the high of the (n) day period.

% D = a moving average of % K for the specified period.

When to use…

Stochastic can be used with several interpretations: among them are divergences, crossovers, and overbought/oversold. Signals of stochastic are to be used in conjunction with trend following indicator. In a strong trending market stochastic can fail completely. When the %K line rises above the %D line it is considered bullish, and when the %K line falls below the %D line, it is considered bearish. A buy signal is generated when either line dips below and then rises above 20, or a bearish signal is generated when either line rises above and then dips below 80.

You can eliminate some false signals by using only the signals that correspond to the direction of the intermediate- to long-term trends.

FIBONACCI RETRACEMENT (FR)

Fibonacci retracement levels are used as support or resistance levels and they are computed using the Fibonacci ratio. Fibonacci ratios derived from Fibonacci series (0, 1,1,2,3,5,8,13….). The various Fibonacci ratios are 0.236, 0.382, 0.500, 0.618, etc. It Plots percentage retracement lines based upon the mathematical relationship within the Fibonacci sequence. These retracement levels provide multiple support and resistance levels that can be used to target price objectives.

Based upon the number sequence, a set of percentage retracements have been developed that identify important support or resistance areas. These are 23.6%, 38.2%, 50%, 61.8%, 76.4%, and 100%. Applying these percentages to the difference between the high and low price for the period selected generates a set of price objectives with regard to each retracement level. The theory of Fibonacci retracements states that after a period of market movement in one direction (up or down), prices retrace a significant portion of the previous trend before resuming the move in the original direction. These countertrend moves tend to fall into certain predictable parameters, which are often the Fibonacci Retracement levels.

When to use…

Prices tends to stop frequently at Fibonacci Retracement Levels, each of the retracement levels present themselves as possible reversal points. Traditionally 50% was used for retracements, but the

38.2 and 61.8 Fibonacci levels, which many equate to 33% (1/3rd) and 67% (2/3rds), are also the important levels and are seen very often in the markets. These levels can best be used in conjunction with other technical signals. For i.e. selling a bounce in a strong downtrend that rallies up to a Fibonacci Retracement Level at the same time that the market becomes overbought and is also touching its near-term downtrend line.

BOLLINGER BANDS

Bollinger bands is commonly used volume indicator, created by John Bollinger, that can show you not only what direction prices are going but also how volatile the price movement is. Bollinger bands consist of two bands—an upper band and a lower band—and a moving average that are generally plotted on the price movement of a chart.

Bollinger bands are typically based on a 20-period moving average. This moving average runs through the middle of the two bands. The upper band is plotted 2 standard deviations above the 20period moving average. The lower band is plotted 2 standard deviations below the 20period moving average.

When to use…

1) Sharp price changes tend to occur after the bands tighten, as volatility lessens.

2) When prices move outside the bands, a continuation of the current trend is implied.

3) Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend.

ACCUMULATION / DISTRIBUTION (AD)

It is a momentum indicator that tracks the relationship between price and volume and acts as a leading indicator. It attempts to gauge supply and demand by determining whether investors are generally “accumulating” (buying) or “distributing” (selling) a certain stock by identifying divergences between stock price and volume flow.

Calculations:

“Close Location Value” or CLV is a value based on the location of the close, relative to the range for the period. The CLV ranges from plus one to minus one with the center point at zero.

The CLV is then multiplied by the corresponding period’s volume and the cumulative total forms the Accumulation/Distribution Line.

When to use…

A bullish signal is given when the Accumulation/Distribution Line forms a positive divergence and a bearish signal is considered when it forms a negative divergence. Stop loss should be placed below the most recent low or high respective to the trade.

CHAIKIN OSCILLATOR

The Chaikin Oscillator was developed by Marc Chaikin. It is based on the assumption that volume and price normally rise and fall together. When this relationship changes, a possible change in the price trend may result.

