Glossary of Technical Indicators

GLOSSARY OF

TECHNICAL INDICATORS

This book is given for reference. So readers may or may not read it.

Before reading this book you should keep in mind that the numerical values given in this book may vary as per requirement. The numerical values are

basically the “parameters” of the indicators.

A TO Z : GLOSSARY OF TECHNICAL ANALYSIS :

A

A/D Line (Breadth) : The Advance/Decline Line (Breadth) is one of the oldest and most basic key indicators, plotting the number of advancing issues divided by the total number of both advancing and declining issues. The basic premise behind volume indicators, including the Accumulation/Distribution Line, is that volume precedes price. Volume reflects the amount of shares traded in a particular stock and is a direct reflection of the money flowing into and out of a stock. Many times before a stock advances, there will be period of increased volume just prior to the move.

If there are more advancing issues than declining issues, the market is said to be strong or having good breadth . New highs in the index have tended to lead peaks in the market. When the line is breaking out to the upside one can usually expect the market pick up in the next few months.

A/D Line Daily : The most widely used indicator of market breadth and one of the oldest is an advance/decline line. This simple but powerful indicator is constructed by taking a cumulative total of the difference of the number of NYSE issues advancing over those declining in a day. Similar indexes may be constructed for the NASDAQ, Amex, or sub-indexes.

Because the number of issues listed on any of these exchanges has expanded greatly in recent years, a simple plurality of advances over declines will give greater weight to more recent years so a better way to look the numbers is to use a ratio.

The A/D line is a leading indicator and will peak before the major averages because of two reasons. First because interest rates peak before stock prices by about 9 months, then interest rate sensitive stocks tend to peak before the rest of the market and pull down the A/D line. Secondly, some industries peak before others as the economy cools off and these industries and sectors will drag down the A/D line before the rest of the economy.

Absolute Breadth Index : The Absolute Breadth Index is a market momentum indicator developed by Norman G. Fosback that displays the activity, volatility, and change taking place on the New York Stock Exchange. It calculates the difference between the advancing issues and declining issues and, by dropping the sign (taking the absolute value), discards the actual direction prices are headed.

By discarding market direction, the ABI functions as an "activity index." High values indicate market activity and change, while low readings indicate a lack of change. Fosback has noted historically high values typically lead to higher prices three to twelve months later. One highly reliable variation of the Absolute Breadth Index is to divide the weekly ABI by the total issues traded. If after a ten-week moving average is calculated and readings are above 40%, they are said to be very bullish. Readings below 15% are bearish.

The Absolute Breadth Index is calculated by subtracting the number of declining issues from the number of advancing issues and taking the absolute value of the difference:

ABI = |Advancing Issues - Declining issues|

recalling that |-100| = 100 = |+100|

Accumulation Swing Index : Developed by Welles Wilder, the Accumulation Swing Index is a cumulative total of the Swing Index. It compares current prices and previous prices to illustrate the 'real' price of a security. As Wilder said, "Somewhere amidst the maze of Open, High, Low and Close prices is a phantom line that is the real market." The Accumulation Swing Index is his attempt to show that line and provide a numerical value to quantify price swings.

With the Accumulation Swing Index attempting to show the "real market," it closely resembles actual prices. This allows usage of classic support/resistance analysis on the Index. Typical analysis involves looking for breakouts, new highs and lows, and divergences. The summary of the calculation for the Accumulation Swing Index is:

Previous Accumulation Swing Index + Swing Index

Step-by-step instructions on calculating the Swing Index are provided in Wilder's book, New Concepts In Technical Trading Systems.

Accumulation/Distribution Line : The Accumulation/Distribution Line was developed by Marc Chaikin to assess the cumulative flow of money into and out of a security. He decided to focus on the price action for a given period (day, week, month) and derived a formula to calculate a value based on the location of the close, relative to the range for the period. This is the "Close Location Value" or CLV. The CLV ranges from plus one to minus one with the center point at zero.

The signals for the Accumulation/Distribution Line are fairly straightforward and involve divergence or confirmation. A bullish signal is given when the Accumulation/Distribution Line forms a positive divergence. Be wary of weak positive divergences that fail to make higher reaction highs. A two-week positive divergence should be suspect. However, a multi-month positive divergence deserves serious attention.

The Accumulation/Distribution Line can also be used to confirm the strength or sustainability behind an advance. In a healthy advance, the Accumulation/Distribution Line should remain up or at least move in an uptrend. If the stock is moving up at a rapid pace, but the Accumulation/Distribution Line has trouble making higher highs or starts going sideways, buying pressure is relatively weak.

The Accumulation/Distribution Line can at time have problems detecting subtle changes in volume flows. The rate of change in a downtrend could be slowing, but it may be impossible to detect until the Accumulation/Distribution Line turns up. This drawback has been addressed in the form of the Chaikin Oscillator or Chaikin Money Flow.

Advance/Decline Line : The Advance/Decline Line (A/D Line) is one the most widely used measures of market breadth. As a cumulative total of the Advancing-Declining Issues indicator, the A/D Line has proven to be a very effective gauge of the market's strength.

The A/D Line is calculated from the running total of advancing stocks minus declining stocks. Designed to measure the strength of the market, a sector or industry, it makes the basic underlying assumption that as long as there are more advancing issues than declining issues, the market remains strong. While a stock index is a composite of stock prices, the A/D Line is a composite of stock movement . This gives the daily A/D Line a downward bias relative to the weekly A/D Line and the price-based indices. This downward bias is a result of the average stock tending to have as many up days as down days, but ultimately the gains will tend to accumulate faster than the losses.

The A/D Line can function as a measure of overall market strength. When more stocks are advancing than declining, the A/D Line moves up. When declining stocks outnumber advancing stocks the A/D Line will move down.

Many feel that the A/D Line shows market strength better than the more commonly reported Dow Jones Industrial Average (DJIA) or the S&P 500 Index. Studying the trend of the A/D Line can illustrate if the market is in a rising or falling trend, if the trend is still intact, or how long a current trend has prevailed.

The A/D Line can also be used to spotlight a divergence between itself the DJIA or a similar index. Often, an end to a bull market can be predicted when the A/D Line begins to round over even while the DJIA is trying to make new highs. Historically, when a divergence develops between the DJIA and the A/D Line, it is the DJIA that has changed direction and moved in the direction of the A/D Line.

Advance/Decline Ratio : The Advance/Decline Ratio (A/D Ratio) illustrates the ratio of advancing issues to declining issues. This is used to display market breadth and while similar to the Advancing-Declining Issues, the A/D Ratio remains constant regardless of the number of issues that are traded on the New York Stock Exchange (which has steadily increased).

This indicator's value is demonstrated by its ability as an overbought/oversold indicator. When the indicator moves towards its upper limits this is inidcative of a overbought situation and implies a correction may occur soon. When the indicator is towards its lower limits this is indicative of an oversold situation and suggests a technical rally is due. Day-to-day fluctuations of the Advance/Decline Ratio are often eliminated by smoothing the ratio with a moving average.

Advancing-Declining Issues : Advancing-Declining Issues is a market momentum indicator used to show the difference between advancing issues and declining issues on the New York Stock Exchange. This information is used to determine the strength of the market on a daily basis.

The formula for the Advancing-Declining Issues is simple:

Advancing Issues - Declining Issues

This calculation is is the basis of many market breadth indicators, including the Advance/Decline Line, Advance/Decline Ratio, Absolute Breadth Index, Breadth Thrust, McClellan Oscillator and Summation Index. Indicators that use advancing and declining issues in their calculations are called market breadth indicators. Plotted by itself, this indicator is helpful to determine daily market strength. Strong up days can have readings of more than +1,000. Very weak days can have readings of under -1,000.


B

Balance of Market Power : The strength of the bulls versus bears is measured by the ability of each to push prices to extreme levels. The Balance of Market Power indicator assigns a score to each based on the following reward values:

" Reward based on open measures the ability of each group to push opening price in opposite directions (bears down and bulls up).

" Reward based on close measures the ability of each group to push closing price in opposite directions (bulls up from the low price and bears down from the high price).

" Reward based on open close measures how each day finishes (up or down), the winning group gains and extra score.

Each reward is calculated to the full price movement for each day (HighPrice-LowPrice). Once each side has been calculated the daily reward is calculated for both the bulls and bears. The Balance of Market Power indicator is calculated as a difference between each side s daily rewards.

The Balance of Market Power is an oscillator and supports price divergence, trends, and overbought-oversold levels. It can also help to determine market trends. This indicator measures the velocity of the price trend and results can be less sustainable than a price trend because maintaining the same velocity of a trend is more difficult than the trend itself.

Beta Coefficient : The Beta Coefficient measures the systematic risk of a security. It is used to illustrate the relative volatility of a security (or portfolio) in comparison with the market as a whole. As the benchmark of this measurement, the market is defined of having a beta of 1.0.

A security with a Beta value >1.0 is indicative of a security that is more volatile than the market. A Beta <1.0 is then less volatile than the market. If the Beta = 1.0, the security's price is said to move along with the market.

Beta2 : Beta2 is a measure of the systematic risk of a security, much like the Beta Coefficient. The difference between Beta and Beta2 being that instead of using the Simple Rate of Change, Beta2 uses the Moving Average of the Rate of Change in its calculation.

Remember, with either form of Beta, securities with a value >1.0 will be more volitile than the market. A Beta <1.0 is said to be less volatile than the market.

Bollinger Bands : Similar to Moving Average Envelopes, Bollinger Bands are plotted at 2 standard deviations above and below a 20-day exponential moving average. As standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods.

As a rule, prices are considered to be overextended on the upside ("overbought") when they touch the upper band. They are considered overextended on the downside ("oversold") when they touch the lower band. Using two standard deviations ensures that 95% of the price data will fall between the two trading bands.

The simplest way to use Bollinger Bands is to use the upper and lower bands as price targets. In other words, if prices bounce off the lower band and cross above the 20 day average, then the upper band becomes the upper price target.

A crossing below the 20 day average would identify the lower band as the downside target. In a strong uptrend, prices will usually fluctuate between the upper band and the 20 day average. In that case, a crossing below the 20 day average warns of a trend reversal to the downside.

As Bollinger Bands creator John Bollinger noted - a move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.

Breadth Thrust Indicator : The Breadth Thrust Indicator is a market momentum indicator. Calculated by dividing a 10-day exponential moving average of the number of advancing issues by the number of advancing plus declining issues, a "Breadth Thrust" occurs when the indicator rises from below 40% to above 61.5%. This indicates that the market has rapidly changed from an oversold condition to one of strength yet has not become overbought.

The Breadth Thrust Indicator was developed by Dr. Martin Zweig who points out that most bull markets begin with a Breadth Thrust. According to Zweig there have only been fourteen Breadth Thrusts in the S&P 500 since 1945 with an average gain of 24.6% following these Thrusts.


C

CCT Bollinger Bands Oscillator : The CCT Bollinger Band Oscillator , also sometimes referred to as the CCT Bollinger Band Oscillator , reconfigures John Bollinger's classic Bollinger Bands (envelopes plotted at two Standard Deviations above and below a moving average) by drawing two parallel lines replacing the erratic envelopes.

The parallel lines represent a measurement of two Standard Deviations from the mean and are assigned a value of zero and 100 on the chart. The indicator represents the price as it travels above and below the mean (50%) and outside the two standard deviations (zero and 100). Penetration of the upper band represents overbought conditions while penetration of the lower band signifies oversold conditions.

