Glossary of Technical Analysis
Terms for Futures Contracts
The following information is provided without warranty of any
kind.
Alpha-Beta Trend Channel
The Alpha-Beta Trend Channel study uses the standard deviation of
price variation to establish two trend lines, one above and one
below the moving average of a price field. This creates a channel
(band) where the great majority of price field values.will occur.
Arms Ease of Movement
Developed by Richard W. Arms, Jr., this analysis routine expands
on Mr. Arms' Equivolume charting tool by quantifying the shape
aspects of the plotted boxes. The purpose of this quantifying is to
determine the ease, or lack thereof, with which a particular issue
is able to move in one direction or another. The ease with which an
issue moves is a product of a ratio between the height (trading
range) and width (volume) of the plotted box. In general, a higher
ratio results from a wider box and indicates difficulty of movement.
A lower ratio results from a narrower box and indicates easier
movement. This ratio is then related to a comparison between today's
and yesterday's trading-range midpoint values to determine the ease
of movement value (EMV). A moving average is then applied to the EMV
value - the moving average period can be varied in order to make the
EMV flexible as a trading tool.
Average True Range
True range is the greatest of the following differences:
- Today's high to today's low
- Today's high to yesterday's close
- Today's low to yesterday's close
The range is normally the "high - low". However, any time the
value of yesterday's close is not within the range of today's bar,
rule b) or rule c) applies. As with most other indicators, the
periodic value is summed and smoothed to create the final indicator.
Bollinger Bands
Bollinger Bands plot trading bands above and below a simple
moving average. The standard deviation of closing prices for a
period equal to the moving average employed is used to determine the
band width. This causes the bands to tighten in quiet markets and
loosen in volatile markets. The bands can be used to determine
overbought and oversold levels, locate reversal areas, project
targets for market moves, and determine appropriate stop levels. The
bands are used in conjunction with indicators such as RSI, MACD
histogram, CCI and Rate of Change. Divergences between Bollinger
bands and other indicators show potential action points. As a
general guidline, look for buying opportunities when prices are in
the lower band, and selling opportunities when the price activity is
in the upper band.
Candlestick Charts
Method of drawing stock (or commodity) charts which originated in
Japan. Requires the presence of Open, High, Low and Close price data
to be drawn. There are two basic types of candels, the white body
and the black body. As with regular bar charts, a vertical line is
used to indicate the periods (normally daily) high to low. When
prices close higher than they opened a white rectangle is drawn on
top of the high-low line. This rectangle originates at the opening
price level and extends up towards the closing price. A down day is
drawn in black. The combination of several candles results in
patterns (with names like "two crows" or "bullish englufing patern")
which give insight into future price activity. For other Japanese
charting approaches also see Renko and Kagi charts.
Chaikin Oscillator
The Chaikin Oscillator is created by subtracting a 10 period
exponential moving average of the Accumulation/Distribution line
from a 3 period moving average of the Accumulation/Distribution
Line.
Commodity Channel Index (CCI)
The CCI is a timing system that is best applied to commodity
contracts which have cyclical or seasonal tendencies. CCI does not
determine the length of cycles - it is designed to detect when such
cycles begin and end through the use of a statistical analysis which
incorporates a moving average and a divisor reflecting both the
possible and actual trading ranges. Although developed primarily for
commodities, the CCI could conceivably be used to analyze stocks as
well.
Forumla: CCI=(M-MAVG)/(0.015xDAVG)
M=1/3 (H+L+C) H=Highest price for a period L=Lowest price for a
period C=Closing price for a period MAVG=N-period simple moving
average of M DAVG= 1/n x SUMi=1 to n (ABS(MI-MAVG))
Commodity Selection Index
The Commodity Selection Index is related to the Directional
Movement Index. Whereas the ADXR plot of the DMI is used to rate
contracts from the longer term, trend-following point of view, the
CSI is used to rate items in the more volatile short term. The
Commodity Selection Index takes into account the ADXR from the
Directional Movement Index, the Average True Range, the value of a
one cent move as well as margin and commission requirements. The
higher the CSI rating, the more attractive an item is for trading.
