Technical Analysis

TECHNICAL ANALYSIS: 

TECHNICAL ANALYSIS Submitted By: Group 8 Pulkit Ahuja Rejaul Karim Nikhil Pandey Abhijit Agarwal Anuj Goyal Sahil Vijay

What is Technical Analysis: 

What is Technical Analysis Technical Analysis is the technique of predicting the appropriate time to buy or sell a stock used by those believing in the castle-in-the-air view of stock market pricing. Technical Analysis is essentially the making and interpreting of stock charts. Thus technical analysts are also called chartists. Most Chartists believe that the market is only 10 percent logical and 90 percent psychological.

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Technical Analysts view the Investment game as one of anticipating how the other players will behave. This is done by comparing current price action (i.e. Current Expectations) with comparable historical price action to predict a reasonable outcome . It is therefore an attempt to forecast stock prices on the basis of market-derived data.

Castle in the air View : : 

Castle in the air View : It is perfectly fine to pay 3 times what a thing is worth as long as later you can find someone else to pay 5 times it’s worth. Any price will do as long as others may be willing to pay more. There is no Reason, only mass psychology. ‘A thing is worth only what some one else will pay for it’

Assumptions: 

Assumptions The markets are not Efficient, ie , the past trends can be used to predict future values. The markets do not follow a Random Walk and that investor phycology plays a major part in the determination of prices. Irrespective of why they occur, shifts in demand and supply can be detected in charts . All information about earnings, dividends and future performance of a company is automatically reflected in the companies past market prices.

Why is Charting Supposed to Work ??: 

Why is Charting Supposed to Work ?? In a survey of top financial chartists by Burton G. Malkiel , most freely admitted that they do not know Why Charting S hould Work -- Probably history has an uncanny habit of repeating itself.

Plausible Explanations of Why Technical Analysis Works (Seems to Work): 

Plausible Explanations of Why Technical Analysis Works (Seems to Work) It has been argued that the crowd instinct of mass phycology makes it so. When investors see the price of a speculative favorite go higher and higher, they want to jump on the Bandwagon and join the rise. Indeed, the price rise itself helps fuel the self fulfilling prophecy . Each rise just increases the expectations and makes investors anticipate a further price rise.

Secondly, (generally the Indian Scenario): 

Secondly, (generally the Indian Scenario) There is unequal access of fundamental information about a company. When some favorable news occurs such as the grant of a big contract or discovery of a rich mineral deposit, Insiders are the first to know and they act, buying the stock and leading to a price rise. The insiders then tell their friends, who act next. Then the professionals find out the news and the big institutions put blocks of shares in their portfolio’s.

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Finally the Mango Public like you and us get the information and buy, pushing the price still higher. (in turn playing the “ Greatest F ool T heory ”) This entire process is supposed to result in a gradual increase in the prices of the stock when the news is good and a gradual decrease when the news is unfavorable. Chartists are convinced that even though they do not have access to inside information, observation of price movements alone enables them to pick the scent of ‘Smart Money’ and permits them to get in long before the general public.

Thirdly,: 

Thirdly, People have a nasty habit of remembering what they paid for a stock or the price they wish they had paid. For eg ., suppose a stock sold for Rs.50 a share for a long time, during which a number of investors bought in. Suppose then that price drops to Rs . 40. The chartists claim that the public will be anxious to sell the stock when it rises back to the price at which it was bought, and break even on the trade. Consequently the price of Rs . 50 at which the stock sold initially becomes a resistance area. Each time the resistance area is reached and the stock turns down, the theory holds and gets stronger, as investors also tend to get an idea that the market of a particular stock won’t go further.

Why Technical Analysis might fail to work: 

Why Technical Analysis might fail to work It should be noticed that a technical analyst buys or sells only after a price trend has been established, and as sharp reversals in the markets occur quite suddenly, the chartists often miss the opportunity. Secondly, such techniques must be self defeating, as more and more people use it, the value of any technique depreciates. No buy or sell signal can be worthwhile if everyone acts on it simultaneously eliminating the scope of gradual price increase or decrease.

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Thirdly, in case of good news, the promoters and operators of the company are usually in such a strong position that they can immediately drive up the prices of the stock within minutes, thereby making the whole cumbersome process of charting a futile exercise. If some people know that the price of a certain stock trading at Rs . 20 will go up to 40 tomorrow, it will go up to 40 today.