Usage of the CCT Bollinger Band Oscillator to identify "failure swings" and "divergences" can lead to significant reversals.

Chaikin Money Flow : Developed by Marc Chaikin, the Chaikin Money Flow compares total volume to the closing price and the daily highs and lows to determine how many issues are bought and sold of a particular security. It is based upon the assumption that a bullish stock will have a relatively high close price within its daily range and have increasing volume. However, if a stock consistently closed with a relatively low close price within its daily range with high volume, this would be indicative of a weak security. There is pressure to buy when a stock closes in the upper half of a period's range and there is selling pressure when a stock closes in the lower half of the period's trading range. Of course, the exact number of periods for the indicator should be varied according to the sensitivity sought and the time horizon of individual investor.

An obvious bearish signal is when Chaikin Money Flow is less than zero. A reading of less than zero indicates that a security is under selling pressure or experiencing distribution.

A second potentially bearish signal is the length of time that Chaikin Money Flow has remained less than zero. The longer it remains negative, the greater the evidence of sustained selling pressure or distribution. Extended periods below zero can indicate bearish sentiment towards the underlying security and downward pressure on the price is likely.

The third potentially bearish signal is the degree of selling pressure. This can be determined by the oscillator's absolute level. Readings on either side of the zero line or plus or minus 0.10 are usually not considered strong enough to warrant either a bullish or bearish signal. Once the indicator moves below -0.10, the degree selling pressure begins to warrant a bearish signal. Likewise, a move above +0.10 would be significant enough to warrant a bullish signal. Marc Chaikin considers a reading below -0.25 to be indicative of strong selling pressure. Conversely, a reading above +0.25 is considered to be indicative of strong buying pressure.

The Chaikin Money Flow is based upon the assumption that a bullish stock will have a relatively high close price within its daily range and have increasing volume. This condition would be indicative of a strong security. However, if it consistently closed with a relatively low close price within its daily range and high volume, this would be indicative of a weak security.

Chaikin Oscillator : The Chaikin Oscillator , or Chaikin A/D Oscillator as it is sometimes referred to, stems from the concept behind the Accumulation/Distribution Line. The basic premise of the Chaikin Oscillator (and the A/D Line) is that the degree of buying or selling pressure can be calculated by the location of a close relative to the high and low for the corresponding period. There is buying pressure when a stock closes in the upper half of a period's range and there is selling pressure when a stock closes in the lower half of the period's trading range.

The Chaikin Oscillator is created by subtracting a 10-period exponential moving average of the Accumulation/Distribution Line from a 3-period exponential moving average of the Accumulation/Distribution Line

The Chaikin Oscillator may be an excellent tool for generating buy and sell signals when its action is compared to price movement. However, because the Chaikin Oscillator is an

indicator of an indicator, it is prudent to look for confirmation of a positive or negative divergence, say a moving average crossover, before counting this as a signal.

Two bullish signals that can be generated from the Chaikin Oscillator: positive divergences and bullish centerline crossovers . Two bearish signals that can be generated from the Chaikin Oscillator: a negative divergence and a bearish centerline crossover .

Chaikin Volatility Indicator : Simply put, the Chaikin Volatility Indicator is the difference between two moving averages of a volume weighted accumulation-distribution line. By comparing the spread between a security's high and low prices, it quantifies volatility as a widening of the range between the high and the low price.

One interpretation of these calculations assumes that market tops are frequently accompanied by increased volatility (as investors get nervous and become indecisive) and latter stages of a market bottom are generally accompanied by decreased volatility. Chaikin has written that an increase in the Volatility Indicator over a relatively short time period indicates that a bottom is near and that a decrease in volatility over a longer time period indicates an approaching top.

To calculate Chaikin Volatility: First, calculate an exponential moving average (normally 10 days) of the difference between High and Low for each period:

EMA [H-L] Then, calculate the percentage change in the moving average over a further period (normally 10 days):

Chande Momentum Oscillator : The Chande Momentum Indicator is closely related to other indicators such as the Relative Strength Index. It differs from momentum indicators such as RSI and Stochastics by using information from both up and down days.

The usual method of interpreting the Chande Momentum Indicator is to look for overbought and oversold conditions. Generally the overbought level is at +50 and the oversold level at -50. These levels are approximate to the 70/30 levels on the Relative Strength Index. Either condition is a strong indicator of a change in the trend of buying/selling.

The CMI is also useful to spot trends, used in a similiar manner as the Vertical Horizontal Filter (VHF). The higher the Chande Momentum Indicator the stronger the trend. Buy when a long period CMI crosses above the short period moving average of the CMI. Sell at the converse.

Commodity Channel Index (CCI) : The CCI or Commodity Channel Index is a means by which the variation of a security's price is calculated from its statistical mean.

Much like the Average Directional Movement Index, the CCI can help give a valuable measurement of the overall trendiness of a market. The faster the CCI is accelerating, the more strongly the market is trending. While it is perhaps mathematically possible for the CCI to move upward while the market does not, this is unlikely.

Typically oscillating between +100 and -100, a CCI reading above +100 implies an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally).

Keep in mind that the CCI can provide important information to a trader even when it is not giving entry signals. If a market stays inside the +/-100 range most of the time, it's demonstrating the absence of a trend, so it might be best to avoid that market or use a countertrend trading strategy.

Despite its name, the CCI can be used effectively on any type of security, not just commodities.

Commodity Selection Index (CSI) : As an indicator of momentum, the Commodity Selection Index, or CSI is designed to help select commodities suitable for short-term trading. Designed for short-term traders who can handle the risks associated with highly volatile markets, a high CSI rating indicates that the commodity has strong trending and volatility characteristics. These characteristics are brought out by the Directional Movement factor in the calculation - the volatility characteristic by the Average True Range factor.

CSI creator Welles Wilder describes his focus to trading commodities with high CSI values. As these commodities are highly volatile, they have the potential to make the quickest return in the shortest time.

The CSI is based upon the ADXR component of the Directional Movement Indicator. For full calculation details on the Commodity Selection Index, see Wilder's book "New Concepts in Technical Trading Systems."

Correlation Analysis : Correlation Analysis compares a stock against either an indicator or another stock and illustrates how similar/dissimilar they are to one another.

You can use correlation analysis in two basic ways: to determine the predictive ability of an indicator or to determine the correlation between two securities.

When comparing the correlation between an indicator and a security's price, a high positive coefficient (more then +0.70) tells you that a change in the indicator will usually predict a change in the security's price. A high negative correlation (less than -0.70) tells you that when the indicator changes, the security's price will usually move in the opposite direction. A low (close to or equal to zero) coefficient indicates that the relationship between the security's price and the indicator is not significant.

Correlation analysis is also valuable in gauging the relationship between two securities. Often, one security's price "leads" or predicts the price of another security. For example, the correlation coefficient of gold versus the dollar shows a strong negative relationship, an increase in the dollar usually predicts a decrease in the price of gold.

CP Volumentum Trend : The CP Volumentum Trend indicator dynamically integrates price and volume into a single indicator. The indicator responds to a divergence in volume from the norm, taking advantage of the fact that volume generally increases significantly at market turning points.

Volume divergence is evaluated against current price action and plotted as both a trend and a strength indicator. The indicator identifies high probability trading zones and automatically adapts to changes in volatility. The strength indicator is used to confirm the conviction behind the Volumentum Trend.

Cumulative Volume Index : The Cumulative Volume Index uses market momentum to illustrate money flows in and out of the market. It is calculated by subtracting the volume of declining stocks from the volume of advancing stocks and adding this resulting value to a running total.

The Cumulative Volume Index and On Balance Volume (OBV) are quite similar in some respects as both were designed to show if volume is flowing into or out of the market. The difference rests in the Cumulative Volume Index using the actual up- and down-volume for the New York Stock Exchange unlike with the OBV which assumes that all volume is up-volume when the stock closes higher and that all volume is down-volume when the stock closes lower as up-volume and down-volume is not available for individual stocks.

One useful method of interpreting the CVI is to look at the overall trends. The CVI will show if there has been more up-volume or down-volume and how long the current volume trend has been in effect.

Also, look for divergences that develop between the CVI and a market index. If the market index is showing a new high while the CVI fails to react in kind, expect the market to correct itself to confirm the underlying story told by the CVI.

Remember, as the CVI always starts at zero, the numeric value of the CVI is of little importance. What is important is the slope and pattern of the CVI.

Cyber Cycles : The Cyber Cycle is used in conjunction with the inverse Fisher transform. It is created by filtering and isolating the cycle components from the trend components of the inverse Fisher transform.

If a cycle has enough amplitude then the inverse Fisher transform can use its built-in compression to give a good indicator.

You can trade the Cyber Cycle using the crossing of the indicator and the indicator delayed by one bar.

The signals are clear with the Cyber Cycle and inverse Fisher transform, just as if you used an RSI and the inverse Fisher transform.


D

Demarker Indicator : Developed by Tom Demarker, the Demarker Indicator is an oscillator which identifies risk areas for buying and selling. It is an attempt to overcome the shortcomings of classical overbought / oversold indicators, making price comparisons from one bar to the next and measuring the level of price demand.

It is similar to the Demarker Range Expansion Index in that it identifies price exhaustion that normally correspond with tops and bottoms. The x-axis ranges from -100 to 100. Look for rises above 60 to indicate low risk and look for areas below 40 to indicate high risk.

Detrended Price Oscillator : The Detrended Price Oscillator is a tool that smoothes the trend in prices, allowing you to more easily identify cycles and overbought/oversold levels.

If you think of long-term cycles as made up of a series of short-term cycles, then analyzing these shorter term components can be helpful in identifying major turning points.

Note that as the oscillator moves above and below the zero line, minor peaks in the DPO will usually coincide with minor peaks in price. Longer-term price trends are not reflected as the 20-day DPO removes cycles of more than 20 days.

DI+ : The Directional Momentum Indicator is an attempt to quantify the trending or directional behavior of a market. It helps identify trends and whether or not price is moving quickly enough to be worth a long or short play.

+DI and -DI are components in the calculation of the ADX (Average Directional Movement) and ADXR (Directional Movement Rating) indicators. Perhaps the best way to think of the +DI is as a measure of the percentage of upwards movement. When the +DI value is greater than the -DI, a long position is indicated.

DI- : Directional Movement is a system for discovering trading signals to be used for price breaks from a trading range. It involves 5 indicators: Directional Movement Index (DX), the plus Directional Indicator (+DI), the minus Directional Indicator (-DI), the Average Directional Movement (ADX) and the Average Directional Movement Rating (ADXR).

Wilder defines -DI as the percentage of the true range that is down. When the -DI is greater than +DI, a short position is indicated.

Directional Movement Index : Directional Movement helps determine if a security is "trending." Developed by Welles Wilder and explained in his book, New Concepts in Technical Trading Systems , it can be used either as a system on its own or as a filter on a trend-following system.

Two lines are generated in a DMI study, +DI and -DI. The first line measures positive (upward) movement and the second number measures negative (downward) movement. A buy signal is given when the +DI line crosses over the - DI line while a sell signal is generated when the +DI line crosses below the - DI line.

In addition to these crossover rules, Wilder believes one should also follow the extreme point rule. When a crossover occurs, use the extreme price as the reverse point. For a short position, use the high made during the trading interval of the crossover. Reverse a long position using the low made during the trading interval of the crossover.

Disparity Index : Steve Nison refers to his Disparity Index as "a percentage display of the latest close to a chosen moving average." This can be defined mathematically using the formula:

Where X is the number of time periods and MA is the calculation type of the moving average.

For more in depth interpretation of the Disparity Index refer to Steve Nison's book "Beyond Candlesticks"

Dynamic Momentum Index : Developed by Tushar Chande and Stanley Kroll, the Dynamic Momentum Index is quite similiar to Welles Wilder's Relative Strength Index. The differnce is the DMI uses variable time periods (from 3 to 30) vs. the RSI's fixed periods.

The variability of the time periods used in the DMI is controlled by the recent volatility of prices. The more volatile the prices, the more sensitive the DMI is to price changes. During quiet market conditions the DMI will use more time periods while less are used during more active markets. As a result, the DMI is more sensitive to fluctuations in the market and displays changes more rapidly than the RSI can.

Much like the RSI, Chande recommends using the DMI much the same as the RSI, with bearish conditions appearing at 70 or above and bullish conditions below 30. Remember, as the DMI is more sensitive to market dynamics, it often leads the RSI into overbought / oversold territories by one or two days.


F

Fibonacci and Gann Projections : The system attempts to predict future turning points, pivots or valleys. These turning points are found by applying Fibonacci ratios to the swings. Time predictions are based on the zigzag indicator and Fibonacci ratios, as well as Gann square of nine calculations.

When using either Fibonacci-Gann Projections Change % or Fibonacci-Gann Retrace %, there are three numerical parameters you can change:

The first, wave %, denotes the retracement percentage.

The next value, Gann inc value, denotes the size of the Gann increment. This controls how many confirmed swing points to use. Confirmed swings are shown in blue.

The third, Gann increments (swing), specifies the required number of bars to the or left of the pivot peak or valley. A default of 1 would mean that a pivot peak is only required to have one lower bar on each side.

Types of Swing: confirmed and non-confirmed. A non-confirmed swing has not formed a peak or valley. Peaks and valleys are only created when the price completes the percentage retracement (using the value selected).

More detailed information on the Fibonacci and Gann Projections can be found in the October 2004 issue of Technical Analysis of Stocks and Commodities

Fibonacci Arcs : Fibonacci Arcs are created by first drawing a trendline between two extreme points, i.e. trough and peak. Three arcs are generated at "Fibonacci Intervals" usually defined as 38.2%, 50% and 61.8% of the distance between a price maximum and minimum. They are centered on the second extreme point and intersect the trendline.

The interpretation of Fibonacci Arcs involves anticipating support and resistance as prices approach the arcs.

What are now known as "Fibonacci numbers" are said to be based upon observations of the Great Pyramid of Gizeh in Egypt by Italian mathematician Leonardo Fibonacci born around 1170 AD.

Fibonacci Fans : Fibonacci Fan lines take their name from their obvious fanlike appearance. They are generated by first drawing a trendline between two extreme points, i.e. trough and peak. Next, an "invisible" vertical line is drawn through the second extreme point. Three lines are then drawn from the first extreme point passing through the invisible vertical line with their slopes at the Fibonacci levels, usually 38.2%, 50.0% and 61.8%.

As the daily prices pass these three fans, one can make predictions about future price movements based upon the appearance of price resistance or support at these intersection points. When the prices hold at the fan line, there is support there. If they quickly move through the fan line, do not look for support until the next fan line is met.

Fibonacci Retracements : Fibonacci Retracements are displayed by first drawing a trendline between two extreme points, i.e. a trough and opposing peak. A series of horizontal lines are drawn intersecting the trendline at the Fibonacci levels.

After a significant price move in either up or down direction, prices will often give back a significant portion (if not all) of the original move. As prices retrace, look for support and resistance levels often occurring at or near the Fibonacci Retracement levels.

Fibonacci Time Series : Fibonacci Time Series is a series of vertical lines spaced at the Fibonacci intervals.

Use the Fibonacci Time Series to look for significant changes in price near the vertical lines.

Fisher Transform : The Fisher Transform indicator attempts to be a major turning point indicator and is based on John Ehlers' November 2002 Stocks and Commodities Magazine article, "Using The Fisher Transform."

With distinct turning points and a rapid response time, the Fisher Transform uses the assumption that while prices do not have a normal or Gaussian probability density function (that familiar bell-shaped curve), you can create a nearly Gaussian probability density function by normalizing price (or an indicator such as RSI) and applying the Fisher Transform. Use the resulting peak swings to clearly identify price reversals.

Force Index : Developed by Dr. Alexander Elder, the Force Index combines price movements and volume to measure the market. Unmodified Force Index results can be rather erratic, better results are achieved by smoothing with an moving average. A 2-day exponential moving average of the Force Index may be used to track the strength of buyers and sellers in the short term while a 13-day exponential moving average better measures the strength of intermediate cycles.

If the Force Index is above zero Elder would say, "the bulls are in control." A negative Force Index would then signal that "the bears are in control." If the Index remains close to zero neither side has control and no strong trends exist.

The greater the distance from zero, the stronger the signal. If the Force Index flattens out it indicates that either volumes are falling or large volumes have failed to significantly move prices. Either situation is likely to precede a reversal.

Forecast Oscillator : Developed by Tushar Chande, the Forecast Oscillator is is an extension of the linear regression based indicators. It is a percentage comparison of the price of an issue and the price as indicated by the Time Series Forecast Oscillator.

The oscillator is above zero when the forecast price is greater than the actual price. Conversely, it's less than zero if its below. When the forecast price and the actual price are the same the oscillator would plot as zero.

Prices that are persistently below the forecast price suggest lower prices ahead. Actual prices that are persistently above the forecast price suggest higher prices ahead.

It is calculated as follows:

Four Percent Model : Developed by Ned Davis, the Four Percent Model is an easy to calculate and easy to analyze market timing tool utilizing the weekly close of the Value Line Composite Index.

A buy signal is generated when the index rises at least four percent from a previous value. A sell signal is generated when the index falls at least four percent.

Utilizing this approach to the stock market during the period from 1993 to 1998 would have a return of 241% versus the buy-and-hold approach which provided a return of 120%.


H

Haurlan Index : The Haurlan Index was developed by Peter N. Haurlan in the 1960s as an overbought / oversold indicator. It is made up of three components - short term, intermediate term, and long term.

The short term component is a 3 day exponential moving average of the net difference between the number of advancing issues and the number of declining issues.

The intermediate term component is a 20 day exponential moving average of the net difference between the number of advancing issues and the number of declining issues.

The long term component is a 200 day exponential moving average of the net difference between the number of advancing issues and the number of declining issues.

When the short term component moves above +100 a short term buy signal is generated. It remains in effect until the short term component moves down to -150. At -150 a short term sell signal is reached. Stay short until the indicator reaches +100.

The intermediate component is used to confirm breaks of support and resistance. With confirmation, buy and sell signals are generated. The long term component is used to determine the primary trend in price.

Heikin-Ashi Difference : The Heikin-Ashi technique is a visual method which eliminates irregularities in candlestick charts. White candles indicate a rising trend while black candles indicate a downtrend. The size of the candle body shows the current trend strength.

The Heikin-Ashi Difference is the difference between haClose and haOpen. Heikin-Ashi offers a modified open-high-low-close configuration.

haClose = ( O + H + L + C ) / 4 haOpen = ( haOpen ( previous bar ) + haClose (previous bar ) ) / 2

haHigh = Maximum ( H, haOpen, haClose ) haLow = Minimum ( L, haOpen, haClose )

The open, high, low, and close are of the current bar.

haOpen is always set to the midpoint of the body of the previous bar.

haClose is computed as the average price of the current bar.

haHigh and haLow are the highest and lowest values of the set.

The solid blue line is the Heikin-Ashi Difference, while the dotted red line is the difference smoothed with a simple moving average.

Herrick Payoff Index : The Herrick Payoff Index determines the amount of money flowing into or out of a futures contract by analyzing volume, price changes, and open interest changes.

When the Herrick Payoff Index is above zero it shows that money is flowing into the futures contract. When the Index is below zero it shows that money is flowing out of the futures contract.

The value of each new day is combined with the value of the previous day using a multiplying factor. Since this is a cumulative indicator the value at the beginning of the data series is zero. The value will primarily increase and decrease with the average price for each day, the amount regulated by the trading volume, changes in the number of open contracts, and changes in the average price.

The primary signal to watch for is a divergence from the price. If prices are increasing and the indicator is decreasing, prices will typically correct to confirm the indicator.

Historical Volatility : No one can accurately predict the future but a knowledge of past behavior can be used as a guide to help make informed decisions of what is likely to happen next. With this idea in mind, Historical Volatility measures the variance of the changes in a security over time.

Traders generally tend to start looking at volatility over a long time, at least ten years. This allows identification of short-term deviations from normal activity. That being said, one should not overlook short-term volatility either. If a commodity has averaged 20% volatility over the last year but only 10% over the past thirty days, it might be wise to adjust the volatility estimates to accommodate the most recent data.


I

Inertia : The Inertia indicator takes its name from the realm of physics. Used to describe the tendency of a body in motion to stay in motion until acted upon by an outside force, here it is used to measure the momentum of a stock based upon its volatility. An outgrowth of Donald Dorsey's Relative Volatility Index, Inertia is simply a smoothed RVI. Dorsey introduced the idea of Inertia in the September 1995 issue of Technical Analysis of Stocks and Commodities.

Inertia is measured on a scale from 0 to 100. Negative inertia is seen if the indicator is below 50. If the indicator is above 50, it is said to have positive inertia. Signs of positive inertia are indicative of a long-term upward trend. Signs of negative inertia illustrate long-term downtrends.

Intraday Momentum Index : Developed by Tushar Chande, the Intraday Momentum Index is a combination of the Relative Strength Index and Candlestick Analysis.

The IMI is calculated like the RSI but uses the relationship between the intraday opening and closing prices to determine whether the day is up or down. When the close is above the open, it is an up day. If the close is below the open it is a down day. White candlesticks signify an up day, black candlesticks used for down days.

As with the RSI, overbought conditions (and lower prices ahead) are indicated when the index rises above 70. Values below 30 indicate a potential oversold situation and higher price ahead. Remember, as with all overbought/oversold indicators, you should first quantify the trendiness of the market before acting on any signals.

Inverse Fisher Transform : The Inverse Fisher Transform can be applied to any oscillator-type indicator such as the RSI (Relative Strength Indicator) and the Cyber Cycle.

The Inverse Fisher Transforms purpose is to alter the probability distribution function (PDF) of indicators.

The PDF of price and indicators do not have normal probability distribution. Turning points should be sharply peaked as a result of altering the PDF of an indicator.

The Fisher transform is expansive; the inverse Fisher transform is compressive. The calculation limits the range from -1 to +1; this probability distribution makes for clear buy and sells signals.

When using the inverse Fisher transform with the RSI, buy when the indicator crosses over -0.5, or crosses over +0.5 (if it has not previously crossed over -0.5). Sell short when it crosses under +0.5, or crosses under -0.5 (if it has not previously crossed under +0.5).


K

Keltner Channels : Keltner Channels are a volatility-based indicator that uses a pair of values placed as an "envelope" around a data field. The values are calculated by taking the Exponential Moving Average of the data for a given period and adding or subtracting twice the average true range from the moving average.

Envelope theory states that prices will most likely fall within the boundaries of the envelope. If prices drift outside their envelope this may signify a trading opportunity.

