Bollinger Bands Explained - What are Bollinger Bands

Bollinger Bands Definition

The Bollinger Bands indicator (named after its inventor) displays the current market volatility changes,
confirms the direction, warns of a possible continuation or break-out of the trend, periods of consolidation,
increasing volatility for break-outs as well as pinpoints local highs and lows.

How to Use Bollinger Bands

The indicator consists of the three moving averages:

Upper band - 20-day simple moving average (SMA) plus double standard price deviation.

Middle band - 20-day SMA.

Lower band - 20-day SMA minus double standard price deviation.

The increasing distance between the upper and the lower bands while volatility is growing, suggests of a price
developing in a trend which direction correlates with the direction of the Middle line. In contrast to the above, at
times of decreasing volatility when the bands are closing in, we should be expecting the price to move sidewards
in a range.
The price moving outside the Bands may indicate either the trends continuation (when the bands are floating
apart as the volatility increases) or the U-turn of the trend if the initial movement is exhausted. Either way each of
the scenarios must be confirmed by other indicators such as RSI, ADX or MACD.
Anyhow the price crossing of the Middle line from below or above may be interpreted as a signal to buy or to
sell respectively.

Bollinger Bands

Bollinger Bands Trading Strategy

Bollinger Bands trading strategy aims to profit from oversold or overbought conditions on the market. Prices
are considered overextended on the upside when they touch the upper band (overbought). They are
overextended on the downside, when they touch the lower band (oversold). This strategy is used as an
immediate signal to buy or sell the security. The usage of upper and lower bands as price targets is referred to as
the simplest way of using Bollinger Bands strategy. If prices cross below the average, the lower band becomes
the lower price target. If the prices cross above the same average, the upper band identifies the upper price
target.

In a Bollinger Band trading system an uptrend is shown by prices fluctuating between upper and middle
bands. In such cases if prices cross below the middle band, this warns of a trend reversal to the downside
indicating a sell signal.
In a downtrend, prices fluctuate between middle and lower bands, and the price crossing above the middle
band warns of a trend reversal to the upside, indicating a buy signal.

Bollinger Bands Formula (Calculation)

The middle line (ML) is a regular Moving Average:
ML = SUM [CLOSE, N]/N
The top line (TL) is ML a deviation (D) higher:
TL = ML + (D*StdDev)
The bottom line (BL) is ML a deviation (D) lower.
BL = ML (D*StdDev)
Where:
N number of periods used in calculation;
SMA Simple Moving Average;
StdDev Standard Deviation.

ATR Definition
The Average True Range (ATR) indicator was introduced by Welles Wilder as a tool to measure the market
volatility and volatility alone leaving aside attempts to indicate the direction. Unlike the True Range, the ATR also
includes volatility of gaps and limit moves. ATR indicator is good at valuating the market's interest in the price
moves for strong moves and break-outs are normally accompanied by large ranges.

How to Use ATR Indicator

The ATR is used with 14 periods with daily and longer timeframes and reflects the volatility values that are in
relation to the trading instrument's price. Low ATR values would normally correspond to a range trading while
high values may indicate a trend breakout or breakdown.

Average True Range (ATR)

Average True Range Formula (ATR Calculation)

Average True Range is a moving average of the True Range which is the greatest of the following three
values:

The distance from today's high to today's low.

The distance from yesterday's close to today's high.

The distance from yesterday's close to today's low.

Relative Strength Index - What is RSI

RSI Definition
Relative Strength Index is an indicator developed by Welles Wilder to assess the strength or the weakness of
the current price movements and to measure the velocity of price changes by comparing price increases with its
losses over a certain period.

How to Use RSI Indicator

The Relative Strength Index allows to identify possible overbought and oversold areas, but should be
considered within trend analysis:

Generally if the RSI indicator climbs above 70, the asset may be overbought;
If the RSI indicator drops below 30, the asset may be oversold.
Leaving extreme areas the indicator may suggest possible corrections or even trend changes:

Crossing the overbought boundary from above, the RSI signals a possible sell opportunity;

Crossing the oversold boundary from below, the RSI signals a possible buy opportunity.
Convergence/divergence patterns may indicate possible trend weakness:

If the price climbs to a new high, but the indicator does not, that may be a sign of the uptrend weakness;

If the price falls to a new low, but the indicator does not, that may be a sign of the downtrend weakness.

