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Indicators Friends or Foes? By Jose Cid. Disclaimer.
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Disclaimer These workshops and webinars are designed to instruct you on using Technical Analysis and are not a recommendation to buy or sell, but rather guidelines to interpreting price charts. The information, software, and techniques presented at the workshop should only be used by investors who are aware of the risk inherent in trading. TA Academy, its associates and partners shall have no liability for any investment decisions based on the use of the information and trading strategies provided herein. Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you cant afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. Hypothetical or simulated performance results have certain limitations. Unlike and actual performance record, simulated results do no represent actual trading. Also, since the trades have nor been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated Trading programs in general are also subject to the fact that they are designed with the benefit of hindsight, no representation is being made that any account will or is likely to achieve profit or losses similar to those shown.
What are indicators? In Economy: Statistics used to measure current conditions as well as to forecast financial or economic trends. In Fundamental Analysis: Economic indicators that quantify current economic and industry conditions are used to provide insight into the profit potential of public companies. In Technical Analysis: A mathematical calculation based on a securities price and/or volume. The result is used to forecast prices and/or price moves.
How many indicators are available? • There are more than 250 known indicators • Vast majority are variations of other indicators • May be ineffective • Correct use require knowledge • Trader’s psychology affects results
How many indicators are available? • Oscillators • Momentum • Volume • Sentiment • Volatility • Geometric • Combination: • Technical with technical • Technical with fundamental
Example – Oscillators and Momentum • MACD - is one of the simplest and most effective momentum indicators available. MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. Because MACD is unbounded, it is not particular useful for identifying overbought and oversold levels. • Chaikin - An oscillator created by subtracting a 10-day EMA from a 3-day EMA of the accumulation/distribution line. • TRIX - TRIX is a momentum indicator that displays the percent rate-of-change of a triple exponentially smoothed moving average of a security's closing price. Oscillating around a zero line, TRIX is designed to filter out stock movements that are insignificant to the larger trend of the stock. • CCI - The assumption behind the indicator is that commodities (or stocks or bonds) move in cycles, with highs and lows coming at periodic intervals.
Example – Oscillators and Momentum Stochastic MACD RSI
Example – Oscillators and Momentum TRIX MACD RSI
Example – Volume and Sentiment • Volume – displays the volume traded, number of trades or financial volume. • OBV - his was one of the first and most popular indicators to measure positive and negative volume flow. The concept behind the indicator: volume precedes price. OBV is a simple indicator that adds a period's volume when the close is up and subtracts the period's volume when the close is down. A cumulative total of the volume additions and subtractions forms the OBV line. • Chaikin Money Flow - is calculated from the daily readings of the Accumulation/Distribution Line. The Closing Location Value multiplied by volume forms the Accumulation/Distribution Value for each period. • Accumulation / Distribution - is calculated based on the location of the close, relative to the range for a period. If the stock closes on the high, the top of the range, then the value would be plus one; if the stock closes above the midpoint of the high-low range, but below the high, then the value would be between zero and one; if the stock closes exactly halfway between the high and the low, then the value would be zero; if the stock closes below the midpoint of the high-low range, but above the low, then the value would be negative; If the stock closes on the low, the absolute bottom of the range, then the value would be minus one.
Example – Volume and Sentiment Accumulation / Distribution Chaikin Money Flow Volume
Example – Volume and Sentiment Accumulation / Distribution OBV Volume
Example – Volume and Sentiment Accumulation / Distribution Chaikin Accumulation / Distribution Volume
Example – Volatility • Bollinger Bands – volatility bands that are placed above and below a moving average. • Standard deviation - is a statistical term that provides a good indication of volatility. It measures how widely values (closing prices for instance) are dispersed from the average. • ATR- measures a security's volatility. As such, the indicator does not provide an indication of price direction or duration, it simply shows the degree of price movement or volatility. • Historical Volatility - The realized volatility of a financial instrument over a given time period. Generally, this measure is calculated by determining the average deviation from the average price of a financial instrument in the given time period. Standard deviation is the most common but not the only way to calculate historical volatility.
Example – Volatility Standard Deviation Bollinger Band Width ATR
Example – Volatility Historical Volatility Bollinger Band Width ATR
Example – Geometric • Trendlines– display (with some subjectivity) the trend by joining relevant bottoms (or tops) • Fibonacci retracement – apply the Fibonacci retracement levels to evaluate potential support and resistance levels • Fibonacci projections – apply the Fibonacci level projections to evaluate potential support and resistance levels • Graphic figures – correlate the appearance of the price movements to geometrical figures, which have specific meaning and potential market outcome
Combining Indicators • Discretionary – study charts and make decisions based on the analysis • Systematic – follow a Trading System, use a systematic strategy to analyse charts • Define market states • Scan the market to find potential trades
Combining Indicators Market Evaluation – Market State
Combining Indicators Market Scan – What to trade
What is Analysis Paralysis? The term "analysis paralysis" or "paralysis of analysis" refers to over-analyzing (or over-thinking) a situation, so that a decision or action is never taken, in effect paralyzing the outcome. A decision can be treated as over-complicated, with too many detailed options, so that a choice is never made, rather than try something and change if a major problem arises. A person might be seeking the optimal or "perfect" solution upfront, and fear making any decision which could lead to erroneous results, when on the way to a better solution.
Evolution of a Trader • Acquire knowledge • Adequate Capital • Capital preservation • Become competent • Become confident • Become consistent
Tweeter: @josecidtrader E-mail: josecid@TAacademy.com
