Technical analysis is a financial expression used to indicate a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Quantitative analysis included technical analysis, which being an aspect of active management stands in contradiction to much of modern portfolio theory. The efficiency of technical analysis is disputed by efficient-market hypothesis since stock market prices are essentially unpredictable.
Many kinds of market indicator for technical analysis are founded; there are several useful market indicators :
Bollinger Bands, there are two indicators derived from Bollinger Bands, %b and BandWidth. %b, pronounced ‘percent b’, is derived from the formula for Stochastic and tells you where you are in relation to the bands. %b equals 1 at the upper band and 0 at the lower band. Indicating upperBB for the upper Bollinger Band, lowerBB for the lower Bollinger Band, and last for the last (price) value:
%b = (last ? lowerBB) / (upperBB ? lowerBB)
BandWidth informs you how wide the Bollinger Bands are on a normalized basis. Writing the same symbols as before, and middleBB for the moving average, or middle Bollinger Band:
BandWidth = (upperBB ? lowerBB) / middleBB
Using the default parameters of a 20-period look back and plus/minus two standard deviations, BandWidth is equal to four times the 20-period coefficient of variation.
Uses for %b contain system building and pattern recognition. Uses for BandWidth contain classification of opportunities arising from relative extremes in volatility and trend identification.
In a series of lectures at The World Money Show in Hong Kong, Asian Traders Investment Conference in Singapore, the Italian Trading Forum in Rimini, Italy, The European Technical Analysis Conference in London, England and the Market Technicians Symposium in New York, USA, all in Spring of 2010, John Bollinger introduced three new indicators based on Bollinger Bands. They are BB Impulse, which measures price change as a function of the bands, BandWidth Percent, which normalizes the width of the bands over time, and BandWidth Delta, which quantifies the changing width of the bands.
MACD (Moving Average Convergence/Divergence) is a technical analysis indicator formed by Gerald Appel in the late 1970s. It is used to mark changes in the strength, direction, momentum, and duration of a trend in a stock’s price.
The MACD is a calculation of the difference between two exponential moving averages (EMAs) of closing prices. This differentiation is charted over time, alongside a moving average of the difference. The divergence between the two is shown as a histogram or bar graph.
Exponential moving averages highlight recent changes in a stock’s price. By comparing EMAs of different periods, the MACD line illustrates changes in the trend of a stock. Then by comparing that difference to an average, an analyst can chart subtle shifts in the stock’s trend.
Since the MACD is founded on moving averages, it is inherently a lagging indicator. As a metric of price trends, the MACD is less useful for stocks that are not trending or are trading erratically.
Note that the term “MACD” is used both generally, to refer to the indicator as a whole, and specifically, to the MACD line itself.
MACD the graph above illustrates a stock with a MACD indicator underneath it. The indicator shows a blue line, a red line, and a histogram or bar chart which calculates the differentiation between the two lines. Values are calculated from the price of the stock in the main part of the graph.
For the example above this means:
- MACD line (blue line): difference between the 12 and 26 days EMAs
- signal (red line): 9 day EMA of the blue line
- histogram (bar graph): difference between the blue and red lines
- MACD = EMA[fast,12] – EMA[slow, 26]
- signal = EMA[period,9] of MACD
- histogram = MACD – signal
The period for the moving averages on which an MACD is based can vary, but the most commonly used parameters involve a faster EMA of 12 days, a slower EMA of 26 days, and the signal line as a 9 day EMA of the difference between the two. It is written in the form, MACD(faster, slower, signal) or in this case, MACD(12,26,9).
Stochastics oscillator is a momentum indicator that uses support and resistance levels. Dr. George Lane promoted this indicator in the 1950s. The term stochastic refers to the location of a current price in relation to its price range over a period of time. This way attempts to forecast price turning points by comparing the closing price of a security to its price range.
The indicator is defined as follows:
where H and L are respectively the highest and the lowest price over the last n periods, and
%D = 3 period moving average of %K.In working with %D it is important to remember that there is only one valid signal—a divergence between %D and the analyzed security
Many more market indicator like: Average Directional Index (ADX) , Mass Index , Moving Average (MA) , Parabolic SAR (SAR) , Trix , Vortex Indicator (VI) , Know Sure Thing Oscillator (KST) , Relative Strength Index (RSI) , True Strength Index (TSI) , Williams %R (%R) Accumulation/Distribution Index , Money Flow Index (MFI) , On-balance volume (OBV) , Volume Price Trend (VPT) , Force Index (FI) , Negative Volume Index (NVI) , Ease of movement , Put/call ratio (PCR), Average True Range (ATR) , Donchian channel , Standard deviation (?), etc. But commonly traders use the three market indicator which explained just now.