Slide 05

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Center For Financial Analysis
Class 5
Indicators (Part 2)
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Volatility Indicators
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Bollinger Bands
Bollinger Bands Measure the volatility of a stock.
Bollinger Bands Developed by John Bollinger.
Bollinger Bands are volatility bands placed above and
below a moving average.
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SMA 20 + 2 Standard
Upper Band
Deviation
SMA 20 - 2 Standard
Deviation
Lower Band
Simple Moving Average (SMA 20)
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Calculation
• Bollinger Bands Calculation:
• Middle Band = 20-day simple moving average
(SMA)
• Upper Band = 20-day SMA + (20-day standard
deviation of price x 2)
• Lower Band = 20-day SMA - (20-day standard
deviation of price x 2)
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Bollinger Bands
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Signal: W-Bottoms
Bollinger uses these various W patterns
with Bollinger Bands to identify W-Bottoms.
A "W-Bottom" forms in a downtrend and
involves two reaction lows. In
particular, Bollinger looks for W-Bottoms
where the second low is lower than the first,
but holds above the lower band.
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W-Bottoms
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Signal: M-Tops
• Bollinger uses these various M patterns
with Bollinger Bands to identify M Bottoms.
According to Bollinger, tops are usually more
complicated and drawn out than bottoms.
Double tops, head-and-shoulders patterns and
diamonds represent evolving tops.
• In its most basic form, an M-Top is similar to a
double top. However, the reaction highs are not
always equal.
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M-Tops
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Bollinger Bounce
A common technical use of Bollinger bands is
to predict when a stock’s price will “bounce”
off the top or bottom Bollinger line and then
return back towards the center of
the Bollinger bands. Therefore, giving a
bullish indicator to a stock whose price is
close to or touching the bottom Bollinger
band and a bearish indicator to a stock
whose price is close to or touching the
top Bollinger band.
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Bollinger Bands Bounce

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Bollinger Squeeze and Breakout

Another common technique used to predict
trends with Bollinger bands is called the
Bollinger squeeze. When the bands contract
so much that they begin to appear to
“squeeze” the stock’s price chart, is when
the Bollinger squeeze occurs. This is usually
a pending breakout which could be bullish
or bearish.
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Squeeze and Breakout

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Percentage Bands or Envelopes

Envelopes are percentage-based envelopes
set above and below a moving average. The
moving average, which forms the base for
this indicator, can be a simple or
exponential moving average. Each envelope
is then set the same percentage above or
below the moving average. This creates
parallel bands that follow price action.
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SMA 20 * Percentage
Upper Envelopes
SMA 20 * Percentage
Lower Envelopes Simple Moving Average (SMA 20)

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Percentage or Envelopes
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Trend Identification
Percentage or Envelopes can be used to
identify strong moves that signal the start of
an extended trend. The trick, as always, is
picking the correct parameters. This takes
practice, trial and error.
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Percentage Bands or Envelpes

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Average True Range (ATR)

ATR developed by J. Welles Wilder, the Average True Range
(ATR) is an indicator that measures volatility.
True Range: Wilder started with a concept called True Range
(TR), which is defined as the greatest of the following:
• Method 1: Current High less the current Low
• Method 2: Current High less the previous Close (absolute
value)
• Method 3: Current Low less the previous Close (absolute
value)
•
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Example A: A small high/low range formed after a

gap up. The TR equals the absolute value of the
difference between the current high and the previous
close.
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• Example B: A small high/low range formed after