Cutler's RSI
Cutler's RSI is a slight variation of Welles Wilder's original
Relative Strength Index. The RSI is a momentum oscillator used to
identify overbought and oversold conditions by keying on specific
levels, generally 30 and 70, on a chart scaled from 0 to 100. The
study can also be used to detect the following:
- Movement which might not be as readily apparent on the bar
chart
- Failure swings above 70 or below 30 which indicate reversals
- Support and resistance
- Divergences between RSI and price
Cutler's RSI is calculated as follows:
- RSI = 100 - (100 / ( 1 + RS ) )
-
- RS = UPAV:x / DNAV:x, and . . .
- UPAV:x = (E, period's Closes UP) / period
- DNAV:x = (z: period's Closes DOWN) / period
- A Close UP (or DOWN) = CLOSE - CLOSE previous
If the difference is positive, it is a Close UP. If the
difference is negative, the sign is changed and it is a Close DOWN.
Demand Aggregate
The Demand Aggregate is used similarly as the Demand Index but
adds Open Interest as a consideration in the formula. In its
simplest terms, the system confirms price trends by analyzing
concurrent Volume and Open Interest trends. For example, a rise in
price, coupled with rising Volume and Open Interest figures, is
considered a bullish indicator. Interpretations are made with
respect to the relationship between the movement of Volume, Open
Interest, and Price.
Demand Index
The Demand Index is a leading indicator which combines volume and
price data in such a way as to indicate a change in price trend. It
is designed so that at the very least it is a coincidental
indicator, never a lagging one. The calculation of this index is
relatively complex. This analysis is based on the general
observation that volume tends to peak before prices peak, both in
the commodity and stock markets.
Detrend
Detrend is simply another interpretation of a moving average. It
provides a means of identifying underlying cycles not apparent when
the moving average is viewed in its original form by effectively
hiding the major cycles from view. The moving average line is drawn
as a straight, horizontal basis line on the Detrend chart. Price
bars are then re-positioned along this line depending on their
relation to the moving average line.
Directional Movement Index
Directional Movement uses a rather complicated set of
calculations designed to rate the directional movement of
commodities or stocks on a scale from 0 to 100. For those traders
who employ trend-following methods, commodities or stocks rating in
the upper end of the scale would be attractive. Those using
non-trending methods, commodities or stocks rating at the lower end
of the scale should be considered for trading. At its most basic,
the Directional Movement would affect trading in the following
manner: Long positions would be taken when the "+DI" line crosses
over the "-DI" line. Short positions would be taken when the "-DI"
line crosses over the "+DI" line. Further components of this index
are the ADX and ADXR lines.
Elliott Wave
Elliott wave theory goes beyond traditional charting techniques
by providing an overall view of market movement that helps explain
why and where certain chart patterns develop. The three major
aspects of wave analysis are pattern, time and ratio. The basic
Elliott pattern consits of a 5 wave uptrend followed by a three wave
correction. Each "leg" of a wave in turn consists of smaller waves.
Elliott waves can be used to successfully define where the market
currently is in relation to "the big picture" but is usually to
unreliable for short term trading.
Fibonacci Ratios and Retracements
They can be applied both to price and time, although it is more
common to use them on prices. The most common levels used in
retracement analysis are 61.8%, 38% and 50%. When a move starts to
reverse the 3 price levels are calculated (and drawn using
horizontal lines) using a movements low to high. These retracement
levels are then interpreted as likely levels where counter moves
will stop. It is interesting to note that the Fibonacci ratios were
also known to Greek and Egyptian mathematicians.The ratio was known
as the Golden Mean and was applied in music and architecture. A
Fibonacci spiral is a logarithmic spiral that tracks natural growth
patterns.
