- Trend Indicators
- Momentum Indicators
- Combining Indicators
Trend Indicators
Trend Indicators are designed to show us the trend of a security, among the many indicators available we will discuss:
- Moving Averages
- MACD
- Ichimoku Kinko Hyo
- ADX
Moving Averages
- The moving average is a trend following indicator
- It does not predict future market action but follows it
- Moving Averages are used to identify the direction of the trend and define potential support and resistance levels
- It can be viewed as a curving trendline
Types of Moving Averages
- The only significant difference between the various types of moving averages is the weight assigned to the data
- Simple moving averages apply equal weight to all prices
- Exponential and weighted averages apply more weight to recent prices
- Triangular averages apply more weight to prices in the middle of the time period
- Variable moving averages change the weighting based on the volatility of prices
Interpretation - Bullish Price Crossover
- Compare the relationship between the price and its moving average
- A bullish signal is given when prices rise above the moving average
Interpretation - Bearish Price Crossover
- Compare the relationship between the price and its moving average
- A bearish signal is given when prices fall below the moving average
Moving Average Convergence/Divergence
- Also known by traders as “M-A-C-D”
- Developed by Gerald Appel in the late seventies, the MACD is considered one of our best mathematical tools
- It is a hybrid indicator that can be used as a trend following or even momentum indicator
MACD - Calculation
- The MACD is made up of two plots
- MACD Line: (12-period EMA – 26-period EMA)
- Signal Line: 9-period EMA of MACD Line
Interpretation - Centerline Crossover
- Centerline Crossover – MACD Line VS Zero Line used for trend direction
- Bullish centerline crossover occurs when the MACD moves above the zero line to turn positive
- Bearish centerline crossover occurs when the MACD moves below the zero line to turn negative
Interpretation II - Signal Line Crossover
- Signal Line Crossover – MACD Vs Signal Line used for price corrections
- Bullish crossover occurs when the MACD turns up and crosses above the signal line
- Bearish crossover occurs when the MACD turns down and crosses below the signal line
Ichimoku kinko Hyo
- The Ichimoku Kinko Hyo was developed by Goichi Hosoda and offered to the public when he published his book in 1969
- Ichimoku translates as “a glance” or “one look”
- Kinko Hyo translates as “the table of equilibrium” or “balance table”
- Defines supports and resistances, identifies trend direction, reflects momentum, and provides trading signals
- It is made of 5 different plots but these lines are interpreted together as a single indicator for signal generation
Ichimoku kinko Hyo Plots
- Tenkan-sen
- Kijun-sen
- Senkou Span A
- Senkou Span B
- Chikou Span
Ichimoku kinko Hyo - Conclusion
- Movements above or below the cloud define the overall direction
- Within the trend, the cloud changes colour as the trend ebbs and flows
- Crossover of Tenkan-Sen and Kijun-Sen generates signals
- Movements above or below the Chikou Span can be used to generate signals
- All 5 plots of the Ichimoku Kinko Hyo can be used as supports and resistances
Directional Movement System
- Is it trending or is it not?
- (ADX), (-DI) and (+DI) represent the “Directional Movement System”
- Identifies whether the market is trending
- Categorizes securities by their trending characteristics
Interpretation – Trend Strength
- ADX determines if a security is trending or not
- A strong trend is present when ADX is above 25
- No trend is present when ADX below 20
Interpretation – Trend Direction
- Plus DI and Minus DI determine trend direction
- Bullish signal when +DI crosses above -DI
- Bearish signal when +DI crosses below -DI
Momentum Indicators
- “Momentum” refers to the velocity or the rate-of-change of a security’s price
- Momentum indicators oscillates above or below an equilibrium line
- All momentum indicators compare price changes
- They measure if a rising trend is accelerating or decelerating or whether prices are declining at a faster or slower pace from a period to another
Three Dimensions Analysis
- Direction – Bullish or Bearish
- Area – Overbought or Oversold
- Divergence – Bullish or Bearish
Direction - Bullish or Bearish
- The same techniques that are used for analyzing price trends can be applied to momentum
- When the indicator goes below its trendline we have a bearish signal
- When the indicator goes below its moving average we have a bearish signal and vice versa
- A trend reversal in momentum is not always associated with a similar reversal in the price – PRICE IS THE BOSS
Area - Overbought & Oversold
- The financial markets are essentially driven by psychological forces
- Our emotions move from one extreme to another, from fear to greed, from hope to despair
- This is what causes momentum indicators to fluctuate from oversold to overbought levels
- Momentum reflects crowd psychology and measures the intensity of the emotions of market participants
- Banded oscillators fluctuate between 0% and 100%
- For RSI and IMI extreme levels are those beyond 70% and 30%
- For Stochastic extreme levels are those beyond 80% and 20%
- Other oscillators are unbanded and traders must manually identify overbought and oversold lines
- Extreme levels are manually determined and marked where the indicator previously toped or bottomed
Indicators Analysis
We will combine the above indicators to analyze three main aspects of a security:
- Main Trend – Bullish or Bearish
- Current Move – Bullish or Bearish
- Extremes – Overbought or Oversold
Main Trend Analysis
- If 5 Indicators are Bullish, Current Move is Strong Up and vice versa
- If 4 Indicators are Bullish, Current Move is Up and vice versa
- If 3 Indicators are Bullish, Current Move is Weak Up and vice versa
Main Trend Analysis - Example
- Price > SMA 100 = Bullish Signal
- Price > EMA 55 = Bullish Signal
- MACD > Zero = Bullish Signal
- Price > Ichimoku Cloud = Bullish Signal
- Momentum > 100 = Bullish Signal
Current Move Analysis
- If 5 Indicators are Bullish, Current Move is Strong Up and vice versa
- If 4 Indicators are Bullish, Current Move is Up and vice versa
- If 3 Indicators are Bullish, Current Move is Weak Up and vice versa
Current Move Analysis - Example
- MACD < EMA 9 = Bearish Signal
- RSI > SMA 8 = Bullish Signal
- ROC < SMA 8 = Bearish Signal
- %K > %D = Bullish Signal
- +DI < -DI = Bearish Signal
Extremes Analysis
- If 2 Indicators are Overbought, Price is Overbought
- If 2 Indicators are Oversold, Price is Oversold
- Else, Price is Neutral
Extremes Analysis - Example
- 30 < IMI < 70 = Neutral
- 30 < RSI < 70 = Neutral
- -100 < CCI < 100 = Neutral
Example - Conclusion