Keltner Channels are similar to Bollinger Bands and share many of their characteristics but represent volatility using high and low, rather than the standard deviation of the one field.

Klinger Volume Oscillator : Developed by Stephen J. Klinger to help in both short- and long-term analysis, the Klinger Oscillator measures trends of money flows based upon volume.

The KO is derived from three types of data: the high-low price range, volume, and accumulation/distribution. Price range is a measure of movement and the force behind that movement is volume. Accumulation is when the sum of today's [high]+[low]+[close] is greater than yesterday's. Distribution is when today's sum is less than the yesterday's. When the sums are equal, the existing trend is maintained.

Volume produces continuous intraday changes in price as it reflects buying and selling pressure. The KO quantifies this difference between the number of shares being accumulated and distributed each day as "volume force." A rising volume force should accompany an uptrend. It should then gradually contract over time during the latter stages of the uptrend and the early stages of the following downtrend. This should be followed by a rising volume force reflecting some accumulation before a bottom develops.

By converting the volume force into an oscillator representing the difference between a 34-period and 55-period exponential moving average with a 13-period trigger, the force of volume into and out of a security can be tracked. Comparing this force to price action can help identify divergences at tops and bottoms.

The KO works well for timing trades in the direction of the trend but can be less effective when going against a trend. However, when the KO diverges from the underlying price action, the observed trend may be losing momentum and nearing its completion.

Klinger notes the most important signal occurs when the KO diverges with the underlying price action, especially on new highs or new lows in overbought/oversold territory. A stock achieving a new high or low for a cycle with the KO failing to confirm this shows a trend that may be losing momentum and is nearing completion.

If the price is in an uptrend (above an 89-day exponential moving average), buy when the KO drops to unusually low levels below zero, turns up, and crosses its trigger line. If the price is in a downtrend (i.e., below an 89-day exponential moving average), sell when the KO rises to unusually high levels above zero, turns down, and crosses its trigger line.


L

Linear Regression : Regression analysis is a way of measuring the relationship between two or more data sets. Linear Regression attempts to explain a relationship using a straight line fit to the data and then extending that line to predict future values.

The most common method for fitting a regression line is the method of least-squares. This method calculates the best-fitting line for the observed data by minimizing the sum of the squares of the vertical deviations from each data point to the line. If a point lies on the fitted line exactly, then its vertical deviation is 0. Since the deviations are squared first and then summed, negative and positive do not cancel each other out. The closer the line calculated sits to the data points, the smaller the sum or "error" of a line.

If you think of this trendline as describing an "equilibrium" price, then any moves above or below the trendline indicates overzealous buyers or sellers. Some ways to use a linear regression line are:

Use the line to forecast prices. The forecast will simply be an extension of the line, so trade in the direction of the line. This can give good results when viewed on a long enough time frame. Use caution as there still can be significant drawdowns as prices fluctuate above and below the line.

Use the line as a basis and draw two parallel lines above and below it to form a channel. See the entries for Linear Regression Channel for more detail.

Linear Regression Channel, Variable : A Linear Regression Channel 100% is created by drawing parallel lines above and below the Linear Regression line.

Parallel and equidistant lines are drawn two standard deviations above and below a Linear Regression trendline. The distance between the channel lines and the regression line is the greatest distance that any one closing price is from the regression line. Regression Channels contain price movement, the bottom channel line provides support and the top channel line provides resistance. Prices may extend outside of the channel for a short period of time but when prices remain outside the channel for a longer period of time, a reversal in trend may be indicated.

A Linear Regression trendline shows where equilibrium exists but Linear Regression Channels show the range prices can be expected to deviate from a trendline.

Linear Regression Indicator : The Linear Regression Indicator plots the trend of a security's price over time. That trend is determined by calculating a Linear Regression Trendline using the least squares method. This ensures the minimum distance between the data points and a Linear Regression Trendline.

Unlike the straight Linear Regression Trendline, the Linear Regression indicator plots the ending values of multiple Linear Regression trendlines. Any point along the Linear Regression Indicator will be equal to the ending value of a Linear Regression Trendline, but the result looks more like a Moving Average.

Unlike a Moving Average, the Linear Regression Indicator does not exhibit as much delay. As the Linear Regression Indicator is fitting a line to the data points rather than simply averaging them, the Linear Regression line becomes more responsive to changes in prices. The Linear Regression Indicator can be thought of as a forecast of the tomorrow's price plotted today.

When prices are persistently higher or lower than the forecasted price, expect them to quickly return to more realistic levels. The Linear Regression Indicator shows where prices should be trading on a statistical basis and any excessive deviation from the regression line is likely to be short-lived.

Linear Regression Reversal : The Linear Regression Indicator plots the trend of a security's price over time. That trend is determined by calculating a Linear Regression Trendline using the least squares method.

This ensures the minimum distance between the data points and a Linear Regression Trendline.

A typical Linear Regression Indicator will hug the price well, reducing lag time by turning two bars earlier than a normal simple moving average and one sooner than an exponential moving average.

A Linear Regression Reversal differs from the Linear Regression Indicator in that it is a binary indicator that displays +1 when the price direction is up and a -1 when the price direction is down. The movement between +1 and -1 is an indicative of price reversal.

This indicator can provide both long and short term signals. One may view a +1 as a long position and a -1 would be taken as a short position. These entries occur only when the next price bars broke or closed above the high or lower than the high (respectively).

It is a variation on a theme, buying on dips and selling in rallies.

Disadvantages to this indicator are its tendency to reverse more often in sideways trading ranges or with minor corrections in a trend, though it can be advantageous in short term price swings.

Linear Regression Slope : Linear Regression Slope is designed to show how much one should expect prices to change per unit of time.

As the Slope of a trend first becomes significantly positive, open a long position. Either sell or open a short position as the Slope becomes significantly negative.

Linear Regression Trendline : A Linear Regression Trendline is a straight line plotted through past prices of a given security via the least squares method. The calculation of this line is described above under Linear Regression.

Extend the resulting line and use it to predict future trends. Remember there still can be significant shifts as prices will continue to fluctuate above and below the line.


M

MA Envelope, Simple : The Simple Moving Average Envelope consists of moving averages calculated from the underling price, shifted up and down by a fixed percentage.

When prices rise above the upper band or fall below the lower band, a change in direction may occur when the price penetrates the band after a small reversal from the opposite direction.

Remember, because only previous data is used to compute a Moving Average, it will always lags behind the actual prices. As a result, Moving Averages will not predict a change in trend, but rather follow behind the current trend. Use them for trend identification and trend following purposes and not for prediction.

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.

MACD (2 lines) : 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 conditions and divergences .

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/Oversold Conditions: 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.

MACD Histogram : 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.

Market Facilitation Index : Developed by Dr. Bill Williams, the Market Facilitation Index synthesizes both price and volume data in an effort to improve trading accuracy.

The calculation for the MFI is:

In his book Trading Chaos , Williams identified four types of trading sessions: Fakes, Fades, Squats, and Greens.

The combination of lowered volume with a rising MFI is known as a "Fake." As there is no real foundation for change behind a stock except for market activity on the floor, the price eventually reverses itself.

A "Fade" is when volume is down and the MFI is also down. In essence, the market is bored and interest in the stock fades. Expect the price to move in the opposite direction.

When volume is up while the MFI is down, the condition is referred to as a "Squat." Think of the stock crouching down like a sprinter before a race. Movement after the squat gives a clue to future to direction.

When volume and the MFI are both up, the situation is "Green." This is a strong signal to follow the trendline.

Mass Index : The Mass Index was developed by Donald Dorsey to identify trend reversals by using the changes of daily price ranges to identify reversals in trends. As the price ranges narrow, the Mass Index decreases. As the price ranges widen, the Mass Index increases.

A significant pattern to watch for is the "reversal bulge." These occur when on a 25-period plot the Mass Index surpasses 27 then falls past 26.5.

A 9-period Exponential Moving Average of prices is often used to determine if the reversal bulge indicates a buying or selling. If a reversal bulge occurs, buy if the moving average is trending down (in anticipation of the reversal) and sell if it is trending up.

McClellan Oscillator : Developed by Sherman and Marian McClellan, the McClellan Oscillator is based on the smoothed difference between the number of advancing and declining issues on the New York Stock Exchange.

Similar to MACD, the McClellan Oscillator is a breadth indicator that uses advances and declines to determine the amount of participation in the movement of the stock market. One sign of a healthy bull market is a large number of stocks making moderate upward advances in price. A small number of stocks making large advances in price is a sign of a weakening bull market. This situation gives the false appearance that all is well and is the type of divergence that often signals an end to a bull market.

The oscillator fluctuates around a zero line usually ranging between +100 to-100. A McClellan Oscillator reading between +70 to +100 which then turns down is an overbought or sell signal. Buy signals are when the oscillator falls into the oversold area of -70 to -100 and then turns up. Any reading that goes beyond these areas (rising above +100 or falling below -100) is a sign of an extremely overbought or oversold condition. These extreme readings are usually a sign of a continuation of the current trend. Crossings above and below the zero line can also interpreted as short to intermediate term buying and selling signals respectively.

The McClellan Oscillator is calculated taking the difference between 10% (approximately 19-day) and 5% (approximately 39-day) Exponential Moving Averages of advancing minus declining issues:

(10% EMA Advances - Declines) - (5% EMA Advances - Declines)

McClellan Summation : The McClellan Summation index is a market breath indicator based on the McClellan Oscillator and was developed by Sherman and Marian McClellan.

The interpretation of the McClellan Summation is similar to that of the McClellan Oscillator except that it is more suited to major trend reversals as it is a long-term version of the Oscillator.

The McClellans suggest the following rules for use with the Summation:

Look for major bottoms when the McClellan Summation drops under -1,300. Look for major tops to occur when a divergence with the market occurs above a

level of +1,600. The beginning of a significant bull market is indicated when the McClellan

Summation crosses above +1,900 after moving upward more than 3,600 points from its prior low.

Median Price : The Median Price function calculates the midpoint between the high and low prices for the day. Sometimes also referred to as the mean or average price.

As with other price adjustment functions, the median price provides a simplified view of the trading prices for the day. It can be used to smooth out some of the volatility of the closing price since it includes information for the entire trading day rather than specifically the end of the day.

The median price can be used anywhere a closing price or other single price field would be used

Mesa Sine Wave : Developed by John Elhers, the Mesa Sine Wave utilizes two sine plots to illustrate if the market is a cycle mode or in a trend mode. When the two plots resemble a Sine wave the market is in cycling mode. When the plots start to wander the market is said to be in a trend mode. In a trend mode the Sine and Lead Sine plots typically languish in a sideways pattern near zero, running parallel and distant from each other.

One useful attribute of the MESA Sine Wave indicator is that it will anticipate cycle mode turning points rather than waiting for confirmation as is seen with most other oscillators. The indicator has the additional advantage that trend mode whipsaw signals are minimized.

The indicator consists of two plots - one line displaying the Sine of the measured phase angle over time and the other the Sine of the phase angle advanced by 45 degrees (the Lead Sine). Together the crossings of the Sine and Lead Sine give clear advanced indication of cycle mode turning points.

When the market is in cycle mode, a buy signal is given as the Sine plot crosses above the Lead Sine plot. The sell signal is given when the Sine plot crosses below the Lead Sine plot.

When the market is in the trend mode, trade the trend. Basic moving average crossovers may be useful for entering and exiting positions in this type of market.

