FIN348 CHAPTER 5 (2)

FIN348
CHAPTER 5:
TECHNICAL INDICATOR AND
OSCILLATORS
PN NIK NUR SHAFIKA MUSTAFA

CHAPTER OUTLINE
Introduction
Function of Indicator
Categories of Indicator
Types of Indicator

INTRODUCTION
A technical indicator is a series of data points that are derived by
applying a formula to the price data of a security.
Price data includes any combination of the open, high, low or close over a
period of time.
Some indicators may use only the closing prices, while others incorporate
volume and open interest into their formulas.
The price data is entered into the formula and a data point is produced.
Many, if not most, popular indicators are shown as oscillators.

FUNCTION/USE OF INDICATOR
To Alert
• An indicator can act as an alert to study price action a little more

closely. If momentum is waning, it may be a signal to watch for a break
of support. Or, if there is a large positive divergence building, it may
serve as an alert to watch for a resistance breakout.
To Confirm
• Indicators can be used to confirm other technical analysis tools. If

there is a breakout on the price chart, a corresponding moving average
crossover could serve to confirm the breakout.
To Predict
• Some investors use indicators to predict the direction of future

prices.
CATEGORIES OF INDICATOR
Leading
Lagging

LEADING
Gives a signal before the new trend or reversal occurs.
Designed to lead price movements.
Most represent a form of price momentum over a fixed look-

back period, which is the number of periods used to calculate
the indicator.
For example, a 20-day Stochastic Oscillator would use the past

20 days of price action (about a month) in its calculation. All
prior price action would be ignored.
LEADING
Benefits Drawbacks
• Early signaling for entry • More signals and earlier
and exit (main benefit). signals increase the
• Generate more signals chances of false signals
and allow more and whipsaws.
opportunities to trade.

LAGGING
Follow the price action
Gives a signal after
and are commonly
the new trend or
referred to as trend-
reversal occurs.
following indicators.
Therefore, act as
confirmation tool
because it follows
price movement.
LAGGING
Benefits Drawbacks
• Ability to catch a • Late entry and

move and remain exit points can
in a move. skew the
• Can be risk/reward
enormously ratio.
profitable and
easy to use.

TYPES OF INDICATORS
Technical indicators that use the same scale

as prices are plotted over the top of the
Overlays
prices on a stock chart i.e. Moving Averages
and Bollinger Bands.
Technical indicators that oscillate between a

local minimum and maximum are plotted
Oscillators below a price chart i.e. Stochastic Oscillator,
MACD or RSI.

INDICATORS CAN HELP TO MEASURE THE:
Measure the direction and strength of a

Trend
trend.
Identify the speed of price movement
Momentum
for trend confirmation and reversal.
Measure the strength of a trend based
Volume
on volume of shares traded.
Measure the rate of price change,
Volatility
regardless of direction in given period.
TYPES OF INDICATOR
OSCILLATORS
William
Stochastic
%R
On
Balance ADX
Volume
Relative
Strength ADL
Index
Moving Average
Types of Money Flow
Convergence
Divergence
Indicators Index (MFI)

MOVING AVERAGE CONVERGENCE DIVERGENCE(MACD)

1. MOVING AVERAGE CONVERGENCE
DIVERGENCE(MACD)
Moving Average Convergence Divergence (MACD) is one of the most well-known

and used indicators in technical analysis.
It is used to signal both the trend and momentum behind a security.
The indicator is comprised of two exponential moving averages (EMA), covering

two different time periods, which help to measure momentum in the security.
The idea behind this momentum indicator is to measure short-term momentum

compared to long-term momentum to help determine the future direction of the
asset.
DIVERGENCE(MACD)
ELEMENTS
Centerline/Zero Line : The point at which the two moving averages are equal.
MACD Line : The MACD Line is the 12-day Exponential Moving Average (EMA) less
than 26-day EMA. Closing prices are used for these moving averages.
Signal Line/Trigger Line: 9-day EMA of MACD Line to indicate bullish and bearish
conditions.
MACD Histogram : The histogram is plotted on the centerline and represented by

bars. Each bar is the difference between the MACD and the signal line
DIVERGENCE(MACD)
EXAMPLE

DIVERGENCE(MACD)
TRADING
SIGNALS :
BUY SIGNALS SELL SIGNALS
CROSSOVER
1.The MACD line crosses The MACD line crosses
RULES above the signal line. below the signal line.
2.The MACD line is above The MACD line is below

the oscillator /or zero line. the oscillator /or zero line.
3.MACD Histogram turns MACD Histogram turns

up above zero line. down below zero line.
DIVERGENCE(MACD)
Sell Signal
Buy Signal
DIVERGENCE(MACD)

DIVERGENCE(MACD)
EXERCISE

DIVERGENCE(MACD)
Divergence Dramatic rise

When the MACD rises
dramatically - that is,
the shorter moving
When the security price
average pulls away from
diverges from the MACD.
the longer-term moving
It signals the end of the
average - it is a signal
current trend.
that the security is
overbought and will soon
return to normal levels.

