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Class 4

Indicators (Part 1)
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Indicators & its types

• Indicators are calculations based on the price and the volume of
a security that measure such things as money flow, trends,
volatility and momentum. Indicators are used as a secondary
measure to the actual price movements and add additional
information to the analysis of securities. Indicators are used in
two main ways: to confirm price movement and the quality of
chart patterns, and to form buy and sell signals.

• There are two types of indicators: leading and lagging.

• A leading indicator gives a buy signal before the new trend or reversal
occurs.
• A lagging indicator gives a signal after the trend has started and basically
informs you about the onset of a trend.

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Indicators & its types

• Lagging Indicators
– MACD (Moving Average Convergence & Divergence)
– Moving Averages
– ADX
– Parabolic SAR
• Leading Indicators
– Stochastic
– Relative Strength Index (RSI)
– Ultimate Oscillator
– StochRSI
– William %R
– Money Flow Index
– Accumulation/Distribution Line

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Moving Averages
• It is one of the most versatile and widely used of all
technical indicators.
• Its construction and interpretation is simple and
effective.
• Moving averages trend signals are precise and not open
to debate.
• By definition, moving average is an average of a certain
period of data.
• There are many types of Moving Averages,
• Simple Moving Average (SMA)
• Exponential Moving Average (EMA)
• Weighted Moving Average (WMA)

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Simple Moving Average (SMA)

• Most widely used by analysts.
• Constructed by totaling a set of data and
dividing the sum by the number of
observations

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SMA

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Weighted Moving Average (WMA)

• Developed to avoid too delayed signals
• Put more weight in most recent
observations.
• Can turn more quickly than SMA or EMA.

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Exponential Moving Average

(EMA)
Faster than SMA
Slower than WMA
Put more weight in past data.

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Difference betweenSMA, EMA and
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WMA

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Interpreting Moving Averages

• Determining trend direction
• Determining trend reversals
• Dynamic Support and Resistance

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Trend Direction

Candle
above
WMA20, 20
days trend
is UP

Trend Line upward,

WMA20 upward =
up trend

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Trend Reversal

Trend
reverse to
down trend EMA30

Trend reverse to
up trend
SMA10

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Dynamic Support and Resistance

Price gets resistance from
SMA30
SMA30

Stock enters
into uptrend

Stock moves
in downtrend

Price gets support from SMA30

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MACD (Moving Avarege Convergence & Divergence)

• Developed by Gerald Appel
• Calculation • MACD Line: (12-day EMA - 26-day EMA)
• Signal Line: 9-day EMA of MACD Line MACD
• Histogram: MACD Line - Signal Line

Histogram

Signal Line

Zero Line/
Center Line

MACD Line
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Convergence

Convergence

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Divergence

Divergence

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Buy & Sell Signals Using MACD

1. MACD crossover
2. Centerline or Zeroline crossover Divergences
3. Secondary/Pullback BUY and SELL signals
4. Multiple Time Frame Analysis

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MACD Crossover

Bearish Crossover

Bullish Crossover

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MACD Centerline Crossover

Bearish zero line

Bullish zero line crossover crossover

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Bullish Hook & Bullish Power Hook

Secondary/Pullback Buy

Secondary/Pullback Buy
Bullish Crossover

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Average Directional Movement Index (ADX)

• Developed by J. Welles Wilder.
Calculation:
• UpMove = today's high − yesterday's high
• DownMove = yesterday's low − today's low
• if UpMove > DownMove and UpMove > 0, then +DM = UpMove, else +DM = 0
• if DownMove > UpMove and DownMove > 0, then −DM = DownMove, else −DM =
0
• +DI = 100 times EMA of +DM divided by ATR of n days
• −DI = 100 times EMA of −DM divided by ATR of n days
• The exponential moving average is calculated over the number of periods
selected, and the average true range is an exponential average of the true ranges.
Then:
• ADX = 100 times EMA of the absolute value of (+DI − −DI) divided by (+DI + −DI)

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Buy & Sell Signals

• Trend Strength:
Strong Trend when ADX>20
Non Trending when ADX<20
• Trend Direction
Up Trend when +DI is above – DI
Down Trend when – DI is above + DI
• Minor crossovers
• +DI>35, top of the uptrend
• -DI>, possible bottom of the downtrend

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ADX

Minor bearish
crossover (exit
-DI>35, signal)
bottom of the
+DI>35 Peak of the
down trend
up trend

Trending (ADX>20)

Non Trending (ADX<20)

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ADX Signal

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Parabolic SAR
• Developed by Welles Wilder
• Determine trend direction
• Also known as “stop and reversal system”.

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Parabolic SAR
Dots above candles indicates downtrend
Parabolic
SAR

1…2…3 dots below candles, sell signal

1…2…3 dots below candles is a buy signal

Dots below candles indicates up trend

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Volume
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Volume Leads Price

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Bearish Volume
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Selling Climex
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Accumulation
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OBV (On Balance Volume)

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OBV
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OBV
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Accumulation Distribution Line

Close - Open and compared to the day's range:

(Close - Open) / (High - Low)

The result is multiplied by Volume for the day:

(Close - Open) / (High - Low) * Volume
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ADL
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ADL
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OBD & ADL

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Money Flow Index

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MFI