Momentum : By measuring the amount that a security's price has changed over a given time span, the Momentum indicator provides an indication of a market's velocity and to some degree, a measure of the extent to which a trend still holds true. It can also be helpful in spotting likely reversal points.

While the mathematics are straightforward (subtract the closing price n days ago from the closing price today), do not underrate its value because of its simplicity.

Use the Momentum indicator as a trend-following oscillator similar to the MACD and buy when the indicator bottoms and turns up. Sell when the indicator peaks and turns down. When the Momentum indicator reaches extremely high or low values (relative to historical values) assume a continuation of the current trend.

A second usage for the Momentum indicator is as a leading indicator. As a market peaks, the Momentum indicator will climb sharply before falling off. At a market bottom, the plot will drop sharply and then climb well ahead of prices.

Momentum % : Momentum % is quite similar to Momentum. The difference lies in that rather than being the difference between today's price and the one of n days prior, Momentum % is a measure of the day as a percentage of the maximum Momentum.

So: if P t today's price and P t-n the price n days ago, Momentum is calculated as:

MO t = P t - P t-n

So if you define MO max the highest absolute value of the momentum, the Momentum % is:

MO %t = MO t / MO max

The interpretation for Momentum % is the same as that for Momentum, purchase when Momentum % changes from negative positive and sell when it is the reverse.

Money Flow : The Money Flow indicator illustrates the inflows and outflows of cash in regards to a particular stock. While a stock's price simply provides a snapshot in time, Money Flow can show if the market may be discounting some future, significant event.

The equation for Money Flow calculation is simply:

Money Flow = (Typical Price) * (Volume)

Where Typical Price is defined as:

Money Flow values can be used as an independent measurement or as part of the Money Flow Index equation.

Money Flow Index : The Money Flow Index is another momentum indicator illustrating the strength of money flowing into and out of a security. While related to the Relative Strength Index, the Money Flow Index accounts for volume while the RSI only incorporates pricing information.

The calculation of the Money Flow Index requires multiple steps. First, determine the period's Typical Price:

Calculate Money Flow ( not the Money Flow Index) by multiplying the period's Typical Price by the volume:

Money Flow = (Typical Price) * (Volume)

If today's Typical Price is greater than yesterday's Typical Price, it is considered Positive Money Flow. If today's price is less, it is considered Negative Money Flow. Positive Money Flow is the sum of the Positive Money over the specified number of periods. Negative Money Flow is the sum of the Negative Money over the specified number of periods.

Then finally:

Use the Money Flow Index to look for divergence between the indicator and the price action. If the price trends higher and the MFI trends lower (or vice versa), a reversal may be imminent.

Look for market tops to occur when the MFI > 80. Look for bottoms to when the MFI < 20.


N

Negative Volume Index : Norman Fosback first detailed the Negative Volume Index in his 1976 book, Stock Market Logic. Used in conjunction with the Positive Volume Index, it's an attempt to identify bull markets. These indicators are predicated on the assumption that smart money dominates trading on quiet days while less uninformed investors dominate trading on active days.

Fosback points out the odds of a bull market are 95 out of 100 when the NVI rises above its one-year moving average. The odds of a bull market are roughly 50/50 when the NVI is below its one-year average. Following this logic, the NVI is most useful as a bull market indicator.

New Highs-Lows Cumulative : The New Highs-Lows Cumulative function is a long-term market momentum indicator that determines the strength of the market. It's found by taking the total cumulative difference between new 52-week highs and new 52-week lows.

Interpretation of the New Highs-Lows Cumulative indicator is similar to the Advance/Decline Line in that divergences occur when the indicator fails to confirm the market index's high or low. Divergences during an up market indicate potential weakness just as divergences in a down market indicate potential strength.

Use the New High-Low Cumulative to confirm a current trend. As most of the time the indicator will move in the same direction as the major indices, when the indicator and the market move in opposite directions a market reversal is predicted. This is due to a decreasing number of stocks participating in the higher prices eventually yielding a reversal in the price trend.

The value of this indicator at the beginning of the data series is zero. This is a cumulative indicator and as such the actual value is less relevant than the slope and direction of the line.

New Highs-New Lows : By displaying the daily difference between the number of stocks reaching new 52-week highs and the number of stocks reaching new 52-week lows, the New Highs-New Lows indicator attempts to determines the strength of the market.

Typically smoothed with a moving average to filter out day-to-day fluctuations and display longer term trends, use the indicator as both a divergence indicator and as an oscillator.

When used to show divergence, the New Highs-New Lows indicator generally reaches its extreme lows slightly before a major market bottom. As the market turns up, the indicator jumps up rapidly. During this time many new stocks are making new highs because it's easy to make a new high when prices have been depressed.

As cycles mature, a divergence occurs as fewer and fewer stocks achieve new highs (and the indicator falls), yet the market indices continue to reach new highs. This is a classic bearish divergence that indicates that the current upward trend is weak and will soon reverse.

Historically the indicator oscillates around zero. When positive, the bulls are in control. If it is negative, the bears are in control. Trade on the indicator by buying and selling as it passes across zero.

New Highs/Lows Ratio : The New Highs/Lows Ratio function calculates the daily ratio between the number of stocks reaching new 52-week highs to the number achieving 52-week lows.

This indicator is similar to the Advance/Decline Ratio and makes a reasonable overbought/oversold indicator for the market. Extremely high values may indicate that the market is becoming overbought. A sell-off may follow, which in turn would cause prices to drop. Likewise, extremely low values can indicate that the market is becoming oversold.

Since it concentrates only on a portion of the activity in the broad market, it is typically more useful as a confirmation for other indicators than directly generating entry/exit signals.

Use broad market indicators for trading against broad market indices through options, futures, and mutual funds. They can also be used to increase the effectiveness of more specific signals by adding confirmation or warning of upcoming trends.


O

On Balance Volume (OBV) : On Balance Volume (OBV) is a momentum indicator that relates volume to price change. Joseph Granville presented the idea that volume will precede price in his 1963 book, New Key to Stock Market Profits .

On Balance Volume keeps a running total of volume flowing into or out of a security. When the security closes higher than the previous close, all of the day's volume is considered up-volume. A close lower than the previous day's results in all of the day's volume considered down-volume. A rising OBV is defined as a sign of smart money flowing into a security. As the public then moves into the security, both the security and the OBV will surge ahead. If price movement precedes OBV movement, Granville calls this a "non-confirmation." Non-confirmations can occur at bull market tops, when the security rises before/without the OBV or at bear market bottoms when the security falls before/without the OBV.

When the security's price closes up, the day's OBV is created by adding the day's volume to the cumulative total. Subtract the day's volume from the cumulative total when the price closes down.

Look for rising trends (when each new peak is higher than the previous peak and each new trough is higher than the previous trough) or falling trends (when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough) to signal a "breakout." OBV breakouts normally precede price breakouts and investors should buy long on OBV upside breakouts and sell short when on OBV downside breakouts. An OBV is moving sideways is in a doubtful trend and implies a hold until the trend changes.

It is the direction of the OBV line (its trend) that is important and not the actual numbers themselves as actual values will differ depending on how far back you are charting.

Open-10 TRIN : The Open-10 TRIN function is a market breadth indicator that uses advancing/declining volume and advancing/declining issues to measure market strength.

The Open-10 TRIN is similar to the Arms Index, Advancing/Declining Ratio, and the Upside/Downside Ratio in that it makes a good overbought/oversold indicator. Extremely low values may indicate that the market is becoming overbought and a sell-off should occur in the near future resulting in lowered prices. Likewise, extremely high values can indicate an oversold market. Readings >0.90 are considered bearish and readings <0.90 are considered bullish.

The Open-10 TRIN keeps running totals of advancing and declining volume as well as advancing and declining issues for the last ten days. It is calculated by dividing the number of advancing issues by the number of declining issues and the amount of advancing volume by the amount of declining volume. The ratio of advancing to declining issues is then divided by the ratio of advancing to declining volume.

Note that the running totals are effectively the same as taking a moving average of each parameter since the division by the length of each average cancels out.

Overbought/Oversold : The Overbought/Oversold function determines the momentum of the market by calculating a moving average of the difference between the advancing and declining issues.

The Overbought/Oversold indicator is calculated by subtracting the number of declining issues from the number of advancing issues and taking a 10-period moving average of this value. Because it uses a moving average the value at the beginning of a data series is not defined until the tenth sample. Readings >200 are considered bearish and readings < -200 are generally considered bullish. When the indicator falls below +200 a sell signal is generated and when the OB/OS indicator rises above -200 a buy signal is generated.

The Overbought/Oversold indicator is useful for determining the momentum of the market. A value above zero is generated when more stocks are advancing (increasing in price) than declining. A value below zero is generated when more stocks are decreasing in price. Broad market indicators are best used for trading against broad market indices through options,

futures, and mutual funds. They can also be used to increase the effectiveness of more specific signals by adding confirmation or warning of upcoming trends.


P

Parabolic Stop and Reversal (PSAR) : Described by Welles Wilder in his 1978 book, " New Concepts in Technical Trading Systems ," the Parabolic SAR (PSAR) sets trailing price stops for long or short positions. Wilder was looking for a system that could capture most of the gains in a trending market without relying on some external method to retain profits.

To use, let the dotted lines below the price establish the trailing stop for a long position and the lines above establish the trailing stop for a short position. At the beginning of a move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop. As the move gets underway, the distance between the price and the indicator will shrink, making a tighter stop-loss as the price moves in a favorable direction.

Polarized Fractal Efficiency : Developed by Hans Hanula, the Polarized Fractal Efficiency indicator draws on Mandelbrot and fractal geometry to illustrate the efficiency of how pricing moves between two points over time. The more linear and efficient the price movement, the shorter the distance the prices must travel.

Use the PFE indicator to measure how trendy or congested the price action is. PFE readings above zero indicate that the trend is up and the higher the reading the "trendier" and more efficient the upward movement. PFE readings below zero mean that the trend is down. The lower the reading the "trendier" and more efficient the downward movement. Readings near zero indicate choppy, less efficient movement and a balance between supply and demand.

Polychromatic Momentum : One problem with momentum based indicators is that the optimum lookback period seems to change over time. Dr. Dennis Meyers' Polychromatic Momentum is one momentum indicator that deals with this by using a unique weighting concept that combines multiple look-back periods and provides a basis for a profitable short-term trading strategy.

Following the curve of Polychromatic Momentum, go long when the curve moves above the green Polychomatic Momentum buy (bxo) level and go short when the curve moves below the red Polychromatic Momentum sell (sxo) level.

Positive Volume Index : The Positive Volume Index by Norman Fosback is the companion to his Negative Volume Index. The two are used to identify bull and bear markets.

Positive Volume Index makes the assumption that the uninformed crowd dominates trading on active days. On days when volume increases, the crowd-following "uninformed" investors are in the market.

The PVI displays what the not-so-smart-money is doing just as the Negative Volume Index displays what the smart money is doing. However the PVI is not a contrarian indicator. While Fosback says the PVI shows what the uninformed may be doing, it still trends in the same direction as price.

Price Action Indicator (PAIN) : Using only today's open, high, low and close, the Price Action Indicator (PAIN) provides quite a bit of useful information. Using the formula: [(C-O)+(C-H)+(C-L)] 2 where:

(C-O) defines Intra-Day Momentum, (C-L) defines Late Selling Pressure (LSP) and (C-H) defines Late Buying Pressure (LBP).

This yields a single value that has proven itself by constructing ideal limit-up and limit-down scenarios in bond futures. The output has also shown to be consistent with the interpretation of Japanese candlestick patterns.

When the Close is near the Low, the stock's price is under selling pressure. If the Close is near the High, the stock s price is under buying pressure, the "Bulls are driving up the

price." If the overall market conditions remain favorable, a high PAIN value with the Close near the High will be an excellent potential long.

Price and Volume Trend : As adjusted cumulative total of volume, the Price and Volume Trend is similar to On Balance Volume. But where OBV adds all volume on days when prices close higher and subtracts all volume on days when prices close lower, the Price and Volume Trend adds or subtracts only a portion of the daily volume.

As the amount of volume added to the PVT is determined by the amount that prices rose or fell relative to the previous day's close, many claim it can more accurately illustrate the flow of money into and out of a security than can the OBV. Recall that the OBV is designed so that it adds the same amount of volume to the indicator if the security closes up a fraction or doubles in price. The PVT on the other had, adds a small portion of volume to the indicator when the price changes by a small percentage and a large portion of volume to the indicator with tlarge changes in the price.

The Price and Volume Trend is calculated:

Price Channel : Inspired by the Dow Theory and by observations found throughout nature, the Elliott Wave Theory identifies a repetitive pattern of five waves in the direction of the main trend followed by three corrective waves. These waves are used to predict movement of the stock market. Ralph Nelson Elliott used Price Channels as a method of arriving at price objectives and to help confirm the completion of wave counts.

Once an uptrend has been established, an initial trend channel is constructed by drawing a basic up trendline along the bottoms of waves 1 and 2. A parallel channel line is then drawn over the top of wave. The entire uptrend will often stay within those two boundaries.

If wave 3 begins to accelerate to the point that it exceeds the upper channel line, the lines are redrawn along the top of wave 1 and the bottom of wave 2.

The final channel is drawn under the two corrective waves (2 and 4) and usually above the top. If wave 3 is either unusually strong or an extended wave, the upper line may have to be drawn over the top of wave 1.

The fifth wave should come close to the upper channel line before terminating. For the drawing of channel lines on long term trends, it's recommended that semilog charts be employed along with arithmetic charts.

The upper trendline will mark resistance and the lower trendline marks support. Price channels with downward slopes are considered bearish and those with upward slopes are bullish.

Look to buy when prices reach main trendline support in a bullish price channel. Sell (or short) when prices reach main trendline resistance in a bearish price channel.

Price Oscillator : The Price Oscillator indicator shows the variation among two moving averages for the price of a security. Unlike the MACD which always uses 12- and 26-day moving averages and always expresses the difference in points, the Price Oscillator can show the variation between any moving averages and can be shown in either percentages or points.

Moving average analysis typically generates buy signals when a short-term moving average or price rises above a longer-term moving average. Sell signals are generated when a shorter-term moving average or price falls below a longer-term moving average. The Price Oscillator's single line illustrates the cyclical and often profitable signals generated by a two moving average system. Buy when the Price Oscillator rises above zero and sell when the indicator falls below zero.

Price Volume Rank : Price Volume Rank is a simple analysis developed by Anthony Macek using just two sets of data, Price and Volume.

Macek describes the indicator as, "for those with neither the time nor the inclination to master the techniques necessary to monitor every blip and sputter that the market produces...."

In short:

Use a 1 if price and volume are up Use a 2 if price is up and volume is down Use a 3 if price and volume are down Use a 4 if price is down and volume is up

Buy when below 2.5 and sell when above 2.5.

Projection Bands : Developed by Mel Widner, Ph.D., Projection Bands are made up of two bands showing the minimum and maximum projected boundaries.

They're drawn by finding the minimum and maximum prices over a specified number of days and projecting these forward, parallel to a linear regression line. The resulting plot consists of two bands representing the minimum and maximum price boundaries. Unlike Bollinger Bands, prices will always be contained by the two bands. The upper band represents a bullish view on the issue and the lower band a bearish one. When the price of an issue nears the upper limit, expect a price correction. If the price is nearing the lower limit, expect prices to move upwards.

Projection Oscillator : The Projection Oscillator is a by-product of Dr. Mel Widner's Projection Bands. In essense a slope-adjusted Stochastic, the Projection Oscillator shows the relationship of the current price to its minimum and maximum prices over time. Unlike the Stochastic Oscillator, here the minimum and maximum prices are adjusted up or down by the slope of the price's regression line. It is this adjustment that makes the Projection Oscillator so responsive to short-term price moves.

Perhaps the best way to understand the relationship between the Projection Oscillator and Projection Bands is the knowledge that the Oscillator shows where the current price rests between the current location of the bands. A value of 0 indicates that prices are touching the bottom band, a value of 50 indicates that the current price is exactly in the middle of the two bands while a value of 100 indicates that prices are touching the top band.

Three common ways to interpret the Projection Oscillator:

Overbought/oversold: Buy when the oscillator falls below a specific level (e.g., 20) and then rises above that level. Sell when the Oscillator rises above a specific level (e.g., 80) and then falls below that level.

Crossovers: Buy when the oscillator crosses above a trigger and sell when the oscillator crosses below it. You may want to qualify your trades by requiring that the crossovers occur above the 70 level or below the 30 level.

Divergences: Consider selling if prices are making a series of new highs yet the oscillator fails to surpass its previous highs. Consider buying if prices are making a series of new lows and the oscillator fails to surpass its previous low. Again, you may want to qualify your trades by requiring that the divergence occur above the 70 level or below the 30 level.


Q

QStick : Developed by Tushar Chande as a way to quantify candlesticks, the QStick indicator is a moving average of the difference between the opening and closing prices of an issue.

With all candlestick charting, the body of a candlestick is black if today's close is less than the open and is white if today's close is greater than the open. If over a specified range of time the majority of candlesticks are white it is considered bullish, a majority of black candlesticks would then be considered bearish.

QStick values falling below zero indicate a majority of black candlesticks over the time periods under observation and provide a bearish bias for the security. Conversely, values above zero indicate a bullish bias.

Analysis of the QStick indicator can yield several trading signals. A QStick that is extremely low and then reverses itself is a signal to buy. If the QStick is extremely high and then begins moving down, use this as a sell signal. Lastly, when price and QStick values diverge, use the direction of the QStick to lead the eventual price movement.


R

R-Squared : The R-Squared or R 2 indicator illustrates how well the Linear Regression Trendline approximates real data points. An R-Squared of 1.0 indicates a perfect fit.

If the R-Squared indicator falls below the critical values shown below, it would illustrate no correlation between the price and the Linear Regression Trendline.

Number of Periods R-Squared Critical Value (95% confidence)

5 .77

10 .40

14 .27

20 .20

25 .16

30 .13

50 .08

60 .06

120 .03

Random Walk Index : The Random Walk Index was created by Michael Poulos who wanted to find an indicator that overcame the effects of a fixed look-back period as well as the drawbacks of traditional smoothing methods. The RWI is based upon the concept of the shortest distance between two points is a straight line. The further prices stray from that straight line within a given time, the less efficient the movement. The more random the movement, the greater the RWI fluctuates.

To effectively use the RWI, Poulos recommends 2 to 7 periods for the short term and 8 to 64 periods for the long term. This is to illustrate the randomness of the short term and the trends of the long term. In the short term, peaks of RWI highs correlate with peaks in price. Peaks of RWI lows correlate with drops in price.

In the long term, peaks of RWI highs above 1.0 illustrate a strong uptrend. Peaks of RWI lows above 1.0 illustrate a strong downtrend.

A trading system using this index would be enter long (or close short) when the long-term RWI of highs is greater than 0 and short term RWI of lows rises above1.0. Likewise, when the long-term RWI of the lows is greater than 1.0 and the short-term RWI of highs rises above 1.0, enter short (or close long).

Range Indicator : Developed by Jack Weinberg, the Range Indicator is based on his observation that changes in the average day's intraday range (high to low) as compared to the average day's interday range (close to close) will either signal a start of a new trend or the end of an existing trend.

When the intraday ranges are dramatically higher than the interday ranges, the market is considered "out of balance," and the Range Indicator will be at a high level. Look for the current trend to end when this happens. When the Range Indicator is at a low level (below 20), look for the emergence of a new trend.

The Range Indicator can be used to improve many momentum and trend-following trading systems. Weinberg found that the results of a basic two moving average crossover system was dramatically improved by filtering the signals with the Range Indicator. By waiting to enter a long position until the Range Indicator crossed above a defined low level and then waiting to exit until the indicator crossed above a defined high level, profits, number of trades, and risk were dramatically improved.

Rate of Change : The Rate of Change is an oscillator that displays the difference between the current price

and the price x -time periods ago. As prices increase, the ROC rises and as prices fall, the ROC falls. The greater the change in prices, the greater the change in the ROC.

The 10-day ROC is an excellent short- to intermediate-term overbought/oversold indicator. The higher the ROC, the more overbought the security; when the ROC falls expect a rally. As with all overbought/over-sold indicators, watching for the market to start its correction before placing a trade. Often extremely overbought/oversold readings usually imply a continuation of the current trend and any overbought market may remain that way for some time.

A 10-day ROC tends to oscillate in a fairly regular cycle. Often, price changes can be anticipated by studying past cycles of the ROC and applying the predicted pattern to the current market.

To construct a 10 day rate of change oscillator, the latest closing price is divided by the close 10 days ago:

Relative Momentum Index (RMI) : Introduced by Roger Altman in the February 1993 issue of Technical Analysis of Stocks & Commodities magazine, the Relative Momentum Index is a variation of the Relative Strength Index (RSI). Instead of counting up and down days from close to close like the RSI, the Relative Momentum Index counts up and down days from the close relative to a close n -days ago (where n is not limited to 1 as required by the RSI).

As with all overbought/oversold indicators, the RMI exhibits similiar strengths and weaknesses. In strong trending markets the RMI will remain at overbought or oversold levels for an extended period.In non-trending markets the RMI tends to predictably oscillate between an overbought level of 70 to 90 and an oversold level of 10 to 30. When the RSI diverges from the price, the price will eventually correct to the direction of the index.

Relative Strength Index (RSI) : The Relative Strength Index (RSI) is an oscillator first introduced in 1978 by Welles Wilder in Commodities (now Futures) Magazine. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses on a scale from 0 to 100.

When using the RSI as an overbought/oversold indicator, Wilder recommended using levels of 70 or more as overbought and 30 and and below as oversold. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal.

Another method of analyzing the RSI is to look for a divergence. If the security is making a new highs and yet the RSI fails to surpass its previous high, this is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing." This serves as a confirmation of the impending reversal.

While the RSI is calculated using a fairly simple formula, it may be wise to refer to Wilder's New Concepts in Technical Trading Systems for a more complete discussion. The basic formula for the RSI is:

Where:

U=An average of upward price change D=An average of downward price change

Relative Strength Index EMA : The Relative Strength Index (RSI) is an oscillator first introduced in 1978 by Welles Wilder

in Commodities (now Futures) Magazine. This indicator identifies support and resistance based on the closing price.

The Relative Strength Index EMA (RSI2) allows the trader to create a relative strength indicator based on the low price for a period. It can be useful in enhancing short-term trading systems by using long-term price movements.

Relative Strength, Comparative : Comparative Relative Strength compares the price movement of a stock with an index, a sector or another stock to illustrate how they are performing relative to one another. It is derived by dividing one security's price by a second (or "base") security's price. The result of this division is the ratio or relationship between the two securities.