RELATIVE STRENGTH INDEX (RSI)

2. RELATIVE STRENGTH INDEX (RSI)
The Relative Strength Index (RSI) is a momentum technical indicator

that measured the speed and change of price movements of stocks.
It measures the strength of the security’s recent up moves compared

to the strength of its recent down moves.
This help to indicate whether a security has seen more buying or

selling pressure over the trading period.

Overbought
• A situation in technical analysis where the price of a security

has risen to such a degree - usually on high volume - that an
oscillator has reached its upper bound.
• This is generally interpreted as a sign that the price of the
asset is becoming overvalued and may experience a pullback.
• Represent a selling opportunity (selling signal) for investors.
Oversold
• A situation in technical analysis where the price of a security

has fallen to such a degree - usually on high volume - that an
oscillator has reached a lower bound.
• This is generally interpreted as a sign that the price of the
asset is becoming undervalued.
• Represent a buying opportunity (buying signal) for investors.
It is plotted between a range of zero to 100

where 100 is the highest overbought condition
and zero is the highest oversold condition.
Overbought Oversold
• RSI goes above 70 • RSI drops below
(overbought line) 30 (oversold line)

TRADING SIGNALS – CROSSOVER RULES
When the RSI reading moves up over
the 30 line it is considered a possible
bullish reversal while a move down
30 70
below the 70 line is considered a
possible bearish reversal.
Oversold Overbought
BUY SELL



EXERCISE

ON BALANCE VOLUME (OBV)

3. ON BALANCE VOLUME (OBV)
❑ On Balance Volume (OBV) is a momentum

indicator that uses volume flow to predict
changes in stock price.
❑ First indicators to measure positive and
negative volume flow.
❑ OBV measures buying and selling pressure as a
cumulative indicator that adds volume on up
days and subtracts volume on down days.

❑ The concept behind OBV is that volume

precedes price movement.
❑ If a security is seeing an increasing OBV, it is
a signal that volume is increasing on upward
price moves.
✓ Suggest as increased in buying pressure, which if
continued, will send the price of a security higher.
❑ If volume is decreasing when the price of a
security is rising then it is a sign of increased
selling pressure, which if continued, will
send the price of a security lower.

INTREPRETATION
A rising OBV reflects positive

volume pressure that can lead to
higher prices.
Falling OBV reflects negative
volume pressure that can predict
lower prices.

EXAMPLE


STOCHASTIC OSCILLATOR (STO)

4. STOCHASTIC OSCILLATOR (STO)
It is a technical
Stochastic studies, or
momentum indicator that
oscillators, help monitor a
compares a security's closing
trend's sustainability and signal
price to its price range over a
reversals in prices.
given time period.
The oscillator's sensitivity to market movements can

be reduced by adjusting the time period or by taking
a moving average of the result.

The oscillator ranges from zero to one hundred.
Traditional settings use 80 as the overbought threshold and 20 as the

oversold threshold.

Stochastic come in two types %K and %D, measured on a scale from 0 to

100. Stochastic D% is used as a signal line for Stochastic K%.
%K is the “fast” more sensitive %D is “slow” and takes more time to
indicator. turn.
Buy Signal Sell Signal
The %K line is above the %D line in The %K line is below the %D line in
the oversold range (below 20). the overbought range (above 80).



WILLIAM % R

5. WILLIAM %R
A leading momentum and trend indicator that was developed by Larry William.
Also referred to as %R.
WM%R is used to determine market entry and exit points.
The WM%R produces values from 0 to -100, a reading over -80 usually indicates a
stock is oversold, while readings below -20 suggests a stock is overbought.

5. WILLIAM %R
TRADING SIGNALS
“Investors can establish buying position

when WM%R moves up above -80, the
security is thought to be oversold and close
out selling position when WM%R moves
down below -20, the security is considered
to be overbought.”

5. WILLIAM %R
EXAMPLE

5. WILLIAM %R -20 -80
Overbought Oversold
EXERCISE
SELL BUY

AVERAGE DIRECTIONAL INDEX (ADX)

6. AVERAGE DIRECTIONAL INDEX (ADX)
Designed to determine if there is a price trend i.e. stocks are rising,
falling /or moving sideways and the strength of trend.
The ADX is part of the Directional Movement system designed by J.

Welles Wilder.
A single line represents ADX is the average resulting from the

Directional Movement indicators with readings ranging from 0 to 100.

▪ The ADX is an oscillator that moves
HOW TO USE ADX? between defined extremes of zero and
100.
▪ A reading below 20 indicates a weak
current trend, while a reading over 40
suggests strength in trend.
▪ Readings above 40 can be both bullish
and bearish, depending on the direction
the prices are moving.
▪ Readings close to zero and above 60 tend
to be rare.

PARAMETERS
ADX Value Indication

Rising Strong trend
Falling Weak trend
Below 20 Weak trend
Between 20 and 40 Strong trend
Above 40 Extreme trend
Weak current
EXAMPLE Below 20
trend
Strength in
Over 40
trend

ACCUMULATION DISTRIBUTION LINE (ADL)

7. ACCUMULATION DISTRIBUTION LINE (ADL)
WHAT IS ADL? A volume-based indicator designed to measure the
cumulative flow of money into and out of a security.
ADL tracks the relationship between price and volume,

acts as a leading indicator of price movements.
It provides a measure of the commitment of bulls and

bears to the market and is used to
detect divergences between volume and price action –
reversal signs /or signs that a trend is weakening.
USES OF ADL? ▪ The ADL measures the trend in the amount of
buying /or selling pressure in security.
✓ ADL trending up is a signal of increasing buying
pressure.
✓ ADL trending downward is a signal of increased
selling pressure.
▪ The ADL can also be used to identify
situations of divergence, which can signal a
shift in the price trend – occurs when the
price trend and the ADL are moving in
opposite directions.

TRADING SIGNALS:
ENTRY AND EXIT SIGNALS

TRADING SIGNALS:

EXAMPLE

MONEY FLOW INDEX (MFI)

8. MONEY FLOW INDEX (MFI)
WHAT IS MFI?
A technical oscillator that uses price and volume data
for identifying buying and selling pressure.
Created by the duo, Gene Quong and Avrum Soudack,

MFI is also known as volume-weighted RSI.
It can also be used to spot divergences which warn of

a trend change in price.
The oscillator moves between 0 and 100.

TRADING SIGNALS:
• When the MFI reading is

above 80, the market is 20 80
often thought to be
exhibiting overbought
conditions, while an MFI Oversold Overbought
reading below 20 can be
an indicator of oversold
conditions
BUY SELL

EXAMPLE

TYPES OF INDICATOR
OVERLAYS
CHAPTER 5 Ichimoku Kinko Hyo
Bollinger bands
PART 2 /Ichimoku Cloud
Moving Average Parabolic SAR
Types of
Indicators

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FIN348

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

Many, if not most, popular indicators are shown as oscillators.

PN NIK NUR SHAFIKA MUSTAFA

• An indicator can act as an alert to study price action a little more

• Indicators can be used to confirm other technical analysis tools. If

• Some investors use indicators to predict the direction of future

PN NIK NUR SHAFIKA MUSTAFA

Designed to lead price movements.

Most represent a form of price momentum over a fixed look-

For example, a 20-day Stochastic Oscillator would use the past

PN NIK NUR SHAFIKA MUSTAFA

• Ability to catch a • Late entry and

PN NIK NUR SHAFIKA MUSTAFA

Technical indicators that use the same scale

Technical indicators that oscillate between a

PN NIK NUR SHAFIKA MUSTAFA

Measure the direction and strength of a

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

Moving Average Convergence Divergence (MACD) is one of the most well-known

It is used to signal both the trend and momentum behind a security.

The indicator is comprised of two exponential moving averages (EMA), covering

The idea behind this momentum indicator is to measure short-term momentum

MACD Histogram : The histogram is plotted on the centerline and represented by

PN NIK NUR SHAFIKA MUSTAFA

2.The MACD line is above The MACD line is below

3.MACD Histogram turns MACD Histogram turns

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

Divergence Dramatic rise

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

The Relative Strength Index (RSI) is a momentum technical indicator

It measures the strength of the security’s recent up moves compared

This help to indicate whether a security has seen more buying or

PN NIK NUR SHAFIKA MUSTAFA

• A situation in technical analysis where the price of a security

• A situation in technical analysis where the price of a security

It is plotted between a range of zero to 100

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

❑ On Balance Volume (OBV) is a momentum

PN NIK NUR SHAFIKA MUSTAFA

❑ The concept behind OBV is that volume

PN NIK NUR SHAFIKA MUSTAFA

A rising OBV reflects positive

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

PN NIK NUR SHAFIKA MUSTAFA

The oscillator's sensitivity to market movements can

PN NIK NUR SHAFIKA MUSTAFA

The oscillator ranges from zero to one hundred.

Traditional settings use 80 as the overbought threshold and 20 as the

PN NIK NUR SHAFIKA MUSTAFA

Stochastic come in two types %K and %D, measured on a scale from 0 to

Buy Signal Sell Signal

PN NIK NUR SHAFIKA MUSTAFA