An Eye Opener : 

An Eye Opener Prof. H Seybun of the University of Michigan found that 95 % of the significant market gains over the thirty year period from mid 1960’s to mid 1990’s came on just 90 of a total of 7,500 trading days. Conclusion : If you happened to miss these 90 days (less than 1% of the total), the entire long term investment advantage vanishes. Market Timers are at a very huge risk of missing these gains.

Types of Charts: 

Types of Charts Basic Line Charts OHLC charts or Bar Charts Japanese Candle Stick Point & Figure Charts Basic Line Chart X Axis- Time Y Axis- Price

Bar (OHLC) Chart: 

Bar (OHLC) Chart Has more information Daily bar chart used for short-term decisions Monthly, weekly used for long-term decisions Volume information can also be added to bar charts

Bar (OHLC) Chart: 

Bar (OHLC) Chart

Interpreting High/Low positions: 

Interpreting High/Low positions Uptrend – Higher highs and higher lows Downtrend – Lower Highs and lower lows

Uncertain Indicators: 

Uncertain Indicators Inside Days – Lower High and Higher Low Outside Days – Higher High and Lower Low Borderline days – Equal High or Equal Low Equal Low Outside Day Inside Day Equal High

Interpreting Bar Ranges: 

Interpreting Bar Ranges Range – Distance between the High and the Low on a bar. Expanding Range is an uptrend signal – Dominance from Buyers Contracting Range is and downtrend signal – Dominance from Sellers

Candle Stick Chart: 

Candle Stick Chart Developed by Japanese to observe the price of rice contracts Drawn from open, high, low and close data If the closing price is above the opening price, the rectangle is white If the closing price is below the opening price, the rectangle is black High and low are the wicks at the bottom and top of the rectangle

Candle Stick Chart: 

Candle Stick Chart

Interpretation of Candle Stick Chart: 

Interpretation of Candle Stick Chart

Bullish Patterns: 

Bullish Patterns Long White Line: It is a bullish. It occurs when price open near the low and close significantly higher near to highest prices. Hammer: this is a bullish line if it occurs after a significant downtrend. Piercing Line: First line is long black line followed by a long white line and second line opens lower than first line low but it closes more than the halfway above the first line real body.

Bullish Patterns: 

Bullish Patterns Bullish Engulfing lines: It is a bullish pattern. It occurs after a significant downtrend. It occurs when a small bearish line is engulfed by a large bullish line. Morning Star: Signifies a potential bottom. Star indicates a possible reversal Bullish Doji Star: Star indicates reversal and a dogi indicates indecision. It indicates a reversal following an indecisive period. You should wait for a confirmation before trading a star

Bearish Patterns: 

Bearish Patterns Long Black Line : It occurs when prices open near the high & close lower near the period’s low Evening Star : The star indicates a possible reversal & the bearish body confirms this. Dark Cloud Cover : It is significant if the 2 nd black body is below the centre of the previous body

Bearish Patterns: 

Bearish Patterns Hanging Man : Are bearish if they occur after a significant uptrend Bearish Engulfing Line : It is strongly bearish if occurs after a significant uptrend Bearish Doji Star : A star indicates a reversal and a doji indicates indecision. Indicates a reversal following an indecisive period. It is above the previous body.

Reversal Patterns: 

Reversal Patterns Shooting Star : Suggests a reversal when occurs after a rally. Star’s body must appear near low price and should havea long upper shadow Long-Legged Doji : open and close are same and highest lowest range is large. Dragonfly Doji : open and close are same and low is far away from all three.

Reversal Patterns: 

Reversal Patterns Gravestone Doji : open, low and close are same and highest is far away from all three. Star : it is a line with small real body that occurs after a line with a much larger body and real body does not overlap.

Uncertain Patterns: 

Uncertain Patterns Doji Star : stat indicates reversal and doji indecision. Spinning Tops : they occur when the distance between high and low and the open and close are relatively small. Doji : Doji line imply that a forceful move will follow a breakout from the current indecision.

