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### Indicators tutorials

1. 1. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Accumulation Distribution Line Accumulation Distribution Line Introduction Developed by Marc Chaikin, the Accumulation Distribution Line is a volume-based indicator designed to measure the cumulative flow of money into and out of a security. Chaikin originally referred to the indicator as the Cumulative Money Flow Line. As with cumulative indicators, the Accumulation Distribution Line is a running total of each periods Money Flow Volume. First, a multiplier is calculated based on the relationship of the close to the high-low range. Second, the Money Flow Multiplier is multiplied by the periods volume to come up with a Money Flow Volume. A running total of the Money Flow Volume forms the Accumulation Distribution Line. Chartists can use this indicator to affirm a securitys underlying trend or anticipate reversals when the indicator diverges from the security price. Calculation There are three steps to calculating the Accumulation Distribution Line (ADL). First, calculate the Money Flow Multiplier. Second, multiply this value by volume to find the Money Flow Volume. Third, create a running total of Money Flow Volume to form the Accumulation Distribution Line (ADL). 1 MnyFo Mlile =[Coe - Lw -(ih-Coe]/Hg -Lw . oe lw utpir (ls o) Hg ls) (ih o) 2 MnyFo Vlm =MnyFo Mlile xVlm frtePro . oe lw oue oe lw utpir oue o h eid 3 AL=Peiu AL+CretPro MnyFo Vlm . D rvos D urn eids oe lw oue The Money Flow Multiplier fluctuates between +1 and -1. As such, it holds the key to the Money Flow Volume and the Accumulation Distribution Line. The multiplier is positive when the close is in the upper half of the high-low range and negative when in the lower half. This makes perfect sense. Buying pressure is stronger than selling pressure when prices close in the upper half of the periods range (and visa versa). The Accumulation Distribution Line rises when the multiplier is positive and falls when the multiplier is negative.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 1/10
2. 2. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com The multiplier adjusts the amount of volume that ends up in the Money Flow Volume. Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1 or -1). The multiplier is +1 when the close is on the high and -1 when the close is on the low. All volume is positive when +1 and all volume is negative when -1. At .50, only half of the volume translates into the periods Money Flow Volume. The table below shows the Money Flow Multipliers, Money Flow Volume and Accumulation Distribution Line for Research-in-Motion (RIMM). Notice how the multiplier is between .50 and 1 when the close is strong and between -.50 and -1 when the close is weak.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 2/10
3. 3. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com Click here for a calculation of the Accumulation Distribution Line in an Excel Spreadsheet. Interpretation The Accumulation Distribution Line is a cumulative measure of each periods volume flow, or money flow. A high positive multiplier combined with high volume shows strong buying pressure that pushes the indicator higher. Conversely, a low negative number combined with high volume reflects strong selling pressure that pushes the indicator lower. Money Flow Volume accumulates to form a line that either confirms or contradicts the underlying price trend. In this regard, the indicator is used to either reinforce the underlying trend or cast doubts on its sustainability. An uptrend in prices with a downtrend in the Accumulation Distribution Line suggests underlying selling pressure (distribution) that could foreshadow a bearish reversal on the price chart. A downtrend in prices with an uptrend in the Accumulation Distribution Line indicate underlying buying pressure (accumulation) that could foreshadow a bullish reversal in prices. ADL versus OBV The Accumulation Distribution Line and On Balance Volume (OBV) are cumulative volume-based indicators that sometimes move in opposite directions because their basic formulas are different. Joe Granville developed On Balance Volume (OBV) as a cumulative measure of positive and negative volume flow. OBV adds a periods total volume when thestockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 3/10
4. 4. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com close is up and subtracts it when the close is down. A cumulative total of this positive and negative volume flow forms the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation. As the formula above shows, Chaikin took a different approach by completely ignoring the change from one period to the next. Instead, the Accumulation Distribution Line focuses on the level of the close relative to the high-low range for a given period (day, week, month). With this formula, a security could gap down and close significantly lower, but the Accumulation Distribution Line would rise if the close were above the midpoint of the high-low range. The chart above shows Clorox (CLX) with a big gap down and a close near the top of the days high-low range. OBV moved sharply lower because the close was below the prior close. The Accumulation Distribution Line moved higher because the close was near the high of the day. Trend Confirmation Trend confirmation is a pretty straight-forward concept. An uptrend in the Accumulation Distribution Line reinforces and uptrend on the price chart and visa versa. The chart below shows Freeport McMoran (FCX) and the Accumulation Distribution Line advancing in February-March, declining from April to June and then advancing from July to January. The Accumulation Distribution Line confirmed each of these price trends.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 4/10
5. 5. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com Divergences Bullish and bearish divergences are where is getting interesting. A bullish divergence forms when price moves to new lows, but the Accumulation Distribution Line does not confirm these lows and moves higher. A rising Accumulation Distribution Line shows, well, accumulation. Think of this as basically stealth buying pressure. Based on the theory that volume precedes price, chartists should be on alert for a bullish reversal on the price chart. The chart above shows Nordstrom (JWN) with the Accumulation Distribution Line. Notice how it is easy to compare price action when the indicator is placed "behind" the price plot. The indicator (pink) and the price trend moved in unison from February to June. Signs of accumulation emerged as the indicator bottomed in early July and started moving higher. JWN moved to a new low in late August. Even though the indicator showed signs of buying pressure, it was important to wait for a bullish catalyst or confirmation on the price chart. This catalyst came as the stock gapped up and surged on big volume.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 5/10
6. 6. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com A bearish divergence forms when price moves to new highs, but the Accumulation Distribution Line does not confirm and moves lower. This shows distribution or underlying selling pressure that can foreshadow a bearish reversal on the price chart.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 6/10