Relative Strength Index (RSI) Indicator

RSI Trading Strategy

RSI trading strategy aims to generate buy and sell signals by the horizontal lines that appear on the chart at
the 70 and 30 values. As we have already mentioned above, a move under 30 indicates an oversold condition
and a move above 70 signals an overbought condition.
Thus, if a trader is looking for a buying opportunity, he watches the indicator dip under 30. A crossing back
above 30 is considered by many traders as a confirmation that the trend has turned up. Conversely, if a trader
seeks for a selling opportunity, he watches the indicator cross above the 70 line.

Relative Strength Index Formula (RSI Calculation)

RSI = 100 100/(1 + RS)
RS (14) = (Upward movements)/(|Downward movements|)

Stochastic Oscillator - What is Stochastic

Stochastic Definition
Stochastic indicator is introduced by George Lane to identify price trend direction and possible reversal points
by determining the place of the current close price in the most recent price range, as in a sustainable uptrend
close prices tend to the higher end of the range and to the lower end in a downtrend.

How to Use Stochastic Oscillator

The Stochastic oscillator allows to identify possible overbought and oversold areas, but should be considered
within trend analysis:

Generally if the indicator climbs above 75, the asset may be overbought;

If the indicator drops below 25, the asset may be oversold.

Leaving extreme areas the indicator may suggest possible turning points:

Crossing the overbought boundary from above, the Stochastic signals a possible sell opportunity;

Crossing the oversold boundary from below, the Stochastic signals a possible buy opportunity.
Crossovers of the indicator with its smoothened signal line, usually a 3-period moving average, may also
detect deal opportunities:

The indicator suggests going long when crossing the signal line from below;

The indicator suggests going short when crossing the signal line from above.
Convergence/divergence patterns may indicate possible trend weakness:

If the price climbs to a new high, but the indicator does not, that may be a sign of the uptrend weakness;

If the price falls to a new low, but the indicator does not, that may be a sign of the downtrend weakness.

Stochastic Indicator

Stochastic Oscillator Trading Strategy

Stochastic system is based on the observation that in an uptrend closing prices tend to be near the upper end
of the price range, and in a downtrend the closing prices tend to be near the lower end of the price range.
In the Stochastic strategy two lines - the %K line and the %D line are used. The K line is faster and the D
line is slower. These lines oscillate from 0 to 100 on the vertical scale. The major signal to consider is the
divergence between the D line and the price of the underlying market. When the D line is over 80 and forms two
declining peaks with prices moving higher, a bearish divergence occurs. When the D line is below 20 and forms
two rising bottoms with prices moving lower, a bullish divergence takes place. Thus, the actual buy and sell
signals are triggered when the K line crosses the D line. A sell signal is generated when the K line crosses below
the D line from above the 80 level. Accordingly, a buy signal is generated when the K line crosses above the D
line bellow the 20 level.

Stochastic Oscillator Formula (Calculation)

Stochastic = 100 x ((C L)/(H L));
Signal = average of the last three Stochastic values;
where:
C latest close price;
L the lowest price over a given period;
H the highest price over a given period.

MACD Explained - Moving-Average Convergence/Divergence

MACD Definition
Moving-Average Convergence/Divergence Oscillator, commonly referred to as MACD indicator, is developed
by Gerald Appel which is designed to reveal changes in the direction and strength of the trend by combining
signals from three time series of moving average curves.

How to Use MACD Indicator

Three main signals generated by the MACD indicator (blue line) are crossovers with the signal line (red line),
with the x-axis and divergence patterns.
Crossovers with the signal line:

If the MACD line is rising faster than the Signal line and crosses it from below, the signal is interpreted
as bullish and suggests acceleration of price growth;

If the MACD line is falling faster than the Signal line and crosses it from above, the signal is interpreted
as bearish and suggests extension of price losses;
Crossovers with the x-axis:

A bullish signal appears if the MACD line climbs above zero;

A bearish signal presents if the MACD line falls below zero.