The Chaikin Oscillator is calculated as follows:

Chaikin Oscillator = (3 day simple moving average of the ADL) – (10 day simple moving average of the ADL)

ADL = (close – low) – (high – close) * Volume) Where ADL = Accumulation/Distribution line (high – low)

When to use…

1. There are two ways in which the Chaikin Oscillator is used. The most important signal is divergence between prices and the oscillator: when prices reach a new high or low in a trend and the oscillator fails to exceed its previous extreme reading and then reverses direction.

2. A second way to use the oscillator is to note changes in direction. BUY signals are given when the price of the security is above its 14-day moving average, the Oscillator turns upward from a negative value. SELL signals are given when the price of the security is below its 14-day moving average, the Oscillator turns downwards and the value of the Oscillator is positive.

PARABOLIC SAR (PSAR)

Parabolic SAR (PSAR) was developed by J. Welles Wilder Jr. and helps in determining the entry and exit points. SAR stands for Stop and Reverse. SAR computes stop loss levels using previous day’s data.

Some of the concepts in PSAR computation are:

Extreme price: This is the highest price recorded to date during a long trade or the lowest price recorded to date during a short trade.

Acceleration factor: The acceleration factor is a rate at which the SAR converges with the price. Typically, the minimum acceleration factor is kept at 2% for every new level reached in the existing trend up to a maximum of 20%.

When to use…

1. The Parabolic system is similar to a moving average, but it has the added advantage of a trailing stop/reversal indicator that moves in the direction of the price trend. The SAR points below the price point indicate a long position while the SAR point above the price point indicates a short position. When the market penetrates this “stop and reverse” point, the current position should be liquidated and the opposite position should be taken. If long, liquidate the long position and establish a short position. If short, liquidate the short position and establish a long position.

2. When a trend begins, the SAR points move in small increments and maintain their furthest difference from the price. This allows the trend to develop and prevents positions from being closed out in the event of an early adverse price movement. When the trend becomes established and gains momentum, the gap between SAR’s widens and distance from the price narrows. This is due to the Acceleration Factor (AF) in the system.

VOLUME WEIGHTED MOVING AVERAGE (VWMA)

As stated in its name, the volume weighted moving average (VWMA) is similar to the simple moving average; however, the VWMA places more emphasis on the volume recorded for each period.

Therefore, if you place a 20-period simple moving average (SMA) on your chart and at the same time, a 20-period volume weighted moving average, you will see that they pretty much follow the same trajectory. However, on further review, you will notice the averages do not mirror each other exactly.

An N-day volume weighted moving average (VWMA) is the average of the past N days closing prices, each weighted in proportion to the volume on that day.

Calculations:

When to use…

This indicator gives buy and sell signals upon crossovers with price or another MA. Thus a buy signal is generated when a fast-moving volume weighted moving average crosses above a slow-moving simple moving average and a sell signal is generated when it crosses below the slow moving simple moving average.

Average Directional Movement Index (ADX)

ADX indicator used in technical analysis as an objective value for the strength of the trend. ADX is non-directional so it quantify a trend’s strength regardless of whether it is up or down.

Calculations:

+DM = Today’s High – Yesterday’s High (when price moves upward)

-DM = Yesterday’s Low – Today’s Low (when price moves downward)

Calculate the true range for the day. True range is the largest of Today’s High – Today’s Low, Today’s High – Yesterday’s Close, and Yesterday’s Close – Today’s Low

+DM14 = ( Prev +DM * 13 + Current +DM) /14

-DM14 =( Prev -DM * 13 + Current -DM) /14 TR14 = ( Prev TR * 13 + Current TR) /14

Next, calculate the Directional Indicators:

+DI14 = +DM14 divided by TR14

-DI14 = -DM14 divided by TR14

Then, calculate the components of the Average Directional Movement Index (ADX): Calculate the DI Difference:

Record the difference between +DI14 and -DI14 as a positive number. Calculate the Directional Index (DX):

DX = DI Difference divided by the sum of +DI14 and -DI14 ADX = (Prev DX * 13 + Current DX) / 14

When to use…

The ADX oscillator fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish but merely assesses the strength of the current trend. A reading above 40 indicate a strong downtrend as well as a strong uptrend.

ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to rise from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.