Gann Square
The Gann Square is a mathematical system for finding support and
resistance based upon a commodity or stock's extreme low or high
price for a given period. Attainment of a particular price level in
a square tells you the next probable price peak or valley of future
movement. The probable price levels tend to be more reliable if they
are extrapolated from Gann Square values along one of the major axes
of the Gann Square. The Gann Square is generated from a central
value, normally a all-time or cyclical high or low. If a low is
used, the numbers are incremented by a constant amount to generate
the Gann Square. If a high is used, the numbers are decremented
during the square generation.
Haurlan Index
This indicator is calculated daily from the plurality of NYSE
advances over declines. There are three components of the Haurlan
index: Short Term, Long Term and Intermediate Term.
1) Short Term. A 3-day exponential moving average is taken of the
net NYSE advances over declines, measuring the short term condition
of the market. When this index moves above +100, a market short term
buy signal is generated. The signal is in effect until the market
drops below -150 at which time a sell signal is generated. The sell
signal remains in effect until the index moves above +100 again.
2) Intermediate Term. Same as above but with a 20-day exponential
moving average. This index is considered the most important of the
three. Market buys and sells are determined in this index by the
crossing of trend lines or support/resistance levels depending on
the particular market in question. For example, when the market is
basing out in preparation for an uptrend, a resistance level may be
set up. Once its value is determined, buy and sell signals could be
generated for that market.
3) Long Term. Same as above except for a 200-day exponential
moving average. Useful for determining trends but not for signals.
Also can be inverted. A reversal
pattern that is one of the more common and reliable patterns. It is
comprised of a rally which ends a fairly extensive advance. It is
followed by a reaction on less volume. This is the left shoulder.
The head is comprised of a rally up on high volume exceeding the
price of the previous rally. And the head is comprised of a reaction
down to the previous bottom on light volume. The right shoulder is
comprised of a rally up which fails to exceed the height of the
head. It is then followed by a reaction down. this last reaction
down should break a horizontal line drawn along the bottoms of the
previous lows from the left shoulder and head. This is the point in
which the major decline begins. The major difference between a head
and shoulder top and bottom is that the bottom should have a large
burst of activity on the breakout.
Herrick Payoff Index
This is a commodity trading tool, useful for the early spotting
of changes in price trend direction. The Payoff Index is best used
to distinguish trends that are destined to continue from those that
will most likely be short-lived. The Payoff Index is a commodity
trading tool that is useful in the early identification of changes
in the direction of price trends. The Payoff Index frequently helps
distinguish between a rally in a trend that is destined to continue
and a significant trend change that will provide a worthwhile
trading opportunity. The Payoff Index tends to give coincident
signals within a day or two before a significant change in price
trend. This advance action is accomplished through use of trading
volume and contract open interest to modify the price action.
Analysts have observed that volume trends often change before a
price-trend change. There are also generally accepted relationships
between the price trend and the trend of open interest.
Kagi Chart
Like Candlestick and Renko charts, Kagi charts come from Japan
and were made popular in the USA by Steve Nison. Kagi charts display
a series of connecting vertical lines where the thickness and
direction of the lines are dependent on the price action. If closing
prices continue to move in the direction of the prior vertical Kagi
line, then that line is extended. However, if the closing price
reverses by a pre-determined "reversal" amount, a new Kagi line is
drawn in the next column in the opposite direction. An interesting
aspect of the Kagi chart is that when closing prices penetrate the
prior column's high or low, the thickness of the Kagi line changes.
MACD (Moving Average Convergence/Divergence)
The MACD is used to determine overbought or oversold conditions
in the market. Written for stocks and stock indices, MACD can be
used for commodities as well. The MACD line is the difference
between the long and short exponential moving averages of the chosen
item. The signal line is an exponential moving average of the MACD
line. Signals are generated by the relationship of the two lines. As
with RSI and Stochastics, divergences between the MACD and prices
may indicate an upcoming trend reversal.
McClellan Oscillator
This index is based on New York Stock Exchange net advances over
declines. It provides a measure of such conditions as
overbought/oversold and market direction on a short-to-
intermediateterm basis. The McClellan Oscillator measures a bear
market selling climax when it registers a very negative reading in
the vicinity of -150. A sharp buying pulse in the market would be
indicated by a very positive reading, well above 100.
