Section 5 - Chapter 2 - Technical Indicator Construction

Chapter 2 - Technical Indicator Construction
Section 5 – Technical Indicators
Presented By :
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Agenda
 Explain what a technical indicator is?
 Describe the two general categories of
indicators
 Contrast various momentum indicators
 Summarize various volume indicators
 Discuss indicators that use price and
volume
 Describe the three plots of the Directional
Movement Index (DMI)
 Express the DMI’s general interpretation
 Outline the DMI’s uses

Technical Momentum
Presented By :

Technical Momentum
1. Key Facts About Momentum
• Momentum = Price Velocity → Measures how quickly the price is rising or falling.
• Momentum Indicators → Used to confirm trends, signal reversals, and detect
overbought/oversold conditions.
• Works Best in Trending Markets → Loses effectiveness in sideways/choppy markets.
• Divergence Matters → If momentum weakens while price continues in the same direction,
a reversal may be near.
• Lagging vs. Leading Indicators
o Momentum Indicators (e.g., MACD, RSI) are often lagging.
o Rate of Change (ROC), Stochastic Oscillator can be more leading in nature.

Technical Momentum
Momentum, as a simple measure that market technicians use, is the difference
between two prices.
Momentum = Current Price − Price n Periods Ago
For example, if the current price is $15 and the price 10 days ago was $10, the momentum
value is $5. Price changed positively by $5 over the previous 10 periods.
In finance, price change is often considered in percentage terms, so it is helpful to normalize the
equation. This is called the rate of change (ROC) or percentage change formula:
Using the same example, the ROC for the current price of $15 and $10 as the price 10 days ago
is a positive change of 50%.

Popular Momentum Indicators
Indicator Purpose Formula Interpretation
Relative Strength Index (RSI)
Measures overbought/oversold
conditions
RSI = 100 - [100 / (1 + RS)]
where RS = Avg. gains / Avg.
losses
RSI > 70 → Overbought, RSI <
30 → Oversold
Moving Average Convergence
Divergence (MACD)
Identifies trend direction &
reversals
MACD = (12 EMA - 26 EMA),
Signal = 9 EMA of MACD
MACD > Signal → Bullish,
MACD < Signal → Bearish
Stochastic Oscillator
Measures price relative to
range
%K = [(C - L14) / (H14 - L14)] ×
100, %D = 3-day SMA of %K
%K above 80 → Overbought,
Below 20 → Oversold
Rate of Change (ROC)
Measures speed of price
change
ROC = [(Current Price - Price N
periods ago) / Price N periods
ago] × 100
Rising ROC → Strong
Momentum, Falling ROC →
Weak Momentum
Commodity Channel Index
(CCI)
Identifies cyclical trends
CCI = (Typical Price - SMA) /
(0.015 × Mean Deviation)
CCI > 100 → Overbought, CCI
< -100 → Oversold
Williams %R Measures price strength %R = [(H - C) / (H - L)] × -100
%R above -20 → Overbought,
Below -80 → Oversold

Comparing Momentum Indicators
Aspect RSI MACD Stochastic ROