Mathematical indicators of

Technical analysis

what is indicator analysis?

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

Mathematical indicators

Simple moving average : It gives equal weight to each price

point over the specified period. The user defines whether the high,
low, or close is used and these price points are added together and
averaged. This average price point is then added to the existing
string and a line is formed. With the addition of each new price
point the sample set drops off the oldest point. The simple moving
average is probably the most widely used moving average.
Exponential moving average: An exponential moving
average multiplies a percentage of the most recent price by the
previous period's average price. Defining the optimum moving
average for a particular currency pair involves "curve fitting". Curve
fitting is the process of selecting the right number of periods with
the correct type of moving average to produce the results the user
is trying to achieve. By trial and error, technicians work with the
time periods to fit the price data.
MACD
The MACD (Moving Average Convergence/Divergence) is a momentum indicator
used to show the relationship between two moving averages. The MACD was
developed by Systems and Forecasts publisher, Gerald Appel.

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

MACD(2lines)

MACD (2-lines) shows the relationship between a 26-day and 12-day Exponential
Moving Average with a 9-day Exponential Moving Average (the "signal" or
"trigger") line plotted on top to show buy/sell opportunities.

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

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

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

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

MACDHistogram

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

Relative Strength Index (RSI): RSI measures the momentum of price

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

Ways to use Relative Strength Index for chart analysis:

 Tops and bottoms

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

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

 Failure swing ( Support or Resistance penetrations or breakouts)

This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low
(trough);

 Support and Resistance levels

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

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

 Calculation:
 RSI = 100-(100/(1+U/D))
 Where:
U — is the average number of positive price changes;
D — is the average number of negative price changes.


Rate of change (ROC): ROC is an oscillator that measures the
relationship between the current price of a share with the price
prevailing a few days earlier. ROC measures the rate of change in
prices over a specific period of days on a regular and continuous
basis. The ROC value can be zero,positive or negetive. These values
are plotted on graph with time on X-axis and ROC values on the Y-
axis. The ROC values oscillate around zero. ROC above zero
indicates that prices are increasing and ROC below zero indicates
that prices are decreasing.
Ease of Movement

The Ease of Movement Indicator was designed to illustrate the

relationship between volume and price change. It shows how much volume
is required to move prices.

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

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

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

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

Where:
H = Today's high
L = Today's low
Hp = the previous day's high price
Lp = the previous day's low price
V = current day's volume
Aroon Indicator

The Aroon Indicator was developed by Tushar Chande. Its comprised of

two plots one measuring the number of periods since the most recent x-
period high (Aroon Up) and the other measuring the number of periods
since the most recent x-period low (Aroon Down). The plotted value is on a
"stochastic" like scale ranging from 0 to 100. So, for example, if in a time-
period of 14 days a security makes a new 14-day high, the Aroon Up =
100. When the security makes a new 14-day low, the Aroon Down = 100.
When the security has not made a new high for 14 days, the Aroon Up = 0
and when the security has not made a new low for 14 days, the Aroon
Down = 0.
When the Aroon Up line reaches 100 it is a sign of strength. If the Aroon Up persists between 70
and 100, a new uptrend is indicated. Likewise if the Aroon Down line falls to 100, potential
weakness is indicated. If the Aroon Down remains persistently between 70 and 100, a new
downtrend is indicated. A strong uptrend is indicated when the Aroon Up line persistently
remains between 70 and 100 while the Aroon Down line persistently remains between 0 and 30.
Likewise a strong downtrend is indicated when the Aroon Down line persistently remains
between 70 and 100 while the Aroon Up line persistently remains between 0 and 30.

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

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

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

Aronoscillator
Developed by Tushar Chande, the Aroon Oscillator is based upon his Aroon Indicator. Much
like the Aroon Indicator, the Aroon Oscillator measures the strength of a trend.
The Aroon Oscillator is constructed by subtracting Aroon Down from Aroon Up. Since Aroon
Up and Aroon Down oscillate between 0 and +100, the Aroon Oscillator oscillates between
-100 and +100 with zero as the center crossover line. The Aroon Oscillator signals an
uptrend if it is moving towards its upper limit. It signals a downtrend when it is moving
towards the lower limit. The closer the Aroon Oscillator value is to either extreme the
stronger the trend.