Uncertain Patterns: 

Uncertain Patterns Harami : this pattern indicates a decrease in momentum. It occurs when a lien with small body falls within the area of a larger body. Harami Cross : this pattern also indicates a decrease in momentum. Double doji lines : These imply that a significant move will follow a break out from the current indecision

Point and Figure Chart: 

Point and Figure Chart No dimension & Volume but only significant price movement Purpose of the chart is to record changes and direction A rise in price is indicated by a ‘X’ marking A fall in price is indicated by a ‘O’ marking Ignores time factor

Point and Figure Chart: 

Point and Figure Chart First X in a new column is plotted one box above the last O in the previous column First O in a new column is plotted one box below the highest X A box indicates the minimal quantum of variation in price Box Size - Number of points needed to make an X or O . Reversal amount - the price change needed to recognize a change in direction

Example: 

Example

Resistance- Support: 

Resistance- Support

Buy – Sell Indicators: 

Buy – Sell Indicators

Dow Theory- First 3 Tenets: 

Dow Theory- First 3 Tenets Charles Dow, the father of technical analysis, made some interesting observation which can be summed in 6 tenets. They are Market has 3 trends namely Primary trend, secondary trend, minor trend Primary trend is either a bullish or a bearish market. This trend usually lasts more than 1 year. Secondary trends are Intermediate corrections to the primary trends, lasts around 1-3 months. Minor trends are short term trends that lasts for a day or two, secondary trends are made up of minor trends

2nd and 3rd tenets: 

2 nd and 3 rd tenets Primary trend has 3 phases. The first phase is made up of aggressive buying by informed investors. This is called the accumulation phase. Here the informed investors know that a turnaround is inevitable The second phase is increased corporate earnings and improved conditions. The third phase is excess participation from general public anticipating high returns, speculation gets high. There is a fall thereafter. The efficient Market Hypothesis

Last 3 Tenets: 

Last 3 Tenets The average must confirm each other. This is used specifically for Dow Industrial average and Dow Transportation Index. This may/ may not hold good for other indices Trends must be confirmed with volume. Any trend with high volumes shows higher strength. Trends exists until definitive proof that they have ended

Trends: 

Trends Uptrend Downtrend Correction Informed traders buying Excess Participation Volumes confirming

Support & Resistance: 

Support & Resistance Support: The price level where there is enough demand, should the price fall, to prevent it from falling further. Resistance means the price level where there is not enough demand to keep the prices rising further. Both of them denotes the end of trends. What was support becomes resistance, and vice-versa. Support Resistance Breakout

Trader’s Remorse, Traps: 

Trader’s Remorse, Traps Trader’s Remorse- The testing of break out of support/ resistance is known as trader’s remorse. Prices return back to support/ resistance level. Happens mostly because of lower volumes at break Bull Trap- After trader’s remorse, if the original resistance gets maintained, it is called bull trap. Bear Trap- After trader’s remorse, if the original support gets maintained, it is called bear trap.

Slide 42: 

NIFTY for the Current Year Long term Support Level of 5200 Breakout Long term Resistance Level of 5600 Breakout Trader’s Remorse Bull Trap

Trend Lines: 

Trend Lines There are three basic kinds of trends: An Up trend where prices are generally increasing, i.e. higher low prices. Up trend is characterized by rising support level A Down trend where prices are generally decreasing, i.e. lower high prices. It is characterized by lower resistance level. A Trading Range. Here the price tends to oscillate in a range of major support and resistance levels.

NSE Trend line: 

NSE Trend line Uptrend Downtrend Range Bound

CHART PATTERNS: 

CHART PATTERNS

Double Tops and Bottoms: 

Double Tops and Bottoms These are reversal patterns meaning Double top is a reversal sign useful in an uptrend and Double bottom is a reversal sign in a downtrend. Double top forms resistance at the trough, while double bottom forms support at the trough. The target line is where the trader enters the trade. The second top or bottom is usually formed with lower volume

RIL Double Bottom: 

RIL Double Bottom #1 #2 60 60 Target Stop Loss Entry Point Decreased volume

Head and Shoulders: 

Head and Shoulders This formation is characterized by two small peaks on either side of a larger peak. This is a reversal pattern, meaning that it signifies a change in the trend. This formation confirms the lack of a support/resistance level in a trend The right shoulder is usually formed on low volume and finally breaks out

Trading Head and Shoulder: 