a gap down. The TR equals the absolute value of
the difference between the current low and the
previous close.
•
• Example C: Even though the current close is
within the previous high/low range, the current
high/low range is quite small. In fact, it is smaller
than the absolute value of the difference between
the current high and the previous close, which is
used to value the TR.
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Calculation
• Current ATR = [(Prior ATR x 13) + Current
TR] / 14
• - Multiply the previous 14-day ATR by 13.
• - Add the most recent day's TR value.
• - Divide the total by 14
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Keltner Channels
Keltner Channels are volatility-based
envelopes set above and below an
exponential moving average. This indicator
is similar to Bollinger Bands, which use the
standard deviation to set the bands. Instead
of using the standard deviation, Keltner
Channels use the Average True Range (ATR)
to set channel distance. The channels are
typically set two Average True Range values
above and below the 20-day EMA.
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Calculation
• There are three steps to calculating Keltner
Channels. First, select the length for the
exponential moving average. Second, choose the
time periods for the Average True Range (ATR).
Third, choose the multiplier for the Average True
Range.
• Middle Line: 20-day exponential moving average
• Upper Channel Line: 20-day EMA + (2 x ATR(10))
• Lower Channel Line: 20-day EMA - (2 x ATR(10))
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Keltner Channels
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Oscillators
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ROC
• ROC = [(Close - Close n periods ago) / (Close n

periods ago)] * 100
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ROC
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RSI
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RSI
• First Average Gain = Sum of Gains over the
past 14 periods / 14.
• First Average Loss = Sum of Losses over the
past 14 periods / 14
• Average Gain = [(previous Average Gain) x

13 + current Gain] / 14.
• Average Loss = [(previous Average Loss) x
13 + current Loss] / 14
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RSI
• Overbought Level > 70
• Oversold Level <30
• Central Line = 50
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RSI
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Stochastic
 Calculation (price based)
• %K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100

• %D = 3-day SMA of %K
• Lowest Low = lowest low for the look-back period
• Highest High = highest high for the look-back period
• %K is multiplied by 100 to move the decimal point two places
 Stochastic is an oscillator that measures overbought

and oversold conditions in the market.
 Stochastic are scaled from 0 to 100.
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Stochastic
 Buy & Sell signal
 Readings below 20 are considered oversold

 Readings above 80 are considered overbought
 Buy and sell signals can also be given when %K
crosses above or below %D
 Requires a double dip above 80 and the second dip
results in the sell signal .
 Price & %K divergence
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Stochastic
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StochRSI
• StochRSI is an oscillator that measures the level of
RSI relative to its range, over a set period of time.
• The indicator uses RSI as the foundation and
applies to it the formula behind Stochastic.
• The result is an oscillator that fluctuates between 0
and1.
• Overbought and Oversold Crossovers (0.20 to 0.80)
• Centerline Crossovers
• Positive and Negative Divergences
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StochRSI
• StochRSI = (RSI - Lowest Low RSI) /

(Highest High RSI - Lowest Low RSI)
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StochRSI
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Ultimate Oscillator
• The Ultimate Oscillator combines a stock's price action
during three different time frames into one bounded
oscillator. Time frames can be specified by the user.
• Values range from 0 to 100 with 50 as the center line.
• Oversold territory exists below 30 and overbought
territory extends from 70 to 100.
• Typically values of 7-periods, 14-periods and 28-periods
are used.
• Extreme values are rare for the Ultimate Oscillator.
• Crosses above and below the center line (50) are
relatively common.
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Ultimate Oscillator
• BP = Close - Minimum(Low or Prior Close).
•
• TR = Maximum(High or Prior Close) - Minimum(Low or
Prior Close)
• Average7 = (7-period BP Sum) / (7-period TR Sum)

• UO = 100 x [(4 x Average7)+(2 x

Average14)+Average28]/(4+2+1)
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Ultimate Oscillator
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William %R
• Williams’ Percent Range Technical Indicator
(%R) is a dynamic technical indicator, which
determines whether the market is
overbought/oversold. Williams’ %R is very
similar to the Stochastic Oscillator.
• Indicator values ranging between -80 and -
100 indicate that the market is oversold.
• Indicator values ranging between -0 and -20
indicate that the market is overbought.
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William %R
• %R = (Highest High - Close)/(Highest High -
Lowest Low) *( -100)
• Lowest Low = lowest low for the look-back

period
• Highest High = highest high for the look-
back period
• %R is multiplied by -100 correct the
inversion and move the decimal
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William %R
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CCI
• CCI = (Typical Price - 20-period SMA of TP)