Momentum
Momentum provides an analysis of changes in prices (as opposed to
changes in price levels). Changes in the rate of ascent or descent
are plotted. The Momentum line is graphed positive or negative to a
straight line representing time. The position of the time- line is
determined by price at the beginning of the Momentum period. Traders
use this analysis to determine overbought and oversold conditions.
When a maximum positive point is reached, the market is said to be
overbought and a downward reaction is imminent. When a maximum
negative point is reached, the market is said to be oversold and an
upward reaction is indicated.
Moving Averages
The moving average is probably the best known, and most
versatile, indicator in the analysts tool chest. It can be used with
the price of your choice (highs, closes or whatever) and can also be
applied to other indicators, helping to smooth out volatility. As
the name implies, the Moving Average is the average of a given
amount of data. For example, a 14 day average of closing prices is
calculated by adding the last 14 closes and dividing by 14. The
result is noted on a chart. The next day the same calculations are
performed with the new result being connected (using a solid or
dotted line) to yesterday’s. And so forth. Variations of the basic
Moving Average are the Weighted and Exponential moving averages.
Norton High/Low Indicator
The Norton High/Low Indicator uses results from the Demand Index
and the Stochastic study and is designed to pick tops and bottoms on
long term price charts. Two lines are generated: the NLP line and
the NHP line. The system also uses level lines at -2 and -3. The NLP
line crossing -3 to the downside is the signal that a new bottom
will occur in 4-6 periods, using daily, weekly, or mnthly data.
Similarly, the NHP line crossing -3 to the downside indicates a new
top in the same time frame. The indicator tends to be more reliable
using longer term data (weekly or monthly). When either indicator
drops below the - 3 level, a reversal may be imminent. The reversal
(or hook) is the signal to enter the market. For greater
reliability, use the Norton High/Low Indicator together with other
studies for confirmation.
Notis %V
A way to measure volatility is to measure the daily ranges
between the high and the low. Volatility is high when the daily
range is large and low when the daily range is small. The Notis %V
study contains two separate indicators. It divides market volatility
into upward and downward components (UVLT and DVLT). Both are
plotted separately in the same window, and can be plotted as an
oscillator. The upward component is also compared to the total
volatility (UVLT + DVLT) and expressed as a percentage; thus the
name, %V. Volatility can be a key to options trading. A good sense
of market volatility can help you avoid those frustrating times when
the market moves your way but your option still loses value.
On Balance Volume (OBV)
OBV is one of the most popular volume indicators and was
developed by Joseph Granville. Constructing an OBV line is very
simple: The total volume for each day is assigned a positive or
negative value depending on whether prices closed higher or lower
that day. A higher close results in the volume for that day to get a
positive value, while a lower close results in negative value. A
running total is kept by adding or subtracting each day's volume
based on the direction of the close. The direction of the OBV line
is the thing to watch, not the actual volume numbers.
Formula: OBV=SUM(C-CP)/(ABS(C-CP)xV)
C=Today's Close CP=Yesterday's Close V=Today's Volume
Parabolic (SAR)
The Parabolic is a Time/Price system for the automatic setting of
stops. The stop is both a function of price and of time. The system
allows a few days for market reaction after a trade is initiated
after which stops begin to move in more rapid incremental daily
amounts in the direction the trade was initiated. For example, when
a long position is taken the stop will move up regardless of price
direction. However, the distance that the stop moves up is
determined by the favorable distance the price has moved. If the
price fails to move favorably within a certain period of time, the
stop reverses the position and begins a new time period.
Point & Figure Charts
The Point and Figure (PF) charting method is a technique that has
been used for many years in analyzing the variations in prices of
stocks and commodities. There are several types of PF charting
methods. Some employ trend lines, resistance levels, and various
other additions to the chart. In this study, we shall be concerned
with only daily reversal type charts. The principal advantage of a
PF chart is that it is much easier to read and interpret than other
types of charts. All the small, and often confusing, price movements
are eliminated, and only the most important features of the price
action remain. It would be reasonable to think of this method as a
filter that (hopefully) allows only meaningful information to enter
the chart and ultimately the decision process. Two basic symbols are
used:
X Denotes the continuance of an increase in price and is
always "stacked" in the vertical direction.