Trading Head and Shoulder Neckline Shoulder Head Shoulder 450 pts. Target 450 pts. Stop Loss Go short Here Do not panic

Wedge- Rising and Falling: 

Wedge- Rising and Falling Rising wedge are always bearish, whereas the falling wedge are bullish. Wedges are different from triangles because they tend to take more time to form and traders tend to miss them

Rising Wedge Trading: 

Rising Wedge Trading Downtrend Rising Wedge Break Low: 505 High: 850 Target: 345 Stop loss

Triangles: 

Triangles Triangles are continuation formations. Three types: Ascending Descending Symmetrical Typically, triangles should break out about half to three-quarters of the way through the formation. Lower Highs Higher Lows

Ascending Triangle Trade: 

Ascending Triangle Trade 1731 1394 Break Target 330 Stop: 1620

Flag and Pennant: 

Flag and Pennant These are continuation pattern. They are seen after a big move in a particular direction. They show a brief correction after the sudden move. Both contains the flag pole. Flag is encompassed by a rectangle. The pennant is encompassed by a triangle

Flag and Pennant Trade: 

Flag and Pennant Trade Break Break Distance: 825- 760= 65 Target Stop 180 Target Stop

Cup Handle: 

Cup Handle Appearance of a coffee cup with handle on the right. After a rally a correction takes places which forms the left side & bottom of the cup, after that the previous high is restored which forms the right side. Volumes at the bottom is extraordinarily low which shows bears are not aggressive. The handle is another correction and is smaller than the cup. Continuation Pattern

Cup Handle in BEL: 

Cup Handle in BEL

Technical Indicators: 

Technical Indicators

Moving Averages: 

Moving Averages The average value of the over specific period of time Used to figure out whether the price of stock or commodity is trending up or down. Most common type of moving averages are: Simple Moving Averages (SMA) Exponential Moving Averages (EMA)

Slide 60: 

Buy Buy Sell Buy Sell

Exponential Moving Averages: 

Exponential Moving Averages Reduces the lag by applying more weight to recent prices Calculations Calculate the simple moving average SMA: 10 period sum / 10 C alculate the weighting multiplier Multiplier: (2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%) Calculate the EMA EMA= {Close - EMA(previous day)} x multiplier + EMA(previous day)

Slide 62: 

Buy Buy Buy Buy Sell Sell SMA E MA

MACD: 

MACD MACD was developed by Gerald Appel as a way to keep track of a moving average crossover system. Appel defined MACD as the difference between a 12-day and 26-day EMA. A 9-day EMA of the MACD line is used to generate Buy/ Sell signals. When this signal line goes from negative to positive, a buy signal is generated. When the signal line goes from positive to negative, a sell signal is generated. MACD is best used in choppy (trendless) markets, and is subject to whipsaws (in and out rapidly with little or no profit).

Trading MACD: 

Trading MACD Range Bound A sell signal generated because MACD crosses below Signal line Range Bound BUY, see momentum

On Balance Volume (OBV): 

On Balance Volume (OBV) M easures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days Developed by Joe Granville in 1963 Granville theorized that volume precedes price

Calculations: 

Calculations If the closing price is above the prior close price then: Current OBV = Yesterday's OBV + Current Volume If the closing price is below the prior close price then: Current OBV = Yesterday's OBV - Current Volume If the closing prices equals yesterday's closing price then: Current OBV = Yesterday's OBV

Slide 67: 

Observation define the trend for OBV determine if the current trend matches the trend for the underlying security look for potential support or resistance levels Once broken, the trend for OBV will change and these breaks can be used to generate signals

Slide 68: 

Bearish Divergence Bullish Divergence

Average Directional Index: 

Average Directional Index The Average Directional Index (ADX) measures trend strength without regard to trend direction . developed by Welles Wilder in 1978.

Direction Movement: 

Direction Movement +DM is a positive directional Movement indicator -DM is a negative directional movement indicator The delta extreme price changes from previous bar [Delta High] = [High] - [Previous High ] [Delta Low] = [Previous Low] - [Low ] Conditions if ([Delta High] < 0) and ([Delta Low] < 0) or [Delta High]=[Delta Low] then [+DM]=0 and [-DM]= 0 if ([Delta High] > [Delta Low]) then [+DM+=[Delta High] and [-DM]= 0 if ([Delta High] < [Delta Low]) then [+DM]=0 and [-DM]=[Delta Low]

Average Directional Movement Indicator: 

Average Directional Movement Indicator +ADM is the Average Positive Direction Movement Indicator for N periods -ADM is the Average Negative Direction Movement Indicator for N periods [ADM+] = Exponential Moving Averages ([+ DM ]) [ADM-] = Exponential Moving Averages ([- DM ]) The True Range (TR) and the Average True Range (ATR ) [TR] = [High] – [Low ] [ATR] = = Exponential Moving Averages ([TR])

The Directional index: 

The Directional index +DI is the average positive directional movement indicator normalized by the average true range -DI is the average negative directional movement indicator normalized by the average true range [+DI] = [+ADM] / ATR * 100 [-DI] = [-ADM] / ATR * 100 Directional Movement Index (DX ) [DX] = (|[+DI] - [-DI]|) /  ([+DI] + [-DI]) * 100 Average Directional Movement Index (ADX ) [ADX] = Exponential Moving Averages ([ DX])

Relative Strength Index (RSI): 

Relative Strength Index (RSI) Developed by J. Welles Wilder The Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator Term “Relative strength” generally means a comparison between two different markets or indices but RSI m easures the relative internal strength of a market (not against another market or index). The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100.

Slide 75: 

Provides an indication of overbought and oversold conditions by measuring the relative changes between higher and lower closing prices. It takes a single parameter, the number of time periods to use in the calculation. Wilder recommends using 14 periods. Divergences are the most important signal provided by RSI.

Slide 76: 

The 70% and 30% levels are used as warning signals. The centerline for RSI is 50% An RSI above 70% is considered overbought and Below 30% is considered oversold . The 80% and 20% levels are preferred by some traders. The significance depends upon the time frame being considered. An overbought reading in a 9-day RSI is not nearly as significant as an RSI for a 12-month period.

Failure Swings: 

Failure Swings If the RSI makes a double top formation, with the first top above 70% and the second top below the first, you get a sell signal when the RSI falls below the level of the dip. Conversely, a double bottom at or below 30% (with the first low below 30% and the second at or above the same level) gives you a buy signal when the RSI breaks above the previous peak.

Slide 78: 

Oversold Condition BUY SIGNAL Failure Swing STRONG BUY SIGNAL given by Failure Swing Overbought Condition SELL SIGNAL

Calculation of RSI: 

Calculation of RSI

RSI Calculation for NIFTY: 

RSI Calculation for NIFTY Close Gain Loss Average Gain Average Loss RS RSI 5035.80 0.00 37.15 15.02 39.69 0.38 27.46 5072.95 0.00 65.35 16.18 39.89 0.41 28.86 5138.30 0.00 22.70 17.42 37.93 0.46 31.48 5161.00 88.15 0.00 18.77 39.10 0.48 32.43 5072.85 0.00 45.65 13.43 42.11 0.32 24.18 5118.50 0.00 92.75 14.46 41.84 0.35 25.69 5211.25 0.00 120.55 15.57 37.92 0.41 29.11 5331.80 0.00 73.00 16.77 31.56 0.53 34.70 5404.80 0.00 51.75 18.06 28.38 0.64 38.89 5456.55 0.00 60.25 19.45 26.58 0.73 42.26 5516.80 34.80 0.00 20.95 23.99 0.87 46.62 5482.00 0.00 5.75 19.88 25.83 0.77 43.49 5487.75 0.00 59.05 21.41 27.38 0.78 43.88

William’s %Range: 

William’s %Range Williams %R is a momentum indicator and is very useful for anticipating market reversals. This oscillator was developed by Larry Williams. Identifies overbought or oversold markets. It is plotted on an inverted 0 to 100 scale. Investors generally wait for %R to form a low below 90% and then bounce back before acting on the buy signals.

