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Technical Analysis
chart indicators

Price charts summarise the underlying opinions and emotions of the market participants.
Every chart tells a story. It pays to understand the stories in the price charts.
Technical analysis indicators can help give us more clues and
provide signals for trading and investing decisions.
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Related links: Technical Analysis - Getting Started; Technical Analysis - What is it?; TA - The Proof; 4 Windows approach
Practical applications and more about Technical Analysis: Published ATAA articles; Blue Chips; Dow Theory;
Moving Average; Weinstein's 30-week MATrends and trend-spotting; Support and Resistance;
Breakouts; Candlestick charts; Divergence; semi-log price charts; Exit strategies; Stop Loss;
Fundamental analysis; Funda-Technical Analysis; eBook Articles Master List; eBook Articles INDEX; about the eBook Articles

Technical Analysis - brief re-cap

The usefulness of techniical analysis is summarised in the statement at the top of this page - that price charts summarise the opinions (and emotions) of the market participants. Every chart tells a story, and it can pay to understand the stories in the price charts.

As a sub-topic of technical analysis, the huge variety of technical analysis indicators can help give us more clues about what's actually happening in the market, and they can give clear cut buy and sell signals to help with trading and investing decisions.

For more of an introduction into technical analysis, and why and how we can use it,
see the Technical Analysis web page.

Quick indicator sample - the Moving Average

The simplest chart indicator, with which many people might be familiar, is the Moving Average. sample of this is shown in the sample chart below. This is a monthly candlestick chart of ACR (Acrux Ltd) showing a bottoming of the price in late 2008 and early 2009, followed by a rising trend through 2009-2011 (a rising trend, by definition, is a series of higher peaks and higher troughs - read more about trends). The blue curve on the sample chart below is the 14-month Simple Moving Average (SMA). See more about the humble Moving Average.

Sample chart showing Moving Average

Why use an indicator? How can they be useful?

Firstly, it is worth re-stating that the price charts summarise the opinions of the market participants regarding so-called fair value for the share price. The price charts can tell us a story about what “Mister Market” has been thinking. It pays to understand the stories in the price charts - this is technical analysis. The more insight we can gain into the share price history, the more we can understand the opinions of the market participants, and the underlying balance of supply and demand of the shares. And this can help give us greater confidence about the more likely scenarios for future price movements. 

Don’t forget that we are not trying to predict future share prices. We are trying to anticipate the likely future movements so that when a price move happens, we won’t be surprised by the move, and we might be able to take advantage of the move (even before it happens).

It can be very useful to be able to interpret a technical analysis indicator, for the following reasons:

  • An indicator can give a greater insight into what has been happening with the share price, and therefore a greater understanding of the opinions of the market participants. For example, a repeated pause in a trend at a particular price level, or an increasing tendency to move up faster or slower (or downwards). (eg. Momentum indicator).

  • An indicator can help to identify a price trend (uptrend or downtrend), and to quantify the strength or nature of the trend — is it strong or weak? is it likely to last or not? (eg. ADX.)

  • An indicator can help us understand the strength of a move in a particular direction, especially if the volume is factored into the indicator (eg. Money Flow).

  • An indicator can help us understand if the share price has moved further in one direction than it normally would under normal share trading activity (eg. rising momentum, or a volatility indicator like Bollinger Bands). Greater price movements can hint that someone knows something, or that there is a general swell of opinion that is tending to move the share price.

  • An indicator can help us understand if the share price is over-sold, and that a turn-around to the upside might be likely. And conversely, if the share price is over-bought and that a turn-around to the downside might be likely. (eg. RSI, Stochastic).

  • An indicator, or a combination of two indicators, can be used to help provide a buy or sell signal or trigger for a potential stock purchase, or for an exit. For example, two different moving averages (plotted together on the price chart) can provide signals.

Indicator categories

Technical analysis chart indicators tend to be categorised under four major headings: trend, volatility, momentum and volume. These different categories tend to give different perspectives into the share price movements by looking at the different characteristics of the price movements. Samples of some of the indicators in each of the four categories are indicated below.

If you want to use several indicators to assist you with a trading or investment decision, it is important to use indicators from each of these four groups. If you use two or three trend indicators, which might all give a similar signal, then you are missing out on the clues that indicators in the other groups could give. In some circumstances, you will find that indicators in each of these groups might conflict (ie. some might give a buy signal, while the others do not). This is for good reason. But when different indicator types concur, the signal might be more reliable.

One thing to watch with indicators is that some tend to be lagging indicators, while only some are leading indicators. The lagging indicators basically move after the price action, and confirm a price movement, whereas the leading indicators change before the price changes.

Where to from here? What next? How to go forward?

For those who can see the benefits of technical analysis indicators, and who want to learn more, there is a challenge — which ones to use? There are many indicators available, and for various reasons there are more indicators being devised from time to time. To help get started, the following are amongst the most popular indicators, and tend to be the easiest to understand.


More details

For more information on this topic, see:

Also see Wikipedia for another view of technical analysis.

Also a range of classic text books on the subject.


Before investing money in the markets, make sure to check with a qualified financial advisor to check if your planned investment is appropriate for you.

STOP! - Are you Share Market Ready?

Whatever you do,
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Beware the sharks in the ocean.

 

Key technical analysis indicators

The following are just some of the hundreds of indicators and variants. These ones are about the most popular, and perhaps the easiest for the newcomer to understand. 

Popular Trend indicators

Moving Average (MA)

Amongst all of the technical analysis chart indicators in common use, the Moving Average (MA) indicator must be about the simplest and the most common. It is very useful, and can be combined with other indicators. The sample at right is a weekly chart of BHP in early 2007, with a 21 week Simple Moving Average (SMA).
 
For more details see Moving Average - explained.

(Click on the image for a larger version.)
Moving Average

Multiple Moving Average (MMA)

The Multiple Moving Average (MMA) indicator is simply a collection of several standard Moving Average (MA) curves. Several people have made this type of Moving Average popular, including Daryl Guppy whose own version of the MMA is the Guppy-MMA. See the sample at right.

(Click on the image for a larger version.)
GMMA

MACD - Moving Average Convergence Divergence

The MACD indicator is basically a special combination of two moving averages. It comprises two lines that appear to be moving averages (in reality they are). In the sample at right, the indicator is shown in the upper pane of the price chart, and comprises two curves - the (Fast) MACD line (the upper line in this example), and the MACD Signal Line. Some traders use a cross-over of these two lines as buy and sell signals.

(Click on the image for a larger version.)
MACD

P-SAR

The Parabolic SAR (Stop And Reverse) indicator was developed by J. Welles Wilder and is used to indicate the Stop-Loss price point for tomorrow's trading. In the sample weekly chart at right, the dots under the price action indicate the price point to be used as the Stop Loss value for next week's trading. That is, if the price falls next week to the level indicated by this week's dot, then sell.

(Click on the image for a larger version.)
P-SAR

ADX Trend Strength indicator

This trend following indicator was developed by J. Welles Wilder, and is known as the ADX (Averaged Directional movement Index), or DMI (Directional Movement Indicator).  It measures trendiness (Chuck le Beau), or the strength of a trend. Some people consider this a momentum indicator.
 
The indicator compares the current price with the previous price range.  It can be said to be roughly the largest part of the current price range outside the previous range, and if it's higher then it is positive, and if it's lower it is negative.  If the day is an inside day, then there is no DI for the day. The actual calculations are rather complex.
 
(Click on the image for a larger version.)
ADX

Popular Volatility indicators

Bollinger Bands

The Bollinger Bands were developed by John Bollinger, and look a little similar to moving average envelopes. As you can see in the sample price chart at right, Bollinger Bands are comprised of three curves (the green ones in this sample) - the middle curve is basically a Moving Average (typically a 20 period Simple MA), while the upper and lower “bands” are a distance away from the middle curve by an amount that is based on the volatility of the price. That is, the more volatile the price (that is, the greater the range in price in a bar or candle), the further apart the bands are spaced. The amount of volatility used is commonly referred to as two standard deviations of the average share price. So the resulting plot is actually “moving standard-deviations” plotted as bands around a moving average of the share price.