When the indicator is moving up, the security is outperforming the base security. Sideways movement means the stock and security are rising and falling by the same percentage. When it is moving down, the security is performing worse than the base security.

Use the indicator to to compare a security's performance with a market index or to develop spreads - buy the best performer and short the weaker one.

Relative Volatility Index : Developed by Donald Dorsey, the Relative Volatility Index is the Relative Strength Index (RSI) only with the standard deviation over the past 10 days used in place of daily price change. Use the RVI as a confirming indicator as it makes use of a measurement other than price as a means to interpret market strength.

The RVI measures the direction of volatility on a scale from zero to 100. Readings >50 indicate that the volatility is more to the upside. Readings <50 indicate that the direction of volatility is to the downside. Initial testing by Dorsey has indicated that the RVI can be used in the same way as the RSI.

When testing the profitability of a basic moving average crossover system, Dorsey found results could be significantly enhanced by the application of a few rules:

Only buy if RVI >50. Only sell if RVI <50. If you missed the buy at 50, buy long if RVI >60. If you missed the sell at 40, sell short if RVI <40. Close a long if RVI falls <40. Close a short if RVI rises >60.

Ribbon Study : The Ribbon Study is best described as the charting of several Moving Averages (10 day, 20 day, 30 day, etc.) all drawn on top of pricing data for the period selected.

When the lines converge or 'compress' upon each other an opportunity appears as a change in direction of price should occur.


T

TD Moving Average : Tom Demark describes his TD Moving Average study as "a means of identifying logical locations to either exit a trade or to place stop loss orders."

If the Moving Average of lows goes into effect, use the price level represented by the Moving Average to determine a place to exit the long position or to place a stop loss on a trade. If the Moving Average of highs goes into effect, use the price level represented by the Moving Average to spot a place to exit the short position or to place a stop loss on a trade.

The plot of the Moving Average remains in force for a period of 4 bars or until the required conditions are no longer valid. Note that once the lowest low in X bars condition is no longer true, the plot continues for a period of 4 bars. Conversely, if the most recent high has achieved a value higher than the high of all previous 12 bars, then a 3 period Moving Average of the highs is calculated and plotted until either the condition is no longer true or for a period of 4 bars, whichever is less.

TD Range Expansion Index : Developed by Tom Demark, the TD Range Expansion Index is an a market-timing oscillator which identifies risk areas for buying and selling. The oscillator is arithmetically calculated and is designed to overcome problems with exponentially calculated oscillators, like MACD.

The oscillator typically produces values from -100 to +100 with 45 or higher indicating overbought conditions and -45 or lower indicating oversold conditions. Tom Demark notes that when REI rises above +45 and falls below +45, price weakness normally occurs. Conversely, when REI falls below -45 and rises above -45, price strength should become apparent.

TD Range Projections : Developed by Tom Demark, the TD Range Projections allows you to project or anticipate the next bar's range, its expected high and low. The projections are dependent on the relationship of the open to close of the most recent period. If the close of the most recent bar is less than the open then the calculations are:

(Current High + 2 * Current Low + Current Close) = X Projected High = X - Current Low Projected Low = X - Current High

If the close of the most recent bar is greater than the open:

(2 * Current High + Current Low + Current Close) = X Projected High = X - Current Low Projected Low = X - Current High

If the close of the most recent bar is equal to the open then:

(Current High + Current Low +2 * Current Close) = X Projected High = X - Current Low

Projected Low = X - Current

High These projections serve as benchmark expectations for the next day's range. If the open is within the projected range, it should remain within that range. If prices open outside the channel (above or below the projected high or low) then expect to see prices continue in the direction of the breakout.

TD Rate of Change : Developed by Tom Demark, the TD Rate of Change indicator can be useful in the identification of potential market turns. It functions by comparing the current close to the close 12 bars ago as a means to determine the degree that the market is overbought or oversold.

The Typical Price : The Typical Price function calculates the average of the high, low, and closing prices for the

day via a simple, single-line plot. As with other price adjustment functions, the typical price provides a simplified view of the trading prices for the day. It can be used to smooth out some of the volatility of the closing price since it includes information for the entire trading day rather than specifically the end of the day.

The Typical Price can be used anywhere a closing price or other single price field would be used. For example, it could be compared to a moving average of its value to determine when a security is trending upward or downward. The Typical Price is a building block of the Money Flow Index.

The Typical Price indicator is calculated by adding the high, low, and closing prices together, and then dividing by three. The formula is:

Time Series Forecast : The Time Series Forecast function displays the statistical trend of a security's price over a specified time period based on linear regression analysis. Instead of a straight linear regression trendline, the Time Series Forecast plots the last point of multiple linear regression trendlines. This is why this indicator may sometimes referred to as the "moving linear regression" indicator or the "regression oscillator."

Because a linear regression line is a straight line as close as possible to all of the given values, a Time Series Forecast does not exhibit as much delay as a Moving Average when adjusting to price changes. This is because the indicator is continuously "fitting" itself to the data rather than simply averaging them. Note that this type of prediction is purely mathematical as it is ultimately the equivalent of drawing a line through the recent points and projecting that line forward.

Trade Volume Index : Similar to the On Balance Volume indicator, the Trade Volume Index (TVI) uses price and volume to show whether a security is being purchased or sold. The On Balance Volume (OBV) method works well with daily prices, but it doesn't work as well with intraday tick prices. The difference between the OBV and the TVI is that the TVI makes use of intraday tick data while the OBV uses of end of day data.

Tick prices, especially stock prices, often display trades at the bid or ask price for extended periods without changing. This creates a flat support or resistance level in the chart. During these periods of unchanging prices, the TVI continues to accumulate this volume on either the buy or sell side, depending on the last price change.

The TVI can identify whether a security is being accumulated or distributed. When the TVI is trending up, trades are taking place at the asking price as buyers accumulate the security. When the TVI is trending down, it shows that trades are taking place at the bid price as sellers distribute the security.

When prices are flat and the TVI is rising, look for prices to start to move to the upside. When prices are flatand the TVI is falling, look for prices to drop.

The Trade Volume Index is calculated by adding each trade's volume to a cumulative total when the price moves up by a specified amount, and subtracting the trade's volume when the price moves down by a specified amount. That specified amount is known as the "Minimum Tick Value." To calculate the TVI you must first determine if prices are being accumulated or distributed:

Change = Price - Last Price

MTV = Minimum Tick Value

Accumulation when Change > MTV or Distribution when. Change < MTV

With direction determined, calculate the TVI:

Accumulation: TVI = TVI + Today's Volume

Distribution: TVI = TVI - Today's Volume

Trend Quality Indicator (Q Indicator) : The Trend Quality indicator is a trend detection and estimation tool based on two-step filtering.

Cumulative Price Changes are measured over term oriented semi-cycles and relates them to noise.

It shows congestion and trending periods which allows you to evaluate strength of trends.

Trend Quality accesses trend strength using a summing process to determine the Cumulative Price Change. Cumulative Price Change is reset at every trend reversal. Trend reversals are based on the crossing of two moving averages. Cumulative Price Change is averaged to produce the trend which is compared to the noise calculation. The result of this calculation is the quality indicator.

TRIX : TRIX is both moving averages and rate-of-change together to show a developing trend.

It is a percent rate-of-change of a triple-smoothed exponential moving average of a closing price.

It is a momentum indicator which moves up over and under a zero line. A movement above indicates a long opportunity, while a movement below indicates a short opportunity.

Formula:

1. Calculate an n-period exponential moving average of the close 2. Calculate an n-period exponential moving average of the first moving average, MA2 3. Calculate an n-period exponential moving average of the second moving average, MA3 4. Calculate the one-day (or one-minute, one-hour, etc) percent change of the third moving average

(MA3), this result is the TRIX

TRIX 2 : Line TRIX 2 Line has two lines, one of which is the normal TRIX and the second is the signal line, generally 3 is used as the number of periods on a chart.

The points where these two lines cross are:

Golden Cross (GC): TRIX breaks through signal line in an upward movement. Dead Cross (DC): TRIX breaks through signal line in a downward movement. Bounce (B): The line changes direction from down to up. Fall (F): The line changes direction from up to down.

General trading guidelines suggest that one should enter trading on a Golden Cross, exit on a Fall and rest from a fall to the next Golden Cross.

Formula: TRIX = (EMA 3 [TODAY] - EMA 3 [YESTERDAY]) / EMA 3 [YESTERDAY]

The solid line is the TRIX while the dotted line is the signal line.

True Strength Index : The True Strength Index (TSI) is a momentum-based indicator, developed by William Blau. Designed to determine both trend and overbought/oversold conditions, the TSI is applicable to intraday time frames as well as long term trading.

The True Strength Index is a variation of the Relative Strength indicator. It uses a double smoothed exponential moving average of price momentum to minimize choppy price changes and highlight spot trend changes with little or no time lag. An increasing True Strength value indicates increasing momentum in the direction of the price movement.

Long Term - First Period used in the double exponential smoothing of the momentum.

Short Term - Second Period used in the double exponential smoothing of momentum.


U

Ultimate Oscillator : Developed by Larry Williams, the Ultimate Oscillator combines a stock's price action during three different time frames into one bounded oscillator. The three time frames represent short, intermediate, and long term market cycles (7, 14, & 28-period). Note that these time periods all overlap, the 28-period time frame includes both the 14-period time frame and the 7-period time frame. This means that the action of the shortest time frame is included in the calculation three times and has a magnified impact on the results.

It is expressed as a single line plotted on a vertical range valued between 0 and 100, with oversold territory below 30 and overbought territory above 70.

Trading should take place when there is a divergence between price and the Ultimate Oscillator. When the price reaches a new low and is not supported by a new low of the Ultimate Oscillator, a bullish signal is generated, provided the Oscillator falls below thirty during this divergence and the Oscillator then rises above its high during the divergence. According to Williams the subsequent uptrend can be ended should the value of the Ultimate Oscillator rise above seventy or rise above fifty and then fall below forty-five. When the price reaches a new high and is not supported by a new high of the Ultimate Oscillator, a bearish signal is generated, provided that the Oscillator rises above fifty during this divergence and the Oscillator then falls to a new low during the divergence. The subsequent downtrend can be ended should the value of the Ultimate Oscillator rise above sixty-five or fall below thirty.

Upside/Downside Ratio : The Upside/Downside Ratio function tries to determine the momentum of the market by calculating the ratio of the volumes of advancing (up) to declining (down) issues on the New York Stock Exchange. This indicator is often smoothed with a moving average to filter out day-to-day fluctuations and display longer term trends.

Values will be greater than 1.0 when more volume is associated with stocks that are advancing (increasing in price) than those declining. Values of less than 1.0 are when greater volume is associated with stocks with falling prices.

This indicator makes a good overbought/oversold indicator. Extremely high values may indicate that the market is becoming overbought with a sell-off occuring in the near future along with a drop in prices. Likewise, extremely low values can indicate that the market is becoming oversold.

Another characteristic to watch for is "mutliple 9-to-1 days" (an Upside/Downside Ratio greater than nine). In his book, Winning on Wall Street, Martin Zweig states, "Every bull market in history, and many good intermediate advances, have been launched with a buying stampede that included one or more 9-to-1 days" Two or more values of 9 or greater within a three month period will typically indicate the beginning a strong bull market.

In general, broad market indicators can be used for trading against broad market indices through options, futures, and mutual funds. They can also be used to increase the effectiveness of more specific signals by adding confirmation or warning of upcoming trends.

Upside/Downside Volume : The Upside/Downside Volume indicator illustrates the difference between up (advancing) and down (declining) volume on the New York Stock Exchange.

The Upside-Downside Volume indicator shows the net flow of volume into or out of the market giving short-term buy/sell signals, based on zero line crossovers. Like all such oscillators, the greater the distance from the zero line, the greater the chances of reversal.

The oscillator is very sensitive, upward movements are associated with buying, and downward with selling. Used in combination with the TRIN or other technical indicators, the Upside/Downside Volume indicator can be a very handy trading tool.


V

Vertical Horizontal Filter : Created by Adam White, the Vertical Horizon Filter illustrates the trendiness of a particular equity. It helps display whether the stock is following a trend or a trading range.

If the Vertical Horizon Filter is rising, this may indicate a trend is forming. The higher the indicator, the better other trend-following indicators will work. Falling values may indicate that prices may be falling out of the trend and entering a congestion phase (the stock trades within a certain price range without much net up or down movement).

Volume : Simply put, Volume is the number of shares traded during any given period, usually hour, day, week, or month. It is the basic yet important analysis of volume that provides investors with an element of technical analysis. Volume can provide valuable clues as to the intensity of a given price move.

During consolidation periods low volume levels generally prevail. This is symptomatic of the indecisive expectations that typically occur during consolidation periods, times when prices move sideways within a fairly narrow strading range. Low volumes also often occur during market bottoms, another period of indecision.

High volume is characteristic of market tops when a consensus forms believing that prices will move higher. High volume is also very common at the start of new trends (i.e., when prices emerge from of a trading range). Just prior to market bottoms, volume will often increase due to panic-driven selling.

Volume can help determine the health of an existing trend. A healthy up-trend should have higher volume on the upward motion of the trend, and lower volume on the way down. A healthy downtrend usually has higher volume on the downward legs of the trend and lower volume on the upward (corrective) legs.

Volume Accumulation : Created by Mark Chaikin, the Volume Accumulation Oscillator shows the cumulative volume adjusted by the difference between the close and the midpoint of the day's range.

Compared to the On Balance Volume (OBV) indicator which assigns all the day's volume to the buyers if a security closes up or to the sellers if it closes down, Volume Accumulation uses the relationship of the closing price to the mean price to assign a proportion to the volume.

Use the Volume Accumulation Oscillator as you would the OBV and let volume confirm a trend. A rising price trend will be confirmed by a rising VA line. An uptrend paired with a rising Volume Accumulation line is considered bullish while a Volume Accumulation line that diverges from the price direction of movement should warn of a near-term price correction.

The formula for Chaikin's Volume Accumulation is:

Volume by Price : Volume by Price is an excellent indicator combining both price and volume into one tool. The volume of trades is plotted onto the chart horizontally at price intervals. Volume by Price can be used see which prices invoke the most volume and activity.

This is useful in determining where the majority of historical trading volume occurred and help find meaningful support and resistance lines. Volume by Price can also help in picking price changes or reversals. A price change is usually associated with large volume so if the current price is hovering around a level of high volume expect a price direction change. Likewise, low volume can be associated with times of uncertainty or consolidation.

Remember, this is a very subjective measure. Volume by Price is never sufficient in and of itself to plan trades.

Volume Flow Indicator : The Volume Flow Indicator (VFI) is an improvement on the On Balance Volume indicator (OBV).

A traditional OBV calculation adds the days volume to a running sum if the price is above the previous days close, and subtracts it if the close is below the previous days close.

Because small random price movements can distort the underlying trend, a longer term indicator is necessary, which is where the VFI becomes useful.

The VFI is a long-term and open-ended indicator that will help assess the major trend and as such, should not be used as an overbought/oversold oscillator.

The VFI indicator had three properties:

1. Level - A level above zero is considered bullish and indicates accumulation over the previous six-month period. Values below zero indicate distribution. A cross of the zero line indicates that the balance of power is changing from the bulls to the bears and vice-versa 2. Divergences - Looking at changes in the VFI can help determine the quality of a price move. A divergence in volume can be evidence of a reversal. Divergence is often shown by a higher high non-confirming to the indicator. A trend may be losing momentum if the VFI fails to confirm a new high or low for a cycle. 3. Direction - Smoothing of an indicator with moving averages allows this indicator to ignore short-term fluctuations. A linear regression line may also filter out short-term noise.

Volume Oscillator : The Volume Oscillator uses the difference between two moving averages of volume to determine if the overall volume trend is increasing or decreasing.

When the Volume Oscillator rises above zero the shorter-term volume moving average has risen above the longer-term volume moving average. This means that the short-term volume trend is higher (i.e., more volume) than the longer-term volume trend. Bullish signals stem from rising prices coupled with increased volume, and falling prices coupled with decreased volume. Alternatively, if volume increases as prices fall, or volume decreases as prices rise, the market is thought to be showing signs of underlying weakness.

The logic behind this strategey is that rising prices coupled with increased volume signifies more buyers which should lead to a continued move. Similiarly, falling prices coupled with increased volume (more sellers) should mean fewer buyers.

Volume ROC : Volume ROC (Rate of Change) is mathmatically identical to Price ROC only it displays the ROC of the security's volume rather than of its closing price.

The Volume ROC shows the speed at which volume is changing. This can be quite informative as almost every significant chart formation (tops, bottoms, breakouts, etc.) is accompanied by a sharp increase in volume.

The Volume ROC indicator is calculated by dividing the amount that volume has changed over the last n periods by the volume n periods ago. The result is the percentage that the volume has changed in the last n periods. When the volume is higher today than it was n periods ago, a positive number will result. If the volume is lower today than it was n periods ago, the ROC will be negative. This is written in formula form as:

Volume+ : Volume+ represents the volume of advancing issues. Use this measument to quantify the total volume of stocks that at the end of the day closed higher than their previous closing price.

Volume+ is generally viewed as an indication of buying pressure. When advancing volume expands it is generally viewed as bullish.


W

Weighted Close : The Weighted Close indicator calculates an average of each day's price. Its name comes from the fact that twice as much weight is given to the closing price as is given to the sum of the daily high and daily low. Similar indicators include the Median Price and Typical Price.

As with other price adjustment functions, the Weighted Close provides a simplified view of the day. It can be used to smooth out some of the volatility of a chart of closing prices as it includes information for the entire trading day. A Weighted Close chart combines the simplicity of the line chart with the scope of a bar chart, by plotting a single point for each day that includes the high, low, and closing price.

Use the Weighted Close anywhere a closing price or other single price field could be used. For example, it could be compared to a moving average of its value to determine when a security is trending upward or downward. The Weighted Close is calculated as:

Wilder's RSI : The Wilder's Relative Strength Index (RSI) is a rate of change oscillator developed by J. Welles Wilder, Jr. It essentially compares the price of a stock to itself. It does NOT compare the relative performance of one stock (or market average) to another. Use this indicator to spot positive and negative divergences with price. It may also be used to determine if a stock or index has reached an overbought or oversold condition.

A reading of 70% or higher is generally an overbought position. Conversely, values near the 30% level should be considered an indication the situation has become oversold. If used as an overbought/oversold indicator, it is important to first determine whether a definable trend exists. This is best determined by using another technical indicator such as price moving averages or trendlines. After the direction of a primary trend has been successfully identified, use Wilder's RSI to trade strictly with the trend.

On this website, Wilder's RSI is calculated using a 5 day Wilder's Smoothing, versus the regular RSI which utilizes a 5-day EMA.

Wilder's Smoothing : Created by Welles Wilder, the Wilder's Smoothing indicator is similar to the Exponential Moving Average. It responds slowly to price changes compared to other moving averages. Wilder's Smoothing is used as a part of wilder's RSI.

Wilders Volatililty Index : Wilders Volatility Index is intended to measure true range over time and is sometimes referred to as Average True Range. It is the greatest difference between:

This period's High and Low The previous period's Close and this period's High The previous period's Close and this period's Low

The discussions on Volatility (Chaikin's), Option Volatility, and Standard Deviation explain the interpretation of other volatility indicators.

Williams %R : Williams %R is a momentum indicator that is designed to identify overbought and oversold areas in a nontrending market. Williams %R was developed by Larry Williams.

The Williams %R is interpreted similarly to the Stochastic Oscillator only plotted upside-down. It also lacks the internal smoothing found in the Stochastic Oscillator. Readings in the range of -80 to -100% indicate that the security is oversold while readings in the 0 to -20% range suggest that it is overbought.

As with all overbought/oversold indicators, it is best to wait for the security's price to change direction before making any trades. It is not unusual for overbought/oversold indicators to remain in that condition for a long time as the security's price continues to climb/fall. Selling on the first indication of an overbought signal may reduce yields as it could be some time before the price shows signs of deterioration.

An interesting phenomena of the Williams %R indicator is its ability to anticipate a reversal in the underlying security's price. The indicator almost always forms a peak and turns down a few days before the security's price follows suit. Likewise, Williams %R usually creates a trough and turns up a few days before the security's price turns up.

The formula to calculate Williams' %R is:

Williams' Acc/Dist : Developed by Larry Williams, the Williams' Accumulation/ Distribution indicator is used to determine if the marketplace is controlled by buyers (accumulation) or by sellers (distribution) and trading when there is divergence between price and the A/D indicator.

Williams reccommends buying when prices fall to a new low yet the A/D indicator fails to reach a new low. Likewise, sell when the price makes a new high and the indicator fails to follow suit.

To calculate the Williams' Accumulation/Distribution indicator, determine:

True Range High (TRH) = Yesterday's close or today's high whichever is greater

True Range Low (TRL) = Yesterday's close or today's low whichever is less

The day's accumulation/distribution is then calculated by comparing today's closing price to yesterday's closing price. If today's close is greater than yesterday's close:

Today's A/D = today's close - TRL

If today's close is less than yesterday's close:

Today's A/D = today's close - TRH

If today's close is the same as yesterday's close then the A/D is zero.

The Williams' Accumulation/Distribution indicator is a cumulative total of the daily values:

Williams A/D = Today's A/D + Yesterday's Williams A/D

A TO Z : GROSSARY OF TECHNICAL ANALYSIS :

Z

Zig Zag : The Zig Zag indicator shows past performance trends and only the most significant changes. It does this by filtering out any changes less than a specified amount.

The Zig Zag indicator is used primarily to help you see changes by highlighting the most significant reversals. Understand that the last segment in a Zig Zag chart can change based on changes in the underlying plot, price being only one example. That is, a change in a security's price can change a previous value of the indicator. Since the Zig Zag indicator adjusts its values based on subsequent changes, it has perfect hindsight into what prices have done. Do not try to create a trading system based on the Zig Zag indicator, as it to be used to illustrate historical patterns.

The Zig Zag indicator is calculated by placing imaginary points on a chart when prices reverse by at least the specified amount. Straight lines are then drawn to connect these imaginary points. Any changes in prices that are less than the specified amount are ignored.

Disclaimer: This book is designed and developed for education purpose and should not be considered as any Stock tips. Stock market involves risk and one can loose money. No representations can be made that recommendations contained herein will be profitable or they will Not result in losses. Readers using the information contained herein or made by us are solely responsible for their actions. The inforation is obtained from sources deemed to be reliable but is not guaranteed as to accuracy and completeness.

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Glossary of Technical Indicators