Slide 82: 

According to Mr. Williams- Readings below 95% give a buy indication - during bull markets. A reading above 10% gives a sell signal during bear markets." He goes on to say that "the %R index will not work if you insist on acting on the buy signals during a bear market." He emphasizes strongly the need to isolate the dominant trend - whether it is a bull or bear trend. Then he tracks price movements with %R and waits for the signals

Trading with William’s %R: 

Trading with William’s %R BUY SIGNAL Over Sold Condition SELL SIGNAL

Breadth of the Market: 

Breadth of the Market Predicts the strength of the market according to the number of stocks that advance or decline in a particular trading day. If the breadth indicator is strong, this theory predicts that the market will be rising and vice versa. Rather than concentrating on just a few key stocks, stock market breadth gives an investor a much larger overview of the market's overall trend. Positive when more no of stocks close higher and vice-versa.

Advance/Decline Line: 

Advance/Decline Line measure of how many stocks are taking part in a rally or sell-off. A/D Line = (No. of Advancing Stocks – No. of Declining Stocks) + Yesterday's A/D Line Value

Stochastic Oscillator: 

Stochastic Oscillator It is a banded oscillator. It compares where a security’s price closed relative to its price range over a given time period. It has a %D and %K line. %D is a moving average of %K line. The specific levels to watch out for are the 20 and 80 levels. %K line above the 80 level shows over bought condition and an indication to sell. %K line below 20 is over sold condition and an indication to buy. Buy when %K line rises above %D line. Sell when %K line goes below %D line.

Formula: 

Formula %K= {(Today’s close- L)/(H-L)}* 100 Where L= Lowest low in %K periods And H= Highest high in %K Periods Example: For a particular security, for 10 day %K, let us say H= 46 and L was 38. Today’s closing price was 41. Find the %K. Answer: 37.5

Trading in Stochastic: 

Trading in Stochastic Over bought SELL SIGNAL, %K line Moves below %D line. BUY SIGNAL

Bollinger Bands: 

Bollinger Bands Bollinger bands were created by John Bollinger. Bollinger Bands are based on a moving average of the closing price. They are two standard deviations above and below the moving average. When markets are volatile, band is wider while they contract during calmer periods A buy signal is given when the stock price closes below the lower band, and a sell signal is given when the stock price closes above the upper band. When the bands contract, that is a signal that a big move is coming, but it is impossible to say if it will be up or down.

Calculation: 

Calculation Upper Band= Middle band + 2 * Lower band = Middle band – 2 *

Trading Bollinger Bands: 

Trading Bollinger Bands HDIL Strong Sell Strong Buy Range Bound, Can go either way Strong Buy

Elliot Wave theory: 

Elliot Wave theory

The Theory: 

The Theory Crowd psychology moves between optimism and pessimism in natural sequences. These swings between fear and greed create patterns evidenced in the price movements of markets at every degree of trend or time scale . In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend

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Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up . Motive waves always move with the trend, while corrective waves move against it.

Elliot Waves: 

Elliot Waves

Degree of Waves: 

Degree of Waves The classification of a wave at any particular degree can vary : Grand super cycle: multi-century Super cycle: multi-decade (about 40-70 years) Cycle: one year to several years (or even several decades under an Elliott Extension) Primary: a few months to a couple of years Intermediate: weeks to months Minor: weeks Minute: days Minuette : hours Subminuette : minutes

Rules for Identification: 

Rules for Identification A correct Elliott wave "count" must observe three rules : Wave 2 always retraces less than 100% of wave 1. Wave 3 cannot be the shortest of the three impulse waves, namely waves 1, 3 and 5. Wave 4 does not overlap with the price territory of wave 1 (otherwise it would be a head and shoulder formation).

Money flow index: 

Money flow index

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The Money Flow Index MFI is a momentum indicator which is used to measure the amount of money flowing into and out of a security. The indicator is similar to the relative strength index formula, but instead of measuring a security’s price action relative to itself, it measures the volume.

MFI Formula: 

MFI Formula The MFI is comprised of two components. typical price and the volume. The typical price formula is calculated as : Typical Price = (High + Low + Close) / 3 The Money Flow Index is calcuated by multiplying the Typical price by the volume : MFI = Typical Price * Volume

Interpretation: 

Interpretation The money flow index is again very similar to the RSI, so traders can look for commonalities between the two indicators. The MFI will move between 100 and 0.  When the MFI is above 80 a potential market top is in play, while a reading below 20 indicates a market bottom.

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Another technique is if the price action and the MFI are both in unison to trade in the direction of that trend. However , if the price is rising while the Money Flow Index is falling, odds are this divergence will cause some sort of counter move in the security .

