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- Alpha-Beta Trend Channel
- Arms Ease of Movement
- Average True Range
- Bollinger Bands
- Candlestick Charts
- Chaikin Oscillator
- Commodity Channel Index (CCI)
- Commodity Selection Index
- Cutler's RSI
- Demand Aggregate
- Demand Index
- Directional Movement Index
- Elliott Wave
- Fibonacci Ratios and Retracements
- Gann Square
- Haurlan Index
- Head & Shoulder Pattern
- Herrick Payoff Index
- Kagi Chart
- MACD (Moving Average Convergence/Divergence)
- McClellan Oscillator
- Moving Averages
- Norton High/Low Indicator
- Notis %V
- On Balance Volume
- Parabolic (SAR)
- Point & Figure Charts
- Price Patterns
- Random Walk Index
- Rate of Change
- Relative Strength Index
- Renko Chart
- Stoller STARC Bands
- Swing Index
- Time Cycles
- Trading Index
- Volume Accumulation
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.
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.
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 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.
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.
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.
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.
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))
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 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.
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.
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 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 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 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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
C=Today's Close CP=Yesterday's Close V=Today's Volume
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.
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 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).
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 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.
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:
- rs= average of x day’s up closes divided by average of x day’s down closes
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.
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
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)
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.
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.
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.
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.
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.
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.
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.
Please note: "Education Center" is designed to teach beginners about and how to trade the futures markets. However, before you begin trading on your own, we strongly advise you to first trade with the assistance of an experienced professional commodity broker. A broker can provide you with many valuable functions to suit your choice. You may only want to have a broker try to make sure you don’t make costly errors by incorrectly initiating and exiting a trade (a common error among beginning traders). On the other hand, you may want the broker to take a more active role: acting as a sounding board for your trades, providing his trading recommendations, research reports, charts, and other helpful trading tools. Or, you may want the broker to find you a commodity trading advisor that best meets your investment goals, affordability, and suitability to professionally manage your account.
Whatever your needs are, a United Futures Trading Broker is a trained professional, there to help and provide you the level of service that you want.
Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading.