MACD

The standard settings on the MACD are 12, 26, 9. On daily charts, the MACD is the difference between
the 12 day exponential moving average (12 day EMA) and the 26 day exponential moving average (26
day EMA) and this difference is plotted on StockCharts as the "thick black line". The 9 refers to the 9
day moving average of the MACD and is the "thin blue line". So what does the MACD do? Well, it is a
momentum indicator. When a stock or index is rising, the 12 day EMA will be higher than the 26 day
EMA and the MACD will be positive and above the zero line, or centerline. When a stock or index is
falling, the 12 day EMA will be lower than the 26 day EMA and the MACD will be negative and below
the zero line, or centerline. The beauty of the MACD is that as prices put in higher highs, the MACD
will sometimes put in a lower reading. The significance here is that on the surface momentum appears
to be strong if looking only at price action. Underneath the surface, however, the MACD begins to
signal a very different message. The difference between the 12 day and 26 day EMA's is actually
beginning to shrink, suggesting slowing momentum. These "negative divergences" can be a precursor
to lower prices, and in some instances even predict a long-term top.

A bullish crossover occurs when the MACD turns up and crosses above the signal line. A bearish
crossover occurs when the MACD turns down and crosses below the signal line. Crossovers can last a
few days or a few weeks, it all depends on the strength of the move.

A Breakout refers to a security's price movement through a historical resistance level. A breakout
typically precedes heavy trading volume and increased volatility.A breakout is most commonly
understood as a situation in which the price of an asset breaks through a level of resistance, increasing
to an unprecedented price. Once the resistance level is breached, that new top price is becomes the next
level of support when the the asset experiences a pullback in price.

The basic theory is this: if price and volume are moving in the same direction, the trend of the stock
price will continue. If they are running counter to each other, the trend will reverse.
The only difference between an exponential moving average and a simple moving average is the
sensitivity each one shows to changes in the data used in its calculation.
More specifically, the exponential moving average (EMA) gives a higher weighting to recent
prices, while the simple moving average (SMA) assigns equal weighting to all values. The two
averages are similar because they are interpreted in the same manner and are both commonly used by
technical traders to smooth out price fluctuations.
EMA Is more sensitive to price changes

On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds
volume on up days and subtracts volume on down days.The On Balance Volume (OBV) line is simply
a running total of positive and negative volume. A period's volume is positive when the close is above
the prior close. A period's volume is negative when the close is below the prior close.When the security
closes higher than the previous close, all of the day’s volume is considered up-volume. When the
security closes lower than the previous close, all of the day’s volume is considered down-volume.
When both price and OBV are making higher peaks, the upward trend is confirmed.
• When both price and OBV are making lower peaks, the downward trend is likely to continue.
• During a trading range, rising OBV indicates accumulation and hence chances of upward
breakout.
• During a trading range, falling OBV indicates distribution and hence chances of support
breakdown.
• When price continues to make higher peaks and OBV fails to make higher peaks, the upward
trend is likely to stall or fail. This is called a negative divergence.
• When price continues to make lower troughs and OBV fails to make lower peaks, the
downward trend is likely to stall or fail. This is called a positive divergence.
OBV indicator is used in three primary ways: confirmation, divergence and breakouts.

Traders usually use this feature of Bollinger Bands to take trading decisions.When the prices touch the
Upper Band and the Band shows downward move,it is time to go short or sell the security.
Target Price for the short position is price corresponding to the Lower Band.Short position is closed
when the prices hit the Lower Band.Some traders like to go short when the price fall below the Simple
Moving Average Line and take profits when price moves to Lower Band.
On the other hand,when the prices are trading at Lower Band and the later shows a turn towards
upside,the traders may take the opportunity to go long or buy the shares.Your Target Price is the Upper
Band.The position is closed when prices hit Upper Band.Some traders take long position only when the
prices has moved above the Simple Moving Average Line.
It is worth mentioning here that like all other technical indicators,the Bollinger Bands also should be
used in conjunction with other indicators showing overbought and oversold conditions like Stochastic
and Relative Strength Index (RSI).

A= (increase in volatility) both upper and lower band is moving away.

B = (indicating a steady run) bands are moving in the same direction and the
price is moving very close to the band (indicating a steady strong trend).

C = (indicating falling volatility) bands are converging nearer.

D = (indicating the change of trend) the price had crossed the moving
average and the price within the average and a band (showing strength in the
trend).

1. Bollinger Bands provide a relative definition of high and low. By definition price is high at the upper
band and low at the lower band.

2. That relative definition can be used to compare price action and indicator action to arrive at rigorous
buy and sell decisions.

3. Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-
market data, etc.

4. If more than one indicator is used the indicators should not be directly related to one another. For
example, a momentum indicator might complement a volume indicator successfully, but two
momentum indicators aren't better than one.

5. Bollinger Bands can be used in pattern recognition to define/clarify pure price patterns such as "M"
tops and "W" bottoms, momentum shifts, etc.

6. Tags of the bands are just that, tags not signals. A tag of the upper Bollinger Band is NOT in-and-of-
itself a sell signal. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal.

7. In trending markets price can, and does, walk up the upper Bollinger Band and down the lower
Bollinger Band.

8. Closes outside the Bollinger Bands are initially continuation signals, not reversal signals. (This has
been the basis for many successful volatility breakout systems.)

9. The default parameters of 20 periods for the moving average and standard deviation calculations, and
two standard deviations for the width of the bands are just that, defaults. The actual parameters needed
for any given market/task may be different.

10. The average deployed as the middle Bollinger Band should not be the best one for crossovers.
Rather, it should be descriptive of the intermediate-term trend.

11. For consistent price containment: If the average is lengthened the number of standard deviations
needs to be increased; from 2 at 20 periods, to 2.1 at 50 periods. Likewise, if the average is shortened
the number of standard deviations should be reduced; from 2 at 20 periods, to 1.9 at 10 periods.

12.Traditional Bollinger Bands are based upon a simple moving average. This is because a simple
average is used in the standard deviation calculation and we wish to be logically consistent.

13. Exponential Bollinger Bands eliminate sudden changes in the width of the bands caused by large
price changes exiting the back of the calculation window. Exponential averages must be used for
BOTH the middle band and in the calculation of standard deviation.

14. Make no statistical assumptions based on the use of the standard deviation calculation in the
construction of the bands. The distribution of security prices is non-normal and the typical sample size
in most deployments of Bollinger Bands is too small for statistical significance. (In practice we
typically find 90%, not 95%, of the data inside Bollinger Bands with the default parameters)

15. %b tells us where we are in relation to the Bollinger Bands. The position within the bands is
calculated using an adaptation of the formula for Stochastics

16. %b has many uses; among the more important are identification of divergences, pattern recognition
and the coding of trading systems using Bollinger Bands.

17. Indicators can be normalized with %b, eliminating fixed thresholds in the process. To do this plot
50-period or longer Bollinger Bands on an indicator and then calculate %b of the indicator.

18. BandWidth tells us how wide the Bollinger Bands are. The raw width is normalized using the
middle band. Using the default parameters BandWidth is four times the coefficient of variation.

19. BandWidth has many uses. Its most popular use is to identify "The Squeeze", but is also useful in
identifying trend changes...

20. Bollinger Bands can be used on most financial time series, including equities, indices, foreign
exchange, commodities, futures, options and bonds.
21. Bollinger Bands can be used on bars of any length, 5 minutes, one hour, daily, weekly, etc. The key
is that the bars must contain enough activity to give a robust picture of the price-formation mechanism
at work.

22. Bollinger Bands do not provide continuous advice; rather they help identify setups where the odds
may be in your favor.

The band was widest when Nifty50 was volatile during July, the band narrowed when Nifty50 was
consolidating during September.

Some important points for interpretation of Bollinger Bands:

· When bands are contracting, there are chances of sharp price changes as volatility is drops

· When price line surpasses the bands’ range, that a strong signal of continuation of the current trend

· When new highs and lows are made outside the bands followed by highs and lows made inside the
bands, it shows an imminent trend reversal

· If a move originating in one band tends to replicate on the other band too, it is useful in deciding
future price targets

· When the price moves near the upper band, that shows an overbought market, and when the prices are
nearer to the lower band, that signals an oversold market

· M-patterns is one of the signal created by Arthur Merrill as an extension to Bollinger Bands to
identify M-Tops, which shows signs of confirmation when prices are making new highs

· W-Bottoms, again Arthur Merrill’s work to identify W-Bottoms to determine the strength when prices
are making new lows

· Use of Bollinger Bands varies with different traders. Some traders may buy when price are near the
lower Bollinger Bands

· Traders tend to exit when price line touches the middle line

· Traders may buy when the price line breaks above the upper band and sell when price falls below the
lower band

Average True Range is not necessarily a trade signal, although it can be used to assist and confirm entry
points. The value returned by the Average True Range is merely an indication as to simply how much a
stock has moved either up or down on an average over the defined period. High values signify that
prices are changing a large amount during the day. Low values signify that prices are staying relatively
steady
ATR is not a directional indicator, such as MACD or RSI. Instead, ATR is a unique volatility indicator
that reflects the degree of interest or disinterest in a move. Strong moves, in either direction, are often
accompanied by large ranges, or large True Ranges. This is especially true at the beginning of a move.
Uninspiring moves can be accompanied by relatively narrow ranges. As such, ATR can be used to
validate the enthusiasm behind a move or breakout. A bullish reversal with an increase in ATR would
show strong buying pressure and reinforce the reversal. A bearish support break with an increase in
ATR would show strong selling pressure and reinforce the support break.