Example: 

Example The most common interpretation of the indicator is as an overbought/oversold indicator. This is denoted when the indicator moves above or below the reference level. In the chart , the Money Flow Index reference levels are shown at 20 and 80 as green lines on the charts. When the price moves beyond these levels the price reaches an overbought or oversold condition and a reversal in the price is likely

ROC: 

ROC

Price Rate of Change Definition : 

Price Rate of Change Definition The Price Rate of Change (ROC) displays the value of the current price relative to the price of n periods ago.  The Price Rate of Change can be expressed in either points or percentages. ROC is also referred to as simply Momentum, It is a pure momentum oscillator that measures the percent change in price from one period to the next.

Price Rate of Change Formulas : 

Price Rate of Change Formulas To plot the ROC in terms of points use the below formula : Current Close – Close n periods ago To plot the ROC in terms of percentages use the below formula : [( Today’s Close – Close n periods ago )/ Close n periods ago] * 100

Interpretation: 

Interpretation The Rate-of-Change indicator is momentum in its purest form . It measures the percentage increase or decrease in price over a given period of time . The most common period for the Price Rate of Change is 12-periods for short- term signals, while 25-periods is popular among swing traders .

A few more points: 

A few more points ROC expands into positive territory as an advance accelerates. ROC dives deeper into negative territory as a decline accelerates. There is no upward boundary on the Rate-of-Change. There is, however, a downside limit. Securities can only decline 100%, which would be to zero.

Differential Time Span Trends: 

Differential Time Span Trends There are approximately 250 trading days in a year. This can be broken down into 125 days per half year, 63 days per quarter and 21 days per month. A trend reversal starts with the shortest timeframe and gradually spreads to the other timeframes. In general, the long-term trend is up when both the 250-day and 125-day Rate-of-Change are positive. This means that prices are higher now than they were 12 and 6 months ago

Parabolic sar: 

Parabolic sar

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Parabolic SAR (SAR - stop and reverse) is a method to find trends in market prices or securities. It may be used as a trailing stop loss based on prices tending to stay within a parabolic curve during a strong trend . The concept draws on the idea that time is the enemy (similar to option theory's concept of time decay), and unless a security can continue to generate more profits over time, it should be liquidated. Caution: The indicator generally works well in trending markets, but provides dicey results during non-trending, sideways phases.

Behavior of Curve: 

Behavior of Curve The Parabolic SAR is calculated independently for each trend in the price. When the price is in an uptrend, the SAR appears below the price and converges upwards towards it. Similarly , on a downtrend, the SAR appears above the price and converges downwards .

Calculation: 

Calculation At each step within a trend, the SAR is calculated ahead of time. That is, tomorrow's SAR value is built using data available today. The general formula used for this is : SAR n + 1 = SAR n + α (EP – SAR n ) Where SAR n and SAR n + 1 represent today's and tomorrow's SAR values, respectively.

: 

The extreme point, EP , is a record kept during each trend that represents the highest value reached by the price during the current uptrend — or lowest value during a downtrend. On each period, if a new maximum (or minimum) is observed, the EP is updated with that value . The α value represents the acceleration factor. Usually, this is set to a value of 0.02 initially. This factor is increased by 0.02 each time a new EP is recorded. In other words, each time a new EP is observed, it will increase the acceleration factor.

What Happens on A Trend Switch ??: 

What Happens on A Trend Switch ?? The first SAR value for this new trend is set to the last EP recorded on the previous trend. The EP is then reset accordingly to this period's maximum. The acceleration factor is reset to its initial value of 0.02.

Practical Advice: 

Practical Advice It is quite useful to establish the strength and direction of the trend first through the use of other indicators such as the Average Directional Index , etc. and then use the Parabolic SAR to trade that trend.

Limitations: 

Limitations Based on price, which always reflects what has already happened in the market. T echnical analysis is reactive - not truly predictive of what will happen Today's markets are much more chaotic and choppy compared to previous decades. (Due to hedge funds and computerized ultra-short term trading activity) result is more false signals and ill-formed patterns Relying on charts completely will not help you to pick up the signals about the changing of a trend until the change has actually taken place could miss up to one-third of the fluctuations in currency trading It can be dangerous to depend totally on the assumption that today's prices predict future prices. They often do, but not necessarily

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