7. 7. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com The chart above shows Southwest Airlines (LUV) with the Accumulation Distribution Line peaking two months ahead of prices. The indicator not only peaked, but it also moved lower in March and April, which reflected some selling pressure. LUV confirmed weakness with a support break on the price chart and RSI moved below 40 shortly afterwards. RSI often trades in bull zones (40-80) and bear zones (20-60). RSI held in the bull zone until early May and then moved into a bear zone. Disconnect with Prices The Accumulation Distribution Line is an indicator based on a derivative of price and volume. This makes it at least two steps removed from the actual price of the underlying security. Moreover, the Money Flow Multiplier does not take into account prices changes from period to period. As such, it cannot be expected to always affirm price action or successfully predict price reversals with divergences. Sometimes there is a, gasp, disconnect between prices and the indicator. Sometimes the Accumulation Distribution Line simply doesnt work. This is why it vitally important to use the Accumulation Distribution Line, and all indicators for that matter, in conjunction with price/trend analysis or other indicators.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 7/10
8. 8. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com Conclusions The Accumulation Distribution Line can be used to gauge the general flow of volume. An uptrend indicates that buying pressure is prevailing on a regular basis, while a downtrend indicates that selling pressure is prevailing. Bullish and bearish divergences serve as alerts for a potential reversal on the price chart. As with all indicators, it is important to use the Accumulation Distribution Line in conjunction with other aspects of technical analysis, such as momentum oscillators and chart patterns. It is not a stand-alone indicator. SharpCharts The Accumulation Distribution Line is available in SharpCharts as an indicator. After selecting, the indicator can be positioned above, below or behind the price of the underlying security. Positioning "behind price" makes it easy to compare OBV with the underlying security. Chartist can also add a moving average or another indicator to OBV by selecting "advanced options", which is to the right of the indicator position. Click here for a live chart with the Accumulation Distribution Line.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 8/10
9. 9. 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com Suggested Scans Bullish Divergence in OBV and ADL: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 daily volume over the last 60 days. Potential bullish divergences are found by looking for stocks where price is BELOW the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are ABOVE the 65-day SMA and 20-day SMA. Bearish divergence in OBV and ADL: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 daily volume over the last 60 days. Potential bearish divergences are found by looking for stocks where price is ABOVE the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are BELOW the 65-day SMA and 20-day SMA.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 9/10
11. 11. 6/1/12 Aroon - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Aroon Aroon Introduction Developed by Tushar Chande in 1995, Aroon is an indicator system that determines whether a stock is trending or not and how strong the trend is. "Aroon" means "Dawns Early Light" in Sanskrit. Chande chose this name because the indicators are designed to reveal the beginning of a new trend. The Aroon indicators measure the number of periods since price recorded an x-day high or low. There are two separate indicators: Aroon-Up and Aroon-Down. A 25-day Aroon-Up measures the number of days since a 25-day high. A 25-day Aroon-Down measures the number of days since a 25-day low. In this sense, the Aroon indicators are quite different from typical momentum oscillators, which focus on price relative to time. Aroon is unique because it focuses on time relative to price. Chartists can use the Aroon indicators to spot emerging trends, identify consolidations, define correction periods and anticipate reversals. Calculation The Aroon indicators are shown in percentage terms and fluctuate between 0 and 100. Aroon-Up is based on price highs, while Aroon-Down is based on price lows. These two indicators are plotted side-by-side for easy comparison. The default parameter setting in Sharpcharts is 25 and the example below is based on a 25 days. AonU =(2 -Dy Sne2-a Hg)2)x10 ro-p (5 as ic 5dy ih/5 0 AonDw =(2 -Dy Sne2-a Lw/5 x10 ro-on (5 as ic 5dy o)2) 0stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 1/7
12. 12. 6/1/12 Aroon - ChartSchool - StockCharts.com Aroon declines as the elapsed time between a new high or low increases. 50 is the cut off point. Because 12.5 days marks the exact middle, a reading of exactly 50 is impossible on a daily chart. It is possible with other timeframes. On daily charts, Aroon is either below 50 (48) or above 50 (52). A reading above 50 means a new high or low was recorded within the last 12 days or less. This is the most recent half of the look-back period. A reading below 50 means a new high or low was recorded within the last 13 days or more {(25-13)/25 x 100 = 48). This is the latter half of the look-back period. The table below shows the range of values for 25-day Aroon-Up and 25-day Aroon-Downstockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 2/7
13. 13. 6/1/12 Aroon - ChartSchool - StockCharts.com Interpretation The Aroon indicators fluctuate above/below a centerline (50) and are bound between 0 and 100. These three levels are important to interpretation. At its most basic, the bulls have the edge when Aroon-Up is above 50 and Aroon-Down is below 50. This indicates a greater propensity for new x-day highs than lows. The converse is true for a downtrend. The bears have the edge when Aroon-Up is below 50 and Aroon-Down is above 50. A surge to 100 indicates that a trend may be emerging. This can be confirmed with a decline in the other Aroon indicator. For example, a move to 100 in Aroon-Up combined with a decline below 30 in Aroon-Down shows upside strength. Consistently high readings mean prices are regularly hitting new highs or new lows for the specified period. Prices are moving consistently higher when Aroon-Up remains in the 70-100 range for an extended period. Conversely, consistently low readings indicate that prices are seldom hitting new highs or lows. Prices are NOT moving lower when Aroon-Down remains in the 0-30 range for an extended period. This does not mean prices are moving higher though. For that we need to check Aroon-Up. New Trend Emerging There are three stages to an emerging trend signal. First, the Aroon lines will cross. Second, the Aroon lines will cross above/below 50. Third, one of the Aroon lines will reach 100. For example, the first stage of an uptrend signal is when Aroon-Up moves above Aroon-Down. This shows new highs becoming more recent than new lows. Keep in mind that Aroon measures the time elapsed, not the price. The second stage is when Aroon-Up moves above 50 and Aroon-Down moves below 50. The third stage is when Aroon-Up reaches 100 and Aroon-Down remains at relatively low levels. The first and second stages do not always occur in that order. Sometimes Aroon-Up will break above 50 and then above Aroon- Down. Reverse engineering the uptrend stages will give you the emerging downtrend signal. Aroon-Down breaks above Aroon-Up, breaks above 50 and reaches 100.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 3/7