O Denotes the continuance of a decrease in price and is
always "stacked" in the vertical direction.
While prices are rising X's are used. When falling, O's are used.
They are always plotted on rectangular grid graph paper such that
columns of X's and O's alternate. A Point and Figure chart is
characterized by the specification of two parameters: box size and
reversal number. The box size dictates the price range associated
with a particular box (cubical area within the grid), while the
reversal number specifies the conditions which terminate a column of
X's and begin a column of O's and vice-versa.
Price Patterns
Price Patterns are formations which appear on commodity and stock
charts which have shown to have a certain degree of predictive
value. Some of the most common patterns include: Head & Shoulders
(bearish), Inverse Head & Shoulders (bullish), Double Top (bearish),
Double Bottom (bullish), Triangles, Flags and Pennants (can be
bullish or bearish depending on the prevailing trend).
Randow Walk Index
This indicator is defined as the ratio of an acutal price move to
the expected random walk. If the move is greater than a random walk,
and thus a trend is present, its index will be larger that 1.0
Rate of Change
Rate of Change is used to monitor momentum by making direct
comparisons between current and past prices on a continual basis.
The results can be used to determine the strength of price trends.
Note: This study is the same as the Momentum except that Momentum
uses subtraction in its calculations while Rate of Change uses
division. The resulting lines of these two studies operated over the
same data will look exactly the same - only the scale values will
differ.
RSI - Relative Strength Index
This indicator was developed by Welles Wilder Jr. Relative
Strength is often used to identify price tops and bottoms by keying
on specific levels (usually "30" and "70") on the RSI chart which is
scaled from from 0-100. The study is also useful to detect the
following:
- Movement which might not be as readily apparent on the bar
chart
- Failure swings above 70 or below 30 which can warn of coming
reversals
- Support and resistance levels
- Divergence between the RSI and price which is often a useful
reversal indicator
The Relative Strength Index requires a certain amount of lead-up
time in order to operate successfully.The formula for calculating
the RSI is:
- rsi=100-(100/1-rs)
- rs= average of x day’s up closes divided by average of x day’s
down closes
Renko Chart
The Renko charting method probably got its name from "renga",
which is the Japanese word for bricks. Introduced by Steve Nison, a
well-known authority on the Candlestick charting method, Renko
charts are similar to Three Line Break charts except that in a Renko
chart, a line is drawn in the direction of the prior move only if a
fixed amount (i.e., the box size) has been exceeded. The bricks are
always equal in size. Example: With a five unit Renko chart, a 20
point rally is displayed as four equally sized, five unit high Renko
bricks.
Stochastic
The Stochastic Indicator is based on the observation that as
prices increase, closing prices tend to accumulate ever closer to
the highs for the period. Conversely, as prices decrease, closing
prices tend to accumulate ever closer to the lows for the period.
Trading decisions are made with respect to divergence between % of
"D" (one of the two lines generated by the study) and the item's
price. For example, when a commodity or stock makes a high, reacts,
and subsequently moves to a higher high while corresponding peaks on
the % of "D" line make a high and then a lower high, a bearish
divergence is indicated. When a commodity or stock has established a
new low, reacts, and moves to a lower low while the corresponding
low points on the % of "D" line make a low and then a higher low, a
bullish divergence is indicated. Traders act upon this divergence
when the other line generated by the study (K) crosses on the
right-hand side of the peak of the % of "D" line in the case of a
top, or on the right-hand side of the low point of the % of "D" line
in the case of a bottom. Two variations of the Stochastic Indicator
are in use: Regular and Slow. When the Regular plot of the
Stochastic too choppy, the "Slow" version can often clarify the
results by reducing the sensitivity of the calculations. The formula
is:
Note: 5 Days is the most commonly used value for %K
%K=100 {(C-L5)/(H5-L5)}
The %D line is a 3 day smoothed version of the %K line
%D=100(H3/L3) where H3 is the 3 day sum of (C-L5) and L3 is the 3
day sum of (H5-L5)
Stoller STARC Bands
STARC bands create a channel surrounding a simple moving average.