Convergence/Divergence:

If the MACD line is trending in the same direction as the price, the pattern is known as convergence,
which confirms the price move;

If they move in opposite directions, the pattern is divergence. For example, if the price reaches a new
high, but the indicator does not, this may be a sign of further weakness.

MACD Indicator

MACD Trading Strategy

MACD strategy is used to determine the buy and sell signals for the financial instrument. The MACD values
range above and below the zero line. When the MACD and Signal lines are far above the zero line, this shows an
overbought condition and indicates a sell signal. When the two lines are well below the zero line, this shows an
oversold condition and indicates a buy signal.

In the MACD system, it is very important to consider MACD histogram. The histogram includes vertical bars
which show the difference between two MACD lines. It is above the zero line when the MACD lines are in positive
alignment, meaning that the faster line is above the slower line. And when the histogram is above the zero line,
but starts to move down toward the zero line, this indicates that the uptrend is weakening. Accordingly, when the
histogram is below the zero line and starts to rise toward the zero line, this shows a weakness in a downtrend.
Signals are shown on the zero line crossings. Though buy or sell signals are generated only when the
histogram crosses the zero line, the latter provides earlier warnings of the trend than the crossover signals. The
histogram turns toward the zero line always precede the actual crossover signals.

MACD Indicator Formula (MACD Calculation)

MACD line = 12-period EMA 26-period EMA
Signal line = 9-period EMA
Histogram = MACD line Signal line

RSI Bars Indicator: Forex Oscillator

Destination
RSI-Bars is an oscillator, developed by IFC Markets in 2014 as the modification of Relative Strength
Index (RSI). RSI-Bars characterizes a stability of a price momentum and allows a definition of a trend potential.
A distinctive feature of RSI-Bars is that this indicator takes into account the volatility of a considered instrument
within the selected timeframe - values of RSI-Bars are defined with account of price OPEN/HIGH/LOW/CLOSE
(OHLC) values and are displayed in the form of chart bars. This allows avoiding of false breakdowns of oscillator
trend lines and thats why traders may use methods of a chart analysis more efficiently in this case.

Metatrader 4 Download
Download RSI-Bars for Metatrader 4
Installation guide:

Download and extract the zip archive with indicator file .ex4;

Open the data directory from the main menu of Metatrader 4 terminal:File =>Open Data Folder;

Put an indicator file into the folder MQL4/Indicators of Data Folder;

Restart the Metatrader 4 terminal;

In order to insert an indicator, open the group of custom indicators in the main
menu: Insert=>Indicators=>Custom indicator.

Advantages of RSI-Bars oscillator

In contrast to the classical Relative Strength Index, developed by J.Wilder, RSI-Bars evaluates an internal
volatility. Minimal and maximum limits of bars are constructed on the basis of 4 prices (OHLC). A calculated set is
used for the selection of a minimum and maximum value of RSI-Bars. Then a bar structure is formed.

An analysis of a candlestick price chart in some cases allows avoiding of a trend false breakdowns. It happens
due to the account of additional price information and it internal volatility. At the same way RSI-Bars takes into
account a true range of price oscillations, not only a characteristic value of a given timeframe. Due to this
property, RSI-Bars allows a correct and convenient use of a chart technical analysis.
A comparative analysis of RSI and RSI-Bars is represented on the figure below we used H4 candlesticks of a
most volatile pair, GBP/USD. As it can be seen, RSI(14) has shown and additional breakdown in contrast with
RSI-Bars (14). Moreover, RSI-Bars has detected later and therefore more correct finishing of a downtrend.
The use of RSI-Bars is demonstrated in trade examples of everyday analytics releases of IFC Markets.