14. 14. 6/1/12 Aroon - ChartSchool - StockCharts.com The chart above shows CSX Corp (CSX) with weekly bars and 25-week Aroon. First, notice that the downtrend began weakening as Aroon-Down declined below 50 at the end of 2007 (far left). The first stage of an uptrend was signaled when Aroon-Up moved above Aroon-Down in early 2008 (first orange circle). Aroon-Up continued above 50 and hit 100 as Aroon- Down remained at relatively low levels. Notice how Aroon-Up remained near 100 as the advance continued. This emerging uptrend signal lasted until September 2008 when Aroon-Down broke above Aroon-Up, exceeded 50 and surged to 100 (second orange circle). Notice how Aroon-Down remained near 100 as the downtrend extended. The third trend on this chart was signaled when Aroon-Up surged to 100 in June 2009 and remained above 50 for over a year (third orange circle). Also notice that Aroon-Down remained below 50 for over a year. Consolidation Period The Aroon indicators signal a consolidation when both are below 50 and/or both are moving lower with parallel lines. It makes sense that consistent readings below 50 are indicative of flat trading. For 25-day Aroon, readings below 50 mean a 25-day high or low has not been recorded in 13 or more days. Prices are clearly flat when not recording new highs or new lows. Similarly, a consolidation is usually forming when both Aroon-Up and Aroon-Down move lower in parallel fashion and the distance between the two lines is quite small. This narrow parallel decline indicates that some sort of trading range is forming. The first Aroon indicator to break above 50 and hit 100 will trigger the next signal.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 4/7
15. 15. 6/1/12 Aroon - ChartSchool - StockCharts.com The chart below shows Omnicom (OMC) with the Aroon indicators moving below 50 in a parallel decline. The width of the channel could be narrower, but we can see the consolidation taking shape on the price chart for confirmation. Both Aroon- Up and Aroon-Down were below 50 in the yellow area. Aroon-Up then broke out and surged to 100, which was before the breakout. Further confirmation came with another Aroon-Up surge at the breakout point. This surge/breakout signaled an end of the consolidation and the beginning of the advance.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 5/7
16. 16. 6/1/12 Aroon - ChartSchool - StockCharts.com The next chart shows Lifepoint Hospitals (LPNT) with 25-day Aroon. Both lines moved lower in May with a parallel decline. The distance between the lines was around 25 points throughout the decline. Aroon-Up and Aroon-Down flattened in June and both remained below 50 for around two weeks as the triangle consolidation extended. Aroon-Down (red) was the first to make its move with a break above 50 just before the triangle break on the price chart. Aroon-Down hit 100 as prices broke triangle support to signal a continuation lower. Conclusions Aroon-Up and Aroon-Down are complementary indicators that measure the elapsed time between new x-day highs and lows, respectively. They are shown together so chartists can easily identify the stronger of the two and determine the trend bias. A surge in Aroon-Up combined with a decline in Aroon-Down signals the emergence of an uptrend. Conversely, a surge in Aroon-Down combined with a decline in Aroon-Up signals the start of a downtrend. A consolidation is present when both move lower in parallel fashion or when both remain at low levels (below 30). Chartist can use the Aroon indicators to determine if a security is trending or trading flat and then use other indicators to generate appropriate signals. For example, chartists might use a momentum oscillator to identify oversold levels when 25-week Aroon indicates that the long-term trend is up. SharpCharts The Aroon indicators are available on SharpCharts as an indicator. Simply choosing "Aroon" will display Aroon-Up and Aroon-Down. These indicators can be positioned above, below or behind the price plot of the underlying security. Users can click on the green arrow to the right of the indicator to see advanced options and add a horizontal line at 50. Users can even apply another indicator to the Aroon indicators. Click here for live chart with the Aroon indicators. Suggested Scans Aroon-Up and Aroon-Down are below 20: This simple scan searches for stocks where Aroon-Up and Aroon-Down are both below 20. A consolidation is often present when both indicators are at such low levels. The first to break above 50 triggers next directional clue. Send us your Feedback! Advertisement:stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 6/7
19. 19. 6/1/12 Average Directional Index (ADX) - ChartSchool - StockCharts.com Directional movement is positive (plus) when the current high minus the prior high is greater than the prior low minus the current low. This so-called Plus Directional Movement (+DM) then equals the current high minus the prior high, provided it is positive. A negative value would simply be entered as zero. Directional movement is negative (minus) when the prior low minus the current low is greater than the current high minus the prior high. This so-called Minus Directional Movement (-DM) equals the prior low minus the current low, provided it is positive. A negative value would simply be entered as zero. The chart above shows four calculation examples for directional movement. The first pairing shows a big positive difference between the highs for a strong Plus Directional Movement (+DM). The second pairing shows an outside day with Minus Directional Movement (-DM) getting the edge. The third pairing shows a big difference between the lows for a strong Minus Directional Movement (-DM). The final pairing shows an inside day, which amounts to no directional movement (zero). Both Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are negative and cancel out each other. Negative values revert to zero. All inside days will have zero directional movement. Calculation The calculation steps for the Average Directional Index (ADX) are detailed in each step. Average True Range (ATR) is not detailed because there is an entire ChartSchool article for this. Basically, ATR is Wilders version of the two period trading range. Smoothed versions of Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are divided by a smoothed version Average True Range (ATR) to reflect the true magnitude of a move. The example below is based on a 14- day ADX calculation. 1. Calculate the True Range (TR), Plus Directional Movement (+DM) and Minus Directional Movement (-DM) for each period.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_ 2/9
21. 21. 6/1/12 Average Directional Index (ADX) - ChartSchool - StockCharts.com Wilders Smoothing As seen in the ADX calculation, there is a lot of smoothing involved and it is important to understand the effects. Because of Wilders smoothing techniques, it can take around 150 periods of data to get true ADX values. Wilder uses similar smoothing techniques with his RSI and Average True Range calculations. ADX values using only 30 periods of historical data will not match ADX values using 150 periods of historical data. ADX values with 150 days or more of data will remain consistent. The first technique is used to smooth each periods +DM1, -DM1 and TR1 values over 14 periods. As with an exponential moving average, the calculation has to start somewhere so the first value is simply the sum of the first 14 periods. As shown below, smoothing starts with the second 14-period calculation and continues throughout. FrtT1 =Smo frt1 proso T1 is R4 u f is 4 eid f R Scn T1 =FrtT1 -(is T1/4 +CretT1 eod R4 is R4 Frt R41) urn R Sbeun Vle =PirT1 -(ro T1/4 +CretT1 usqet aus ro R4 Pir R41) urn R4 The second technique is used to smooth each periods DX value to finish with the Average Directional Index (ADX). First, calculate an average for the first 14 days as a starting point. The second and subsequent calculations use the smoothing technique below: FrtAX4=1 pro Aeaeo D is D1 4 eid vrg f X Scn AX4=(is AX4x1)+CretD Vle eod D1 Frt D1 3 urn X au Sbeun AX4=(ro AX4x1)+CretD Vle usqet D1 Pir D1 3 urn X austockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_ 4/9
25. 25. 6/1/12 Average Directional Index (ADX) - ChartSchool - StockCharts.com used when trading above the 50-day moving average. Once initiated, the Parabolic SAR can be used to set stops. Click here for a live example of ADX. Suggested Scans Overall Uptrend with +DI Crossing above -DI: This scan starts with stocks that average 100,000 shares daily volume and have an average closing price above 10. An uptrend is present when trading above the 50-day SMA. A buy signal is possible when ADX is above 20. This signal materializes when +DI moves above - DI. Overall Downtrend with - DI Crossing above +DI: This scan starts with stocks that average 100,000 shares daily volumestockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_ 8/9
27. 27. 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Average True Range (ATR) Average True Range (ATR) Introduction Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. As with most of his indicators, Wilder designed ATR with commodities and daily prices in mind. Commodities are frequently more volatile than stocks. They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this "missing" volatility. It is important to remember that ATR does not provide an indication of price direction, just volatility. Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, RSI and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilders indicators have stood the test of time and remain extremely popular. 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) Absolute values are used to insure positive numbers. After all, Wilder was interested in measuring the distance between two points, not the direction. If the current periods high is above the prior periods high and the low is below the prior periods low, then the current periods high-low range will be used as the True Range. This is an outside day that would use Method 1 to calculate the TR. This is pretty straight forward. Methods 2 and 3 are used when there is a gap or an inside day. A gap occurs when the previous close is greater than the current high (signaling a potential gap down or limit move) or the previous close is lower than the current low (signaling a potential gap up or limit move). The image below shows examples when methods 2 and 3 are appropriate.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 1/7
28. 28. 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com 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. 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. Calculation Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. For this example, the ATR will be based on daily data. Because there must be a beginning, the first TR value is simply the High minus the Low, and the first 14-day ATR is the average of the daily TR values for the last 14 days. After that, Wilder sought to smooth the data by incorporating the previous periods ATR value. CretAR=[PirARx1)+CretT]/1 urn T (ro T 3 urn R 4 -Mlil tepeiu 1-a ARb 1. utpy h rvos 4dy T y 3 -Adtems rcn dysT vle d h ot eet a R au. -Dvd tettlb 1 iie h oa y 4stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 2/7
29. 29. 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com Click here for an Excel Spreadsheet showing the start of an ATR calculation for QQQQ. In the Spreadsheet example, the first True Range value (.91) equals the High minus the Low (yellow cells). The first 14-day ATR value (.56)) was calculated by finding the average of the first 14 True Range values (blue cell). Subsequent ATR values were smoothed using the formula above. The spreadsheet values correspond with the yellow area on the chart below. Notice how ATR surged as QQQQ plunged in May with many long candlesticks.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 3/7
30. 30. 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com For those trying this at home, a few caveats apply. First, ATR values depend on where you begin. The first True Range value is simply the current High minus the current Low and the first ATR is an average of the first 14 True Range values. The real ATR formula does not kick in until day 15. Even so, the remnants of these first two calculations linger to slightly affect ATR values. Spreadsheet values for a small subset of data may not match exactly with what is seen on the price chart. Decimal rounding can also slightly affect ATR values. Absolute ATR ATR is based on the True Range, which uses absolute price changes. As such, ATR reflects volatility as absolute level. In other words, ATR is not shown as a percentage of the current close. This means low priced stocks will have lower ATR values than high price stocks. For example, a \$20-30 security will have much lower ATR values than a \$200-300 security. Because of this, ATR values are not comparable. Even large price movements for a single security, such as a decline from 70 to 20, can make long-term ATR comparisons impractical. Chart 4 shows Google with double digit ATR values and chart 5 shows Microsoft with ATR values below 1. Despite different values, their ATR lines have similar shapes.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 4/7
31. 31. 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com Conclusions 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, orstockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 5/7
33. 33. 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com MetaTrader4 - ACFX Low Spreads Starting from 2 Pips. Start Earning your Money Now! www.acfx.com 95-99% Accurate Tips Earn Rs 200000 / Month in Equity & Commodity with 99% Accurate Tips www.pyramidstocks.com Free Trial Intraday Tips Pay Only When You Make Profits 90% Accuracy. Try It Yourself! BestStockIdeas.co.in/BSE-NSE Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2012 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 7/7
35. 35. 6/1/12 Bollinger Band %B - ChartSchool - StockCharts.com After identifying a bigger up trend, %B can be considered oversold when it moves to zero or below. Remember, %B moves to zero when price hits the lower band and below zero when price moves below the lower band. This represents a move that is 2 standard deviations below the 20-day moving average. Chart 2 shows the Nasdaq 100 ETF (QQQQ) within an uptrend that began in March 2009. %B moved below zero three times during this uptrend. The oversold readings in early July and early November provided good entry points to partake in the bigger uptrend (green arrows).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_perce 2/5
36. 36. 6/1/12 Bollinger Band %B - ChartSchool - StockCharts.com Signals: Trend Identification John Bollingers book also featured a trend-following system using %B with the Money Force Index, also known as the Money Flow Index (MFI). An uptrend begins when %B is above .80 and MFI is above 80. MFI is bound between zero and one hundred. A move above 80 places MFI in the upper 20% of its range, which is a strong reading. Bollinger suggested setting MFI periods at 1/2 the number of Bollinger Band periods, which would be 10. Downtrends are identified when %B is below .20 and MFI is below 20. Chart 3 shows FedEx (FDX) with Bollinger Bands (20,2), %B and MFI (10). An uptrend started in late July when %B was above .80 and MFI was above 80. This uptrend was subsequently affirmed with two more signals in early September and mid November. While these signals were good for trend identification, traders would likely have had issues with the risk- reward ratio after such big moves. It takes a substantial price surge to push %B above .80 and MFI above 80 at the same time. Traders might consider using this method to identify the trend and then look for appropriate overbought or oversold levels for better entry points. Conclusions %B quantifies the relationship between price and Bollinger Bands. Readings above .80 indicate that price is near the upper band. Readings below .20 indicate that price is near the lower band. Surges towards the upper band show strength, but can sometimes be interpreted as overbought. Plunges to the lower band show weakness, but can sometimes be interpreted as oversold. A lot depends on the underlying trend and other indicators. While %B can have some value on its own, it is best when used in conjunction with other indicators or price analysis. Click here for a live chart with Bollinger Bands.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_perce 3/5
37. 37. 6/1/12 Bollinger Band %B - ChartSchool - StockCharts.com %B and SharpCharts %B can be found in the indicator list on SharpCharts. The default parameters (20,2) are based on the default parameters for Bollinger Bands. These can be changed accordingly. 20 represents the simple moving average. 2 represents the number of standard deviations for the upper and lower band. %B can be positioned above, below or behind the price plot. Click here to see a live example of %B. Suggested Scans %B Uptrend Scan: This scan filters out stocks where %B is above .80 and MFI just crossed above 80. According to Bollinger, these stocks could be starting new up swings. This scan is just a starting point. Further refinement and analysis are required. %B Downtrend Scan: This scan filters out stocks where %B is below .20 and MFI just crossed below 20. According to Bollinger, these stocks could be starting new down swings. This scan is just a starting point. Further refinement and analysis are required. Further Study Bollinger on Bollinger Bands John Bollinger Advertisement: Online Forex Try the ACFX Free \$50.000 Demo. Open an Account Now! www.acfx.com Free Techincal Analysis Get support & resistance levels for 15 yrs & 2574 instruments for free. www.dynamiclevels.com Best Intraday Tips Pay Only When You Make Profits 90% Accuracy. Get Free Trial Now! BestStockIdeas.co.in/BSE-NSE Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutesstockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_perce 4/5
39. 39. 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Bollinger BandWidth Bollinger BandWidth Introduction Bollinger BandWidth is an indicator derived from Bollinger Bands. In his book, Bollinger on Bollinger Bands, John Bollinger refers to Bollinger BandWidth as one of two indicators that can be derived from Bollinger Bands. The other indicator is %B. Non-normalized BandWidth measures the distance, or difference, between the upper band and the lower band. BandWidth decreases as Bollinger Bands narrow and increases as Bollinger Bands widen. Because Bollinger Bands are based on the standard deviation, falling BandWidth reflects decreasing volatility and rising BandWidth reflects increasing volatility. SharpCharts Calculation (pe Bn -LwrBn) Upr ad oe ad Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average usually set at 20 periods. The outer bands are usually set 2 standard deviations above and below the middle band. Settings can be adjusted to suit the characteristics of particular securities or trading styles. BandWidth is simply the difference between the upper band and the lower band.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 1/8
40. 40. 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com The chart above shows the S&P 500 ETF (SPY) with Bollinger Bands, BandWidth and the Standard Deviation. Notice how BandWidth tracks the Standard Deviation (volatility). The image below shows a spreadsheet with the calculations for June 2009.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 2/8
41. 41. 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com Defining Narrowness It is important to remember that non-normalized BandWidth varies according to securitys volatility and price. A BandWidth value of 5 would be considered narrow for \$100 a stock, but wide for a \$30 stock. Five is 5% of 100, but 16.6% of 30. Usually, Bandwith is considered low (narrow) when it is 5-10% of a securitys price. Low BandWidth for a \$50 stock would range from 2.5 to 5, while low BandWidth for a \$20 stock would range from .50 to 1. Depending on underlying volatility, the definition of narrowness varies from stock to stock. Narrow BandWidth can also be gauged relative to prior BandWidth values over a period of time. It is important to get a good look-back period to define BandWidth range. For example, a one year chart will show BandWidth highs and lows over a significant timeframe. BandWidth is considered narrow as it approaches it the lows of its one year range and high as it approaches the highs of its range. Signal: The Squeeze Bollinger BandWidth is best for identifying The Squeeze. This occurs when volatility falls to a very low level, as evidenced by the narrowing bands. The upper and lower bands are based on the standard deviation, which is a measure of volatility. Therefore, volatility contracts as the bands narrow. The bands narrow as price flattens or moves within a relatively narrow range. The theory is that periods of low volatility are followed by periods of high volatility. Relatively narrow BandWidth (a.k.a. the Squeeze) can foreshadow a significant advance or decline. After a Squeeze, a price surge and subsequent band break signal the start of a new move. A new advance starts with a Squeeze and subsequent break above the upper band. A new decline starts with a Squeeze and subsequent break below the lower band. Chart 2 shows Alaska Airlines (ALK) with a squeeze in mid June. After declining in April-May, ALK stabilized in early June as Bollinger Bands narrowed. BandWidth dipped to around 1.5 to put the Squeeze play on in mid June. With the stock around 15-16, BandWidth was less than 10% of the stock price. With the subsequent surge above the upper band, the stock broke out to trigger an extended advance.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 3/8
42. 42. 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com Chart 3 shows Aeropostale (ARO) with a couple of Squeezes. The second Squeeze occurred in October as ARO consolidated around 43 and BandWidth dipped below 3. Aeropostale is priced higher than Alaska Airlines and this means its non-normalized BandWidth will be relatively higher. Low Bandwith for ARO is below 4. Relatively low BandWidth in ARO alerted traders to be ready for a move in mid August. ARO subsequently broke the lower band with a move below 40 and this triggered an extended decline. The advance stalled in late September and BandWidth narrowed in October. Notice how BandWidth declined back to its August lows in early October and then flattened out. The subsequent break below the lower Bollinger Band triggered a bearish signal in late October.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 4/8
43. 43. 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com The Squeeze can also be applied to weekly charts or longer timeframes. Volatility and BandWidth on weekly charts is higher than on the daily chart. This makes sense because larger price movements can be expected over longer timeframes. Chart 4 shows Barrick Gold (ABX) consolidating throughout 2006 and into 2007. As the consolidation narrowed and a triangle formed, Bollinger Bands contracted and BandWidth dipped below 5. Notice how BandWidth remained at low levels as the consolidation extended. A bullish signal triggered with the breakout in July 2007. BandWidth also rose as prices moved sharply in one direction and Bollinger Bands widened.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 5/8
44. 44. 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com Chart 5 shows Honeywell (HON) with an extended trading range around 55. There was a move to the upper band in May, but no breakout for a signal. Instead, HON clearly broke below the lower band to trigger a bearish signal. Conclusions The BandWidth indicator can be used to identify the Bollinger Band Squeeze. This alerts chartists to prepare for a move, but direction depends on the subsequent band break. A Squeeze and break above the upper band is bullish, while a Squeeze and break below the lower band is bearish. Be careful for head-fakes though. Sometimes the first break fails to hold as prices reverse the other way. Strong breaks hold and seldom look back. An upside breakout followed by an immediately pullback should serve as a warning. BandWidth and SharpCharts Bollinger BandWidth can be found in the indicator list on SharpCharts. The default parameters (20,2) are based on the default parameters for Bollinger Bands. These can be changed accordingly. 20 represents the simple moving average. 2 represents the number of standard deviations for the upper and lower band. BandWidth can be positioned above, below or behind the price plot. Click here to see a live example of BandWidth. BandWidth and Market Carpets Normalized Bollinger BandWidth is shown in the Market Carpet. This allows users to compare BandWidth for a number of securities. Bollinger BandWidth is normalized by divided the width by the middle band. Using the Sector Market Carpet as an example, choose Bollinger BandWidth and then click the delta icon (little triangle) to view absolute levels. A shaded deltastockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 6/8
45. 45. 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com icon shows percentage change. A white delta icon shows absolute levels. Green boxes show stocks with relatively wide BandWidth. Light boxes show stocks with relatively narrow BandWidth. A list of the stocks with the narrowest BandWidth is shown at the bottom right of the Market Carpet (Bottom 5). Click the names to see a small chart above. Users can dive into the sectors by clicking on the sector heading (e.g. Technology). With nine sectors and the Bottom 5 stocks listed for each sector, users can quickly view 45 stocks with relatively narrow BandWidth. Further Study Bollinger on Bollinger Bands John Bollinger —-stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 7/8
46. 46. 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com Send us your Feedback! Advertisement: Online Forex Try the ACFX Free \$50.000 Demo. Open an Account Now! www.acfx.com 2 days Free Trial in Gold Free Trading Tips on Gold Commodity Join for 2 Days Free Trial. www.capitalvia.com Best Intraday Tips Pay Only When You Make Profits 90% Accuracy. Get Free Trial Now! BestStockIdeas.co.in/BSE-NSE Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 8/8
47. 47. 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Commodity Channel Index (CCI) Commodity Channel Index (CCI) Introduction Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can successfully applied to indices, ETFs, stocks and other securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In this manner, CCI can be used to identify overbought and oversold levels. Calculation The example below is based on a 20-period Commodity Channel Index (CCI) calculation. The number of CCI periods is also used for the calculations of the simple moving average and Mean Deviation. CI=(yia Pie - 2-eidSAo T)/(05xMa Dvain C Tpcl rc 0pro M f P .1 en eito) TpclPie(P =(ih+Lw+Coe/ yia rc T) Hg o ls)3 Cntn =.1 osat 05 Teeaefu sest cluaigteMa Dvain Frt sbrc hr r or tp o acltn h en eito. is, utat tems rcn 2-eidaeaeo tetpclpiefo ec pro h ot eet 0pro vrg f h yia rc rm ah eids tpclpie Scn,tk teaslt vle o teenmes Tid yia rc. eod ae h boue aus f hs ubr. hr, smteaslt vle.Fut,dvd b tettlnme o pros(0. u h boue aus orh iie y h oa ubr f eid 2) Lambert set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100. This percentage also depends on the look-back period. A shorter CCI (10 periods) will be more volatile with a smaller percentage of values between +100 and -100. Conversely, a longer CCI (40 periods) will have a higher percentage of values between +100 and -100.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 1/8
48. 48. 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com Click here for a CCI calculation in an Excel Spreadsheet.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 2/8
49. 49. 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com Interpretation CCI measures the difference between a securitys price change and its average price change. High positive readings indicate that prices are well above their average, which is a show of strength. Low negative readings indicate that prices are well below their average, which is a show of weakness. The Commodity Channel Index (CCI) can be used as either a coincident or leading indicator. As a coincident indicator, surges above +100 reflect strong price action that can signal the start of an uptrend. Plunges below -100 reflect weak price action that can signal the start of a downtrend. As a leading indicator, chartists can look for overbought or oversold conditions that may foreshadow a mean reversion. Similarly, bullish and bearish divergences can be use to detect early momentum shifts and anticipate trend reversals. New Trend Emerging As noted above, the majority of CCI movement occurs between -100 and +100. A move that exceeds this range shows unusual strength or weakness that can foreshadow an extended move. Think of these levels as bullish or bearish filters. Technically, CCI favors the bulls when positive and the bears when negative. However, using a simple zero line crossovers can result in many whipsaws. Although entry points will lag more, requiring a move above +100 for a bullish signal and a move below -100 for a bearish signal reduces whipsaws. The chart below shows Caterpillar (CAT) with 20-day CCI. There were four trend signals within a seven month period. Obviously, a 20-day CCI is not suited for long-term signals. Chartists need to use weekly or monthly charts for long-term signals. The stock peaked on 11-Jan and turned down. CCI moved below -100 on 22-January (8 days later) to signal the start of an extended move. Similarly, the stock bottomed on 8-February and CCI moved above +100 on 17-February (6stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 3/8
50. 50. 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com days later) to signal the start of an extended advance. CCI does not catch the exact top or bottom, but it can help filter out insignificant moves and focus on the larger trend. CCI triggered a bullish signal when CAT surged above 60 in June. Some traders may have considered the stock overbought and the reward-to-risk ratio unfavorable at these levels. With the bullish signal in force, focus would have been on bullish setups with a good reward-to-risk ratio. Notice that the stock retraced around 62% of the prior advance and formed a falling flag by the end of June. The subsequent surge above the flag trendline provided another bullish signal with CCI still in bull mode. Overbought/Oversold Identifying overbought and oversold levels can be tricky with the Commodity Channel Index (CCI), or any other momentum oscillator for that matter. First, CCI is an unbound oscillator. Theoretically, there are no upside or downside limits. This makes an overbought or oversold assessment subjective. Second, securities can continue moving higher after an indicator becomes overbought. Likewise, securities can continue moving lower after an indicator becomes oversold. The definition of overbought or oversold varies for the Commodity Channel Index (CCI). ±100 may work in a trading range, but more extreme levels are needed for other situations. ±200 is a much harder level to reach and more representative of a true extreme. Selection of overbought/oversold levels also depends on the volatility of the underlying security. The CCI range for an index ETF, such as SPY, will be usually be smaller than for a most stocks, such as Google.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 4/8