(Click on the image for a larger version.)
Bollinger Bands

ATR - Average True Range

It is more important to understand the concept of Average True Range, than the ATR indicator itself. The ATR is a comparison of the variation in share price between the high price, low price and close price, over a given period of time. Something like a 14-period comparison is common. In the sample price chart at right, the ATR indicator is shown in the upper price pane. Now we would not normally use it in this manner, but this helps to demonstrate exactly what it is.

(Click on the image for a larger version.)
ATR

Popular Momentum indicators

Momentum

The momentum indicator itself is a measure of how far the share price has moved over a specific time period. A stock with a strongly rising Momentum is likely to keep rising. It compares current price to earlier price, and indicates the pace and strength of a trend. It can help to identify trend weakness, and possible trend reversals.  High Momentum values (either positive or negative) occur when a trend is at its strongest, while lower values are found near the start and end of a trend.
 
Normally, the Momentum curve and the price plot will rise and fall together. In the sample at right, BHP made a Double Top pattern in 2008, while the Momentum curve failed to make a similar top. The fall in Momentum as shown here is referred to as Bearish Divergence - a very useful observation to make.

(Click on the image for a larger version.)
Momentum

OBV - On Balance Volume

The OBV indicator was developed by Joseph Granville, and attempts to measure the level of accumulation and distribution by comparing volume to price movement. (It is described in his book “Granville's New Strategy of Daily Stock Market Timing for Maximum Profit”). It works on the premise that larger traders accumulate and distribute stock in higher volumes prior to a corresponding move in share price. It is a measure of underlying strength, and is basically a “running total” of the traded volume, where the day's volume is added to the “running total” if the day's closing price is higher than the previous close. Conversely, if the day's close is less than yesterday's, then the volume is subtracted. Of course, this is for a daily perspective.
 
In the specific example chart at right, this stock (ANZ bank) made a Double Top pattern in 2007, while it's OBV nade successively lower peaks. As with Momentum above, this observation is know as Bearish Divergence.

(Click on the image for a larger version.)
OBV

RSI - Relative Strength Index

The RSI is a momentum oscillator developed by J. Welles Wilder. It compares upward movements of the closing price with downward movements, resulting in a value which ranges between 0 and 100 (hence the oscillator descriptor). In other words, it indicates the strength of a single security, relative to that security's past performance.

(Click on the image for a larger version.)
RSI

Popular Volume indicators

Volume Moving Average (VMA)

This is simply a Moving Average applied to the volume pane of the price chart, as in the sample at right (a daily chart of FLT - Flight Centre). The key observation from this particular sample is that the VMA (the green curve in the lower pane) was trending lower for several weeks, indicating a waning of interest in the stock.

(Click on the image for a larger version.)
Volume Moving Average

Volume Oscillator

The Volume oscillator is derived from two moving averages of volume (somewhat similar to MACD and Stochastic) to result in a single curve that oscillates above and below a horizontal zero line. The sample weekly chart at right shows the share price (candles) in the upper pane, the regular volume bars in the bottom pane, and the Volume Oscillator in the middle pane.
 
Possible signals:
  • Possible buy when the oscillator is rising (more positive, suggests strong trend); but look for confirmation with another indicator.
  • Possible sell when the oscillator is falling (indicating trend weakness).
(Click on the image for a larger version.)
Volume Oscillator

The study of technical analysis provides invaluable insights into the underlying mood and sentiment of the security or the market. It can be applied to price charts of stocks, and the market index, and commodities, and other financial instruments. Using technical analysis indicators can provide a much greater insight into the share price performance.

Price charts summarise the underlying opinions
and emotions of the market participants.
Every chart tells a story. Understand the stories in the price charts.

More information

Technical Analysis - What is it? (more details)...

Technical Analysis - how to get started...

Also see the links in the column at top right.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.

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Last revised: 28 August, 2017