RSI-Bars Indicator

Application

The oscillator works most efficiently in a flat motion. A lower and higher bounds of oscillator values are
introduced subjectively (for example 30% and 70%) and correspond to overbought and oversold levels;

RSI-Bars can take extreme values during a trend motion. Thats why in this case a use of overbought
and oversold levels is incorrect;

RSI-Bars allows a definition of standard chart analysis instruments - figures, lines of support and
resistance, etc. In this case the indicator should be used for a confirmation of technical analysis. We should
take into account that RSI-Bars can give preliminary signals of a trend change;

Divergence is the strongest signal of RSI-Bars opposite directions of price and oscillator movements
are detected in this case. This signal is a harbinger of a possible trend weakening;
Values of RSI-Bars lie between 0% and 100%.

Commodity Channel Index - CCI Indicator

CCI Indicator Definition
The Commodity Channel Index is an indicator by Donald Lambert. Despite the original purpose to identify new
trends, its nowadays widely used to measure the current price levels in relation to the average one.

How to Use CCI Indicator

Commodity Channel Index indicator oscillates around the naught line tending to stay within the range from
-100 to +100. The naught line represents the level of an average balanced price. The higher the indicator surges
above the naught line the more overvalued the security is. The further the CCI indicator plunges into the negative
area the more potential for growth the price may have.
Still the unbalanced price alone may not serve as a clear indicator neither to the direction the price is following
nor to its strength. There are critical values and the crossing directions which need to be looked at closely:

Exceeding past the 100 level suggests a possible further upward movement

Decreasing past the 100 level indicates a U-turn and serves as a signal to sell.

Decreasing past the -100 level suggests a possible further downward movement

Exceeding past the -100 level indicates a U-turn and serves as a signal to buy.

Crossing the naught line upwards from below serves as a confirmation to buy

Crossing the naught line downwards from above serves a confirmation to sell.
Smaller CCI indicator period increases its sensitivity. Shifting critical levels to 200 allows to exclude
insignificant price fluctuations.

Commodity Channel Index (CCI)

CCI Trading Strategy

CCI trading strategy is used by most traders, investors and chartists as an overbought or oversold oscillator.
The basic strategy of CCI is to watch the readings above +100 and below -100. The readings above +100 are
considered overbought and generate buy signals. The readings below -100 are considered oversold and
generate sell signals. Though the Commodity Channel Index was initially developed for commodities, it is also
used for trading stock index futures and options.

Ichimoku Indicator - Ichimoku Kinko Hyo

Ichimoku Definition
The Ichimoku Kinko Hyo (Equilibrium chart at a glance) is a comprehensive technical analysis tool
introduced in 1968 by Tokyo columnist Goichi Hosoda. The concept of the system was to provide an immediate
vision of trend sentiment, momentum and strength at a glance perceiving all the Ichimoku's five components and
a price in terms of interactions among them of a cyclical type related to that of human group dynamics.

How to Use Ichimoku Indicator

The Ichimoku indicator consists of five lines which may all serve as flexible support or resistance lines,
whose crossovers may as well be assumed as additional signals:
1.

Tenkan-Sen (Conversion line, blue)

2.

Kijun-Sen (Base line, red)

3.

Senkou Span A (Leading span A, green boundary of the cloud)

4.

Senkou Span B (Leading span B, red boundary of the cloud)

5.

Chikou Span (Lagging span, green)

Kumo (Cloud) is a central element of the Ichimoku system and represents support or resistance areas. It is
formed by Leading Span A and Leading Span B.
Determining the trend persistence and corrections:

Price moving above the cloud indicates an uptrend

Price moving below the cloud indicates a downtrend

Price moving within the cloud indicates a sideways trend

Cloud turning from green to red indicates a correction during an uptrend

Cloud turning from red to green indicates a correction during a downtrend

Determining support and resistance:

Leading span A serves as a first support line for an uptrend

Leading span B serves as a second support line for an uptrend

Leading span A serves as a first resistance line for a downtrend

Leading span B serves as a second resistance line for a downtrend

Strong Buy/Sell signals occurring above the cloud:

Conversion line crosses Base line up from below is a signal to buy

Conversion line crosses Base line down from above is a signal to sell
Less reliable Buy/Sell signals occurring within the cloud:

Conversion line crosses Base line up from below is a signal to buy

Conversion line crosses Base line down from above is a signal to sell

Ichimoku Indicator

Ichimoku Trading Strategy

Traders use the Ichimoku strategy to identify the trend. For a bullish signal this trading strategy sets three
criteria. First, the trend is bullish when prices reach above the lowest line of the cloud. Second, a bullish signal
triggers when prices reverse and reach above the Conversion Line. And third, the trend is bullish when the price
moves below the Base Line.