51. 51. 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com The chart above shows Google (GOOG) with CCI(20). Horizontal lines at ±200 were added using the advanced indicators options. From early February to early October (2010), Google exceeded ±200 at least five times. The red dotted lines show when CCI moved back below +200 and the green dotted lines show when CCI moved back above -200. It is important to wait for these crosses to reduce whipsaws should the trend extend. Such a system is not fool proof though. Notice how Google kept on moving higher even after CCI became overbought in mid September and moved below -200. Bullish Bearish Divergences Divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and CCI forms a higher low, which shows less downside momentum. A bearish divergence forms when the security records a higher high and CCI forms a lower high, which shows less upside momentum. Before getting too excited about divergences as great reversal indicators, note that divergences can be misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences often after appear in extended downtrends. Confirmation holds the key to divergences. While divergences reflect a change in momentum that can foreshadow a trend reversal, chartists should set a confirmation point for CCI or the price chart. A bearish divergence can be confirmed with a break below zero in CCI or a support break on the price chart. Conversely, a bullish divergence can be confirmed with a break above zero in CCI or a resistance break on the price chart.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 5/8
52. 52. 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com The chart above shows United Parcel Service (UPS) with 40-day CCI. A longer timeframe, 40 versus 20, was used to reduce volatility. There are three sizable divergences over a seven month period, which is actually quite a few for just seven months. First, UPS raced to new highs in early May, but CCI failed to exceed its March high and formed a bearish divergence. A support break on the price chart and CCI move into negative territory to0 confirm this divergence a few days later. Second, a bullish divergence formed in early July as the stock moved to a lower low, but CCI formed a higher low. This divergence was confirmed with a CCI break into positive territory. Also notice that UPS filled the late June gap with a surge in early July. Third, a bearish divergence formed in early September and this was confirmed when CCI dipped into negative territory. Despite a CCI confirmation, price never broke support and the divergence did not result in a trend reversal. Not all divergences produce good signals. Conclusions CCI is a versatile momentum oscillator that can be used to identify overbought/oversold levels or trend reversals. The indicator becomes overbought or oversold when it reaches a relative extreme. That extreme depends on the characteristics of the underlying security and the historical range for CCI. Volatile securities are likely to require greater extremes than docile securities. Trend changes can be identified when CCI crosses a specific threshold between zero and 100. Regardless of how CCI is used, chartists should use CCI in conjunction with other indicators or price analysis. Another momentum oscillator would be redundant, but On Balance Volume (OBV) or the Accumulation Distribution Line can add value to CCI signals. Using with SharpCharts CCI is available as a SharpCharts indicator that can be placed above, below or behind the price plot of the underlying security. Placing CCI directly behind the price makes it easy to compare indicator movements with price movements. Thestockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 6/8
53. 53. 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com default setting is 20-periods, but this can be adjusted to suit analysis needs. A shorter timeframe makes the indicator more sensitive. A longer timeframe makes it less sensitive. Members can click the green arrow next to "advanced options" to add horizontal lines to mark overbought or oversold levels. Two lines can be added by separating the numbers with a comma (200,-200). Suggested Scans CCI Oversold in Uptrend: This scan reveals stocks that are in an uptrend with oversold CCI turning up. First, stocks must be above their 200-day moving average to be in an overall uptrend. Second, CCI must cross below -200 to show the indicator rising from oversold levels. CCI Overbought in Downtrend: This scan reveals stocks that are in a downtrend with overbought CCI turning down. First,stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 7/8
54. 54. 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com stocks must be below their 200-day moving average to be in an overall downtrend. Second, CCI must cross above +200 to show the indicator falling from overbought levels. Further Study Murphy has a chapter devoted to momentum oscillators and their various uses. Murphy covers the pros and cons as well as some examples specific to the Commodity Channel Index. Pring shows the basics of momentum indicators by covering divergences, crossovers and other signals. There are two more chapters covering specific momentum indicators with plenty of examples. Technical Analysis of the Financial Markets Technical Analysis Explained by Martin Pring John J. Murphy Martin Pring Send us your Feedback! Advertisement: 2 days Free Trial in Gold Free Trading Tips on Gold Commodity Join for 2 Days Free Trial. www.capitalvia.com Free Techincal Analysis Get support & resistance levels for 15 yrs & 2574 instruments for free. www.dynamiclevels.com Best Nifty Options Tips. 90% Accuracy and Single Target. Apply for a Free Trail Now. www.niftyprime.com Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 8/8
55. 55. 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Chaikin Money Flow Chaikin Money Flow Introduction Developed by Marc Chaikin, Chaikin Money Flow measures the amount of Money Flow Volume over a specific period. Money Flow Volume forms the basis for the Accumulation Distribution Line. Instead of a cumulative total of Money Flow Volume, Chaikin Money Flow simply sums Money Flow Volume for a specific look-back period, typically 20 or 21 days. The resulting indicator fluctuates above/below the zero line just like an oscillator. Chartists weigh the balance of buying or selling pressure with the absolute level of Chaikin Money Flow. Chartists can also look for crosses above or below the zero line to identify changes on money flow. Calculation There are four steps to calculating Chaikin Money Flow (CMF). The example below is based on 20-periods. First, calculate the Money Flow Multiplier for each period. Second, multiply this value by the periods volume to find Money Flow Volume. Third, sum Money Flow Volume for the 20 periods and divide by the 20 period sum of volume. 1 MnyFo Mlile =[Coe - Lw -(ih-Coe]/Hg -Lw . oe lw utpir (ls o) Hg ls) (ih o) 2 MnyFo Vlm =MnyFo Mlile xVlm frtePro . oe lw oue oe lw utpir oue o h eid 3 2-eidCF=2-eidSmo MnyFo Vlm /2 pro Smo Vlm . 0pro M 0pro u f oe lw oue 0 eid u f oue Each periods Money Flow Volume depends on the Money Flow Multiplier. This multiplier is positive when the close is in the upper a half of the periods high-low range and negative when the close is in the lower half. The multiplier equals 1 when the close equals the high and -1 when the close equals the low. In this way the multiplier adjusts the amount of volume that ends up in Money Flow Volume. Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1 or -1).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 1/10