Momentum vs Volatility
The ATR indicator measures volatility. Traders often mistakenly believe that volatility equals
bullishness or bearishness. Volatility does not say anything about the trend strength or the trend
direction, but it tells you how much price fluctuates. As we have seen above, the ATR just looks at how
far price swings and not how much it actually moves into one direction.
Volatility = How much price fluctuates around the average price. In a high volatility environment,
price candles usually have long wicks, you can see a mix of bearish and bullish candles, and their
candle body is relatively small compared to the wicks.
Momentum = Momentum is the exact opposite. Momentum describes the trend strength into one
direction. In a high momentum environment, you typically see only one color of candles (very few
candles moving against the trend) and small candle wicks.
The screenshot below shows the differences. The ATR measures volatility, while the RSI measures
momentum:
Whereas volatility is low and decreasing during uptrends (when price is above the moving average),
volatility rises significantly when prices are falling and are below the moving average.

The most common use for the ATR indicator is to use it as a stop loss tool. Basically, when the ATR is
high, a trader expects wider price movements and, thus, he would set his stop loss order further away to
avoid getting stopped out prematurely. On the other hand, we would use a smaller stop loss when
volatility is low.

The ATR also helps you understand the profit potential of your trades. Whereas you should aim for a
closer take profit in a low volatility environment, setting your take profit order further away when
volatility is high, can improve your trading.
As we have seen, in a high volatility market the volatility stop would lead to a larger stop loss distance.
To offset a wider stop loss, the ATR will also tell you to aim for a larger take profit when volatility
is high. Thus, a trader does not reduce his reward-risk ratio by only adjusting his stop loss.
So any stop placed less than 1 ATR from the price action is too tight, and you’ll be stopped out
unnecessarily. This is why stop placement should be 1- 3 times the ATR away from the price.
When trading long (buying shares), stops are usually calculated from the low price, though some
traders choose to calculate stops from the closing price or from the high price, which is referred to
as a chandelier exit. If in doubt choose the low price for your calculations.

On the chart above, BHP is trading at $40.64, with a low of $40.60, and the ATR(7) is $0.74. To
calculate the position of a stop, subtract 2 times the ATR from the low. So in this case:

Low – (2 x ATR) = Stop

$40.60 – (2 x 0.74) = $39.12

High delivery percentage suggests that investors are accepting delivery of the stock, which means that
investors are bullish on it.

An increase in open interest along with a decrease in price mostly indicates a build-up of short
positions.
A decrease in open interest along with an increase in price mostly indicates short covering.

Uses for the Stochastic Oscillator include overbought/oversold readings, divergences. bull/bear trade
setups and crossovers.
Overbought and Oversold
A security is overbought when the Stochastic is above 80, and the security is oversold if the indicator is
below 20.
The labels are misleading though; overbought doesn’t necessarily mean the price will drop
immediately, and oversold doesn’t mean the price will rally immediately. Overbought and oversold
simply mean the price is trading near the top or bottom of the 14 day range, respectively. These
conditions can last for a long time.
Traders do use overbought and oversold levels to monitor reversals though. If the indicator is
overbought (above 80) and then falls below 50, it indicates the price is moving lower. If the price was
oversold (below 20) and rallies above 50 it indicates the price is moving higher.
False or late signals occur frequently if these signals are traded unfiltered. Use the price trend to filter
the signals.
During a price downtrend, enter short when the indicator was overbought and then drops below 50.
During an uptrend, buy when the price was oversold then rallies above 50. The 50 level is commonly
used, but can be adjusted based on personal trading strategies.
In Figure 2 this approach is applied to a stock trending higher. Only the long trades are initiated as the
Stochastic moves above 50 after being oversold. Place a stop loss below the recent low that formed just
before the signal (just above recent high for short sale signals).
Apply the same method to getting out of a profitable trade. Wait for the price to reach overbought
levels (for long trades) then exit when the price falls below 50 (or 70 or 60 to get out a bit earlier). For
short trades, let the price move to oversold levels, then exit when the price rallies above 50 (or 30 or 40
to get out a bit earlier).
Divergence
Bearish divergence is when the price is making new highs, but the Stochastic isn’t. It shows that
momentum has slowed, and a reversal could be forthcoming.
Bullish divergence is when the price is making new lows, but the Stochastic isn’t. It shows selling
pressure has slowed, and a reversal higher could be around the corner.
Until divergence is confirmed by an actual turnaround in price, don’t base trades simply on divergence.
A stock can continue to rise (or fall) for a long time even while bearish (or bullish) divergence is
occurring.
Bull and Bear Trade Setups
A bull trade setup is when the stochastic makes a higher high, but the price makes a lower high. The
Stochastic is indicating that momentum is building and the price could rally following a pullback.
This is a setup that can be used with any number of entry signals. Here is one way to use it:
Once the bull setup has occurred the price will typically pullback and then rally, presenting a trade
opportunity. Following the bull trade setup, buy after a pullback (the Stochastic must drop below 50 on
the pullback) when the Stochastic rallies back above 50 (or 40 or 30).
The Stochastic indicator does not show oversold or overbought prices. It shows momentum.
Breakout trading: When you see that the Stochastic is suddenly accelerating into one direction and
the two Stochastic bands are widening, then it can signal the start of a new trend. If you can also spot a
breakout out of sideways range, even better.

Trend following: As long as the Stochastic keeps crossed in one direction, it shows that the trend is
still valid.
• Strong trends: When the Stochastic is in the oversold/overbought area, don’t fight the trend but
try to hold on to your trades and stick with the trend.
Trend reversals: When the Stochastic is changing the direction and leaves the overbought/oversold
areas, it can foreshadow a reversal. As we’ll see, we can also combine the Stochastic with a moving
average or trendlines nicely.
• Important: when we look for a bullish reversal, we need to see the green Stochastic line
to get above the red one and leave the overbought-oversold area.
• Divergences: As with every momentum indicator, divergences can also be a very important
signal here to show potential trend reversals, or at least the end of a trend.
By monitoring the changes in the open interest, price and volume figures, one can draw important
conclusions about the market activities, which can help in predicting the near-term price trend. Below
table shows how one can read futures contract data.

Price Open Interest Signal

Long Built-up Rising Up Strong/ Bullish
Short Built-up Falling Up Weak/ Bearish
Long Unwinding Falling Down Weak/ Bearish
Short Covering Rising Down Strong/ Bullish

Relationship between Price and Open interest

Price OI Position
UP UP Long
Down UP Short
UP Down Short Covering
Down Down Long Unwinding

O.I (Open Interest) IV PCR Position Indication View

Sr. No
1 Increase in Put O.I Increases Increases Buying of Put Option Bearish

2 Increase in Put O.I Decreases Increases Writing of Put Options Bullish

3 Increase in Call O.I Increases Decreases Buying of Call Options Bullish

4 Increase in Call O.I Decreases Decreases Writing of Call Options Bearish

5 Decrease in Call O.I Decreases Increases Call Unwinding Bearish

6 Decrease in Put O.I Decreases Decreases Put Unwinding Bullish

7 Decrease in Put O.I Increase Decreases Short Covering in Put Option Bearish

8 Decrease in Call O.I Increase Increases Short Covering in Call Option Bullish

Put / Call Ratio Interpretation

If put call ratio increases as minor dips getting Bullish Indication. It means the put writers are aggressively w
bought in during an up trending market dips expecting the uptrend to continue

If put call ratio decreases while markets testing Bearish Indication. It means call writers are building fresh p
the resistance levels expecting a limited upside or a correction in the market.

If put call ratio decreases during down trending Bearish indication. It means option writers are aggressively se
market call option strikes.

The Put/Call Volume Ratio

Combining put and call option volume, we can arrive at another useful indicator in gauging sentiment,
the put/call volume ratio. To arrive at this figure, the put volume is divided by call volume. Such ratios
are calculated on individual stocks, indices, or the overall market. Near market lows, the put/call ratio
will rise as options traders become excessively worried about downside risk and seek to hedge their
portfolios or speculate on further downside activity with puts. Near market peaks, interest in calls heats
up to form a low put/call ratio. The put/call ratio is thus a contrary indicator when it reaches extreme
highs or lows.
Looking at our example on XYZ Inc., we have call volume of 300 contacts at the stock's October 30
strike. Should put volume at the same strike arrive at 100 contracts, the resulting put/call ratio would be
0.33 (100 put contracts / 300 call contracts = 0.33). The closer this ratio moves to 1.0, the more put
contracts are being traded relative to calls. As such, a put/call ratio greater than a reading of 1.0
indicates that traders are favoring bearishly oriented puts over calls in greater numbers. Such a
development can be seen as a contrarian indicator of excessive pessimism, and can hint at a potential
bottom, or rebound, in the underlying stock or index. The inverse can also be seen as a contrarian
indicator for a potential top, or roll over, in the underlying stock or index