Ichimoku Formula (Ichimoku Kinko Hyo Calculation)

Tenkan-Sen (Conversion line, blue) is (9-period high + 9-period low)/2

Kijun-Sen (Base line, red) is (26-period high + 26-period low)/2

Senkou Span A (Leading span A, green boundary of the cloud) is (Conversion Line + Base Line)/2

Senkou Span B (Leading span B, red boundary of the cloud) is (52-period high + 52-period low)/2

Chikou Span (Lagging span, green) is close price plotted 26 periods in the past

Williams Percent Range - What is %R

%R Definition
Williams Percent Range (%R) is a technical indicator developed by Larry Williams to identify whether an asset
is overbought or oversold and therefore to determine possible turning points. Unlike the Stochastic
oscillator Williams Percent Range is a single line fluctuating on a reverse scale.

How to Use %R
The main goal of Williams Percent Range is to identify possible overbought and oversold areas, however the
indicator should be considered within trend analysis:

Generally if the indicator climbs above -20, the asset may be overbought;

If the indicator drops below -80, the asset may be oversold.

Leaving extreme areas the indicator may suggest possible turning points:

Crossing the overbought boundary from above, Williams Percent Range signals a possible sell
opportunity;
Crossing the oversold boundary from below, Williams Percent Range signals a possible buy opportunity.
Divergence patterns are rare, but may indicate possible trend weakness:

If the price climbs to a new high, but the indicator does not, that may be a sign of the uptrend weakness;

If the price falls to a new low, but the indicator does not, that may be a sign of the downtrend weakness.

Williams Percent Range Indicator

Williams %R Trading Strategy

Williams %r indicator, as already mentioned, helps to determine the points when the market is oversold or
overbought. The trading rules of %R strategy are simple: buying when the market is oversold (%R reaches -80%
or lower) and selling when the market is overbought (%R reaches -20% or higher).

Williams %R Formula (Calculation)

R% = - ((H - C)/(H L)) x 100;
where:
C latest close price;
L the lowest price over a given period;
H the highest price over a given period.

Momentum Indicator: Forex Oscillator

Momentum Indicator Definition
Momentum Oscillator is an indicator that shows trend direction and measures how quickly the price is
changing by comparing current and past prices.

How to Use Momentum Indicator

The indicator is represented by a line, which oscillates around 100. Being an oscillator, momentum should be
used within pricetrend analysis.

Crossing the x-axis:

It is believed that if the indicator climbs above 100 during an uptrend, it is a bullish signal;

Otherwise if the indicator falls below 100 during a downtrend, a bearish signal appears.

Falling out of its normal range:

Extreme points mean that the price has posted its strongest gain or loss for a particular number of
moving periods, supporting trend strength;

At the same time if the price movement was too rapid, they may indicate possible overbought and
oversold areas.

Divergence patterns:

If the price hits a new high, but the indicator does not, that could mean that investor sentiment is
actually lower;

And on the contrary if the price falls to a new low, but the indicator does not support the drop, it is a
signal that the trend may end soon.

Momentum Indicator

Momentum Indicator Formula (Calculation)

Momentum = (Current close price / Lagged close price) x 100

Relative Vigor Index - RVI Indicator

RVI Indicator Definition
Relative Vigor Index, developed by John Ehlers, is a technical indicator designed to determine price trend
direction. The underlying logic is based on the assumption that close prices tend to be higher than open prices in
a bullish environment and lower in a bearish environment.