The width of the created channel varies with a period of the average
range; thus the name ('ST' for Stoller, plus 'ARC' for Average Range
Channel). STARC Bands, in a fashion similar to Bollinger Bands, will
tighten in steady markets and loosen in volatile markets. However,
rather than being based on closes, the STARC Bands are based on the
average true range, thus giving a more in depth picture of the
market volatility. While the penetration of a Bollinger Band may
indicate a continuation of a price move, the STARC Bands define
upper and lower limits for normal price action.
Swing Index
The Swing Index (primarily for use with commodity trading)
attempts to determine real market direction, and changes in
direction, by making use of the most significant comparisons between
the results (Open-High-Low-Close) of the current and previous days'
trading.
Time Cycles
Some analysts believe that price analysis alone only offers half
the information needed for successful trading. The other part is
time, more exactly time cycles, which give actual insight into
understanding the movements of markets. Common cycles are the
seasonal cycles apparent in many commodity markets, but cylces can
be detected on intra-day charts as well.
Trading Index
This index (also kown as the "Arms" index, or "TRIN") measures
the relative strength of volume associated with advancing stocks
against the strength of volume associated with declining stocks.
When used as a short term indicator, readings below 1.0 are
considered bullish while readings above 1.0 are considered bearish.
An extreme bearish reading would be 1.5 or higher; an extreme
bullish reading would be .5 and lower. Readings of 2.0 or .3 would
be considered "climactic". For the intermediate term, a bearish sign
is an index over 1.0, bullish under 1.0. For the long term, the
Trading Index can be viewed as an overbought / oversold indicator.
Trix
Single linear exponential smoothing was developed in the early
1950s as a means of prediction along a straight line whose slope was
based on previous data. The Triple Exponential Smoothing Oscillator
(Trix) has now been developed to act on trends of a higher order
than linear. Trix uses a one-day momentum of a triple exponential
smoothed price series to produce an indicator which is cycle
dependent. Changes in the Trix direction are less prone to whipsaws
than standard cycle-momentum indicators. The period is chosen to
filter out any insignificant cycles shorter than the period. Fourier
Analysis or visual observation may be used to find the proper cycle
length of a given market. Raising the number of days will remove
more small cycles and smooth out the oscillator, but at the loss of
sensitivity. The more smoothing that is applied to the data, the
more of a lag in the oscillator, but not nearly the lag of a normal
moving average.
Volume Accumulation
This volume indicator addresses some of On Balance Volume's
shortcomings and was developed by Marc Chaikin. Where OBV assigns
all of a day's volume a positive or negative value, Volume
Accumulation counts only a percentage of the volume as positive or
negative, depending on where the close is in relation to the average
price of the day. The only time the entire day's volume is assigned
a positive value is when the close is the same as the day's high.
The opposite applies for a close at the day's low.
Volatility
This analysis is based on the idea that stocks bottom from
"panic" selling, after which a rebound is imminent. One way of
measuring this phenomenon is to observe a widening range between
high and low prices each day. In general a progressively wider
range, observed over a relatively short period of time, can indicate
that a bottom is near. Price tops are generally reached at a more
leisurely pace and can be characterized by a narrowing of the price
range. This measure of the trading range takes place over a
specified period in order to determine whether or not an issue is
being "dumped" and is approaching a bottom. A pre-requisite to a
valid bottom is an increase in the volatility line above the
reference line. In a similar manner, an indication of an imminent
top would be a decrease in the volatility line below the reference
line. As long as volatility is rising, in all probability a stock
will not approach a top. It should be noted that this study should
be used in conjunction with trend following analyses and momentum
oscillators for confirmation and accuracy. |