56. 56. 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com The table above shows some examples using daily data for Research in Motion (RIMM). Notice how the multiplier was near +1 on 5-Jan when the stock closed near its high. The multiplier dipped to -.97 on 18-Jan when the stock closed near its low. The multiplier finished near zero (-.07) when the stock closed near the mid point of its high-low range on 29-Dec. Click here for a calculation example of Chaikin Money Flow in an Excel Spreadsheet. Interpretation Chaikin Money Flow (CMF) is an oscillator that fluctuates between -1 and +1. Rarely, if ever, will the indicator reach these extremes. It would take 20 consecutive closes on the high (low) for 20-day Chaikin Money Flow to reach +1 (-1). Typically, this oscillator fluctuates between -.50 and +.50 with zero as the centerline.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 2/10
57. 57. 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com Chaikin Money Flow measures buying and selling pressure for a given period of time. A move into positive territory indicates buying pressure, while a move into negative territory indicates selling pressure. Chartists can use the absolute value of Chaikin Money Flow to confirm or question the price action of the underlying. Positive CMF would confirm an uptrend, but negative CMF would call into question the strength behind an uptrend. The reverse holds true for downtrends. Buying/Selling Pressure Chaikin Money Flow can be used to define a general buying or selling bias simply with positive or negative values. The indicator oscillates above/below the zero line. Generally, buying pressure is stronger when the indicator is positive and selling pressure is stronger when the indicator is negative. While this zero line cross seems simple enough, the reality is much choppier. Chaikin Money Flow sometimes only briefly crosses the zero line with a move that turns the indicator barely positive or negative. There is no follow through and this zero line cross ends up becoming a whipsaw (bad signal). Chartists can filter these signals with buffers by setting the bullish threshold a little above zero (+.05) and the bearish threshold a little below zero (-.05). These thresholds will not entirely eliminate bad signals, but can help reduce whipsaws and filter out weaker signals.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 3/10
58. 58. 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com The chart above shows Freeport McMoran (FCX) with 20-day Chaikin Money Flow in the indicator window. There were at least 10 crosses of the zero line between February and December 2010. Adding a small buffer greatly reduced the number of bullish and bearish signals. A move above +.50 was considered bullish, while a move below -.50 was considered bearish. There were only three signals. While these signals will come a little later, it may be worth it to reduce whipsaw.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 4/10
59. 59. 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com The chart for Harley Davidson (HOG) shows a few good signals and a whipsaw with the May bounce. CMF moved above .50 for a few days, but this move failed to hold and the indicator broke back below -.50 in early June. Whipsaws are going to happen, especially during volatile periods or when the trend flattens. CMF turned bullish in July and stayed bullish the rest of the year. Notice that HOG formed a falling wedge that retraced just over 62% in August, when CMF was still in bull mode. This pullback offered a second chance to partake in the CMF signal.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 5/10
60. 60. 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com Chaikin Money Flow is not suited for all securities. The chart above shows P.F. Chang (PFCB) with some 18 crosses above +.50 or below -.50. Basing CMF signals on these crosses resulted in one whipsaw after another. It is important to analyze the basic price trend and the characteristics of an indicator with a particular security. PFCB exhibits some trend, but price action within this trend is choppy and money flow cannot maintain a positive or negative bias. It would be better to find a different indicator for this stocks. Calculation Quirk The Money Flow Multiplier in Chaikin Money Flow focuses on the level of the close relative to the high-low range for a given period (day, week, month). With this formula, a security could gap down and close significantly lower, but the Money Flow Multiplier would rise if the close were above the midpoint of the high-low range. The chart below shows Clorox (CLX) with a big gap down and a close near the top of the days high-low range. Even though the stock closed sharply lower on high volume, Chaikin Money Flow rose because the Money Flow Multiplier was positive and volume was well above average. Ignoring the change from close-to-close means that Chaikin Money Flow can sometimes disconnect with price.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 6/10
61. 61. 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com The opposite can happen when a security gaps up and closesnear the low for the day. The chart below shows Travellers (TRV) gapping up and closing over 1% higher on the day. Despite this jump, the close was near the low for the day, which insured a Money Flow Multiplier near -1. As a result, almost all of the days volume was counted as negative money flow and the Chaikin Money Flow fell.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 7/10
62. 62. 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com Conclusions Chaikin Money Flow is an oscillator that measures buying and selling pressure over a set period of time. At its most basic, money flow favors the bulls when CMF is positive and the bears when negative. Chartists looking for quicker money flow shifts can look for bullish and bearish divergences. Be careful though. Selling pressure still has the edge in negative territory, even when there is a bullish divergence. This bullish divergence simply shows less selling pressure. It takes a move into positive territory to indicate actual buying pressure. As an money flow oscillator, CMF can be used in conjunction with pure price oscillators, such as MACD or RSI. As with all indicators, Chaikin Money Flow should not be used as a stand-alone indicator. Marc Chaikin also developed the Accumulation Distribution Line and the Chaikin Oscillator. SharpCharts Chaikin Money Flow can be set as an indicator above or below the main window. Because it is shown in area format, it is not really suited for placement behind the securitys price plot. Once the indicator is chosen from the drop down list, the default parameter appears (20). These parameters can be adjusted to increase or decrease sensitivity. Users can click on "advanced options" to add horizontal lines, moving averages or other overlays. Chartists can even plot a second and longerstockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 8/10