How to Use RVI Indicator

The Relative Vigor Index allows to identify the reinforcement of price changes (and therefore may be used
within convergence/divergence patterns analysis):

Generally the higher the indicator climbs, the stronger is the current relative price increase;

Generally the lower the indicator falls, the stronger is the current relative price drop.
Together with its signal line (Red), a 4-period moving average of RVI, the indicator (Green) may help to
identify changes in prevailing price developments:

Crossing the signal line from above, the RVI signals a possible sell opportunity;

Crossing the signal line from below, the RVI signals a possible buy opportunity.

Relative Vigor Index (RVI) Indicator

Relative Vigor Index Formula (RVI Calculation)

Relative Vigor Index (1) = (Close - Open) / (High - Low)
Relative Vigor Index (10) = 10-period SMA of Relative Vigor Index (1)

Force Index Indicator - What is Force Index

Force Index Definition
The Force Index indicator invented by Alexander Elder measures the power behind every price move based
on their three essential elements, e.g., direction, extent and volume. The oscillator fluctuates around the zero,
i.e., a point of a relative balance between power shifts.

How to Use Force Index

The Force Index allows to identify the reinforcement of different time scale trends:

The indicator should be made more sensitive by decreasing its period for short trends.
The indicator should be smoothed by increasing its period for longer trends.
The Force Index may strongly imply a trend change:

Break-down of an uptrend when the indicator's value is changing from positive to negative and price and
indicator show divergence.

Break-down of a downtrend when the indicator's value is changing from negative to positive and price
and indicator show convergence.
Together with a trend-following indicator the Force Index can help identify trend corrections:

An uptrend correction when the indicator bounces off the low.

A downtrend correction when the indicator slides from a pike.

Force Index Indicator

Force Index Formula (Calculation)

Force Index(1) = {Close (current period) - Close (prior period)} x Volume
Force Index(13) = 13-period EMA of Force Index(1)

DeMarker Indicator - DeM Indicator

DeMarker Indicator Definition
This indicator was introduced by Tom DeMark as a tool to identify emerging buying and selling opportunities. It
demonstrates the price depletion phases which usually correspond with the price highs and bottoms.
The DeMarker indicator proved to be efficient at identifying trend break-downs as well as spotting intra-day
entry and exit points.

How to Use DeMarker Indicator

The indicator fluctuates with a range between 0 to 1 and is indicative of lower volatility and a possible price
drop when reading 0.7 and higher, and signals a possible price increase when reading below 0.3.

Demarker Indicator

DeMarker Indicator Formula (Calculation)

The DeMarker indicator is the sum of all price increment values recorded during the "i" period divided by the
price minima:
The DeMax(i) is calculated:
If high(i) > high(i-1) , then DeMax(i) = high(i)-high(i-1), otherwise DeMax(i) = 0
The DeMin(i) is calculated:
If low(i) < low(i-1), then DeMin(i) = low(i-1)-low(i), otherwise DeMin(i) = 0
The value of the DeMarker is calculated as:
DMark(i) = SMA(DeMax, N)/(SMA(DeMax, N)+SMA(DeMin, N))

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Where:
SMA - Simple Moving Average;
N - the number of periods used in the calculation.

Envelopes Indicator - Moving Average Envelope

Envelopes Indicator Definition
The Envelopes indicator reflects the price overbought and oversold conditions helping to identify the entry or
exit points as well as possible trend break-downs.

How to Use Envelopes Indicator

The Envelopes indicator consists of two SMAs that together form a flexible channel in which the price
evolves. The averages are plotted around a Moving Average in a constant percentage distance which may be
adjusted according to the current market volatility. Each line serves as a margin of the price fluctuation range.
In a trending market take only oversold signals in an uptrend conditions and overbought signals in a
downtrend conditions.
In a ranging market the price reaching the top line serves as a sell signal, while the price at the lower line
generates a signal to buy.

Envelopes Indicator

Envelopes Indicator Formula (Calculation)

Upper Band = SMA(CLOSE, N)*[1+K/1000]
Lower Band = SMA(CLOSE, N)*[1-K/1000]
Where:
SMA Simple Moving Average;
N averaging period;
K/1000 the value of shifting from the average (measured in basis points).