Mathematical indicators of Technical analysis

what is indicator analysis?

Indicator analysis is a newer form interpretation of price volume charts. It is a mathoriented examination of price and volume information over a given period through a series of calculations. The objective of this mathematical examination is to predict where and in which direction the price may move in near feature. The indicator analysis attempts to establish a mathametical relationship of current price to past prices. Verious indicators have been used by technical analysts. These indicators can be clssified as trend following or oscillators.

Mathematical indicators

Simple moving average : It gives equal weight to each price point over the specified period. The user defines whether the high, low, or close is used and these price points are added together and averaged. This average price point is then added to the existing string and a line is formed. With the addition of each new price point the sample set drops off the oldest point. The simple moving average is probably the most widely used moving average.

Exponential moving average: An exponential moving average multiplies a percentage of the most recent price by the previous period's average price. Defining the optimum moving average for a particular currency pair involves "curve fitting". Curve fitting is the process of selecting the right number of periods with the correct type of moving average to produce the results the user is trying to achieve. By trial and error, technicians work with the time periods to fit the price data.

MACD

The MACD (Moving Average Convergence/Divergence) is a momentum indicator used to show the relationship between two moving averages. The MACD was developed by Systems and Forecasts publisher, Gerald Appel.

The MACD is simple and reliable. It uses moving averages to include trend-following characteristics. These lagging indicators are turned into a momentum oscillator and plotted as a line that moves above and below zero with no upper or lower limits. The MACD proves most effective in studying wide-swinging trading markets.

M ACD (2lines)

MACD (2-lines) shows the relationship between a 26-day and 12-day Exponential

Moving Average with a 9-day Exponential Moving Average (the "signal" or "trigger") line plotted on top to show buy/sell opportunities.

Three popular ways to use the MACD are crossovers, overbought/oversold conditionsanddivergences.

-Crossovers:The basic MACD trading rule is sell when the MACD falls below its signal line and buy when the MACD rises above it. It is also common to buy/sell when the MACD goes above/below zero.

-Overbought/OversoldConditions:The MACD is also can be used as an overbought/oversold indicator. If the shorter moving average pulls away dramatically from the longer moving average and the MACD rises it is likely that the security price is overextended and will soon return to more realistic levels.

-Divergences:Expect the end a current trend may be near when the MACD diverges from the price of a security. A bearish divergence occurs when the MACD is making new lows while prices fail to match these lows. Likewise, a bullish divergence occurs when the MACD is making new highs while prices fail to follow suit. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

MACDHistogram

Signals from the MACD Indicator can tend to lag behind price movements. The MACD Histogram is an attempt to address this situation showing the divergence between the MACD and its reference line (the 9-day Exponential Moving Average) by normalizing the reference line to zero. As a result, the histogram signals can show trend changes well in advance of the normal MACD signal.

A buy signal is generated as the histogram crosses above the zero point. A sell signal is generated as the histogram crosses below zero.

Relative Strength Index (RSI): RSI measures the momentum of price movements. It is also plotted on a scale ranging from 0 to 100. Traders will tend to look at RSI readings over 70 as an indicator of a market that is overbought or susceptible to a downturn, and readings under 30 as a market that is oversold or ready to turn higher.This logic therefore implies that prices cannot rise or fall forever and that by using an RSI study, one can determine with a reasonable degree of certainty when a reversal will come about. However, be very wary of trading on RSI studies alone. In many instances, an RSI can remain at very lofty or sunken levels for quite a while without prices reversing course. At these times, the RSI is simply telling you that a market is quite strong or quite weak and shows no signs of changing course.

Ways to use Relative Strength Index for chart analysis:

Tops and bottomsThe Relative Strength Index usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart;

Chart FormationsThe RSI often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart;

Failure swing ( Support or Resistance penetrations or breakouts)This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough);

Support and Resistance levelsThe Relative Strength Index shows, sometimes more clearly than price themselves, levels of support and resistance.

DivergencesAs discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in the direction of the RSI.

Calculation: RSI = 100-(100/(1+U/D))

Where:U — is the average number of positive price changes;D — is the average number of negative price changes.

Rate of change (ROC): ROC is an oscillator that measures the relationship between the current price of a share with the price prevailing a few days earlier. ROC measures the rate of

change in prices over a specific period of days on a regular and continuous basis. The ROC value can be zero,positive or negetive. These values are plotted on graph with time on X-axis and ROC values on the Y-axis. The ROC values oscillate around zero. ROC above zero indicates that prices are increasing and ROC below zero indicates that prices are decreasing.

Ease of Movement

The Ease of Movement Indicator was designed to illustrate the relationship between volume and price change. It shows how much volume is required to move prices.

High Ease of Movement values occur when prices are moving upward with light volume. Low values occur when prices are moving downward on light volume. If prices are not moving or if heavy volume is required to move prices then the indicator will read near zero.

A buy signal is produced when it crosses above zero (an indication that prices are more easily moving upward ). A sell signal is produced when the indicator crosses below zero (prices are moving downward more easily).

Developed by Richard Arms, Jr., perhaps better known for the Arms Index (TRIN), the formula is as follows:

[ {(H+L)/2} - {(Hp+Lp)/2} ] / [ V/(H-L) ]

Where:H = Today's highL = Today's lowHp = the previous day's high priceLp = the previous day's low priceV = current day's volume

Aroon Indicator

The Aroon Indicator was developed by Tushar Chande. Its comprised of two plots one measuring the number of periods since the most recent x-period high (Aroon Up) and the other measuring the number of periods since the most recent x-period low (Aroon Down). The plotted value is on a "stochastic" like scale ranging from 0 to 100. So, for example, if in a time-period of 14 days a security makes a new 14-day high, the Aroon Up = 100. When the security makes a new 14-day low, the Aroon Down = 100. When the security has not made a new high for 14 days, the Aroon Up = 0 and when the security has not made a new low for 14 days, the Aroon Down = 0.

When the Aroon Up line reaches 100 it is a sign of strength. If the Aroon Up persists between 70 and 100, a new uptrend is indicated. Likewise if the Aroon Down line falls to 100, potential weakness is indicated. If the Aroon Down remains persistently between 70 and 100, a new downtrend is indicated. A strong uptrend is indicated when the Aroon Up line persistently remains between 70 and 100 while the Aroon Down line persistently remains between 0 and 30. Likewise a strong downtrend is indicated when the Aroon Down line persistently remains between 70 and 100 while the Aroon Up line persistently remains between 0 and 30.

When the Aroon Down line rises above the Aroon Up line, potential weakness is indicated and expect prices to begin trending lower. When the Aroon Up line crosses the Aroon Down line, potential strength is indicated and prices should begin to trend higher.

When the Aroon Up and Aroon Down Lines move parallel with each other then consolidation is indicated. Expect further consolidation until a directional move is indicated either by an extreme level or a crossover.

Aroon is a Sanskrit word meaning "dawn's early light" or the change from night to day.

Aronoscillator

Developed by Tushar Chande, the Aroon Oscillator is based upon his Aroon Indicator. Much like the Aroon Indicator, the Aroon Oscillator measures the strength of a trend.

The Aroon Oscillator is constructed by subtracting Aroon Down from Aroon Up. Since Aroon Up and Aroon Down oscillate between 0 and +100, the Aroon Oscillator oscillates between -100 and +100 with zero as the center crossover line. The Aroon Oscillator signals an uptrend if it is moving towards its upper limit. It signals a downtrend when it is moving towards the lower limit. The closer the Aroon Oscillator value is to either extreme the stronger the trend.