SUMMARY EXPLANATIONS OF TECHNICAL INDICATORS

The principal purpose of most technical indicators is to determine the trend.  A well known saying is that "the trend is your friend" based on the idea if you can stay with the trend you will be more successful.  Another purpose of the indicators is to try to determine when the trend may change, based on watching a combination of volume, price, and other indicators.  By nature, this is not an accurate science because the trend can change according to the mood of the markets but being aware of market statistics, positions of traders, or any significant change in the markets can be of benefit to those interested in the market.

 

 

STOCHASTICS:

This can be useful at spotting overbought or oversold conditions. It is a widely used method and is generally based on the closing price compared to the range in which the price traded during the day. When Stochastics are at extreme levels, the probability of a price reversal is greater. Like waves, they tend to go up and down.

Rising Stochastics tend to occur as a price rises.   Rising, in neutral area, means the line is rising, neither overbought or oversold, but somewhere close to the middle, usually on the way up.  Declining Stochastics of course refer to the opposite, a declining line headed towards oversold (sometime referred to as low levels), but close to the middle area with a ways to go to oversold.

They can sometimes stay at extremes for a while, so it is best to use this indicator in conjunction with others.

 

RELATIVE STRENGTH:

This indicator is mainly helpful in finding overbought or oversold conditions. As a general rule, an overbought condition exists when the relative strength reaches 70-80, and an oversold condition exists when the relative strength declines to 20-30, although in both cases, these figures are general guidelines and can be extended even further up or down.

When the relative strength is neither overbought or oversold, its usefulness is much less.

An extreme condition (i.e., overbought or oversold) in this indicator rarely lasts as much as a week (although on rare occasions can last longer).

 

 

 

 

 

 

TIME/PRICE INDEX:

This is a tool which analyzes the current trend, based on how much the price moves combined with the time in which it does it. If a price is rising at close to the same rate, this index will rise. However, if the price becomes stalled, begins to decline, or the rate of rise slows down significantly, the time line will catch up with it and this index will then be in a declining trend.

This tends to be a lagging indicator because by the time the trendline catches up with it, the price trend normally has already begun to reverse, although not always, because if the price remains the same the time line will catch up to it.. However, the change in price trend combined with other indicators can be useful.

 

 

 

 

 

PRICE MOMENTUM:

This is a relative measure of the rate of price movement. If a price is rising at approximately the same rate for several days, the momentum will rise. If however, the price is rising, but at a slower rate, the momentum will stop rising and decline instead.

For this reason, this indicator can sometimes be a leading indicator, since a slowdown in the rate of price movement can often precede a reversal in price.

Of course, the reverse holds true for declining prices. If a price is declining at about the same rate, the momentum will decline, but will start to rise if the rate of price decline slows down or of course, if the price turns around and begins to rise.

A neutral reading usually means the rate of price change is about the same as recent movement or no trend is discernible.

 

 

 

 

 

MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD):

This is a simple convergence of two moving averages, i.e., the average price line for the past week crossing over (either up or down) the average price line for the past two weeks. A rising MACD indicates the shorter average is crossing over the longer average, thus indicating a rising price.

As the price falls back the shorter price line will decline towards the longer average. When the lines meet it is considered neutral - a decline below neutral usually indicates a short term declining trend.

This indicator is best used when confirmed by other indicators.

Occasionally we will call this neutral if there is very little difference between the two averages or if no trend is discernible.

 

 

 

 

 

CHANNEL INDEX:

This is a relative figures based on recent price movement. It is a good indicator for spotting overbought or oversold conditions. The index will generally rise as the price rises, but will begin to turn down if the rise shows signs of faltering or turning down.

This is an especially good indicator when at extremes, and particularly when it is turning up or down from an overbought or oversold condition. Like most indicators, it is best used in conjunction with others.

Occasionally when no trend is discernible or the line is stalled in an area which is neither overbought or oversold, we refer to it as neutral.

 

 

 

 

 

 

40 DAY MOVING AVERAGE:

This is a simple calculation, which averages the price for the past 40 days. When the price trades lower than the 40 day average, it is usually in a declining trend and when it trades higher, the price tends to be rising.

This is a lagging indicator, but useful because this trend can establish the context of the price trend for the past two months. If the price is over the average and the other indicators are also positive, this can be helpful. Of course, the reverse holds true for declining prices.