/ (.015 x Mean Deviation)
• Typical Price (TP) = (High + Low + Close)/3
• Constant = .015
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CCI
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Composite Indicator
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Composite indicators
1. Guppy MMA
2. Ichimoku Kinko Hyo
www.stockbangladesh.com
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Guppy Multiple Moving Average

• Developed by Daryl Guppy
• Consists of two groups of Moving Averages
• Short term MA group consists EMA of 3, 5,
8, 10, 12, 15 periods.
• Long term MA group consists EMA of 30,
35, 40, 45, 50, 55, 60.
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Interpretation of Guppy MMA

Trend direction and
trend reversals Breakouts
Trend Strength Resistance
Breakouts
Pullbacks Resistance
Resistance
Pullbacks in uptrend
Stock moves in down trend

Matured or strong trend
Resistance Short term moving average group
Long term moving average group
Stock moves in uptrend Immature or weak trend
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Ichimoku kinko Hyo (IKH)

• Gauges future price momentum
• Determines future areas of Support and Resistance levels
• Detects the direction of trend.
• Trigger pullbacks and breakouts.
Ichimoku consists of 3 lines and a cloud,
1. Standard Line
2. Delayed Line
3. Turning Line
4. Ichimoku cloud
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Using Ichimoku
 Ichimoku clouds acts as Support and Resistance lines.
 The Turning line forms the first support/resistance level while the
Standard line is the second support/resistance level.
 If the price is higher than the Standard line, it could continue to
climb higher. If the price is below the Standard line, it could keep
dropping.
 The Turning line is an indicator of the market trend. If the Turning
line is moving up or down, it indicates that the market is
trending. If it moves horizontally, it signals that the market is
ranging.
 Lastly, if the Delayed line crosses the price in the bottom-up
direction, that's a buy signal. If the Delayed line crosses the price
from the top-down, that's a sell signal.
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Bullish/Up Trend
Delayed Line
Turning Line
Standard
Line
Ichimoku
Cloud
Acts as Support
when in uptrend
Trend Pullback
Reversal
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Bearish/Down Trend
Trend Reversal
Acts as Resistance
in downtrend
Pullback
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Divergence Study
• Occurs when indicators direction is opposite to the price
movement.
• Very useful to detect trend reversals
There are 3 types of divergences,
1. Regular Divergence
2. Hidden Divergence
3. Exaggerated Divergence
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Bullish Regular Divergence
LL
HL
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Bearish Regular Divergence

HH
LH
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Hidden Bullish Divergence
HL
LL
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Hidden Bearish Divergence
LH
HH
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Exaggerated Bullish Divergence
SH
HL
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Exaggerated Bearish Divergence

SH
HH
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Divergence Trading Strategy

Indicators Used:
MACD/RSI/Stcoh RSI etc.
Entry:
Identify Divergence
Enter after MACD bullish crossover occurs
Exit:
MACD bearish crossover
20% or 30% fixed stop
Trailing stop
Stop Loss:
6-7% stop loss or MACD reverse crossover

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Stock Bangladesh

Center For Financial Analysis

Center For Financial Analysis

Center For Financial Analysis

Center For Financial Analysis

Center For Financial Analysis

Center For Financial Analysis

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Bollinger Bands Bounce

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Bollinger Squeeze and Breakout

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Squeeze and Breakout

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Percentage Bands or Envelopes

Lower Envelopes Simple Moving Average (SMA 20)

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Center For Financial Analysis

Percentage Bands or Envelpes

Center For Financial Analysis

Average True Range (ATR)

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Example A: A small high/low range formed after a

Center For Financial Analysis

• Example B: A small high/low range formed after

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Center For Financial Analysis

Center For Financial Analysis

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• ROC = [(Close - Close n periods ago) / (Close n

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• Average Gain = [(previous Average Gain) x

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 Calculation (price based)

• %K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100

 Stochastic is an oscillator that measures overbought

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 Readings below 20 are considered oversold

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• StochRSI = (RSI - Lowest Low RSI) /

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• Average7 = (7-period BP Sum) / (7-period TR Sum)

• UO = 100 x [(4 x Average7)+(2 x

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• Lowest Low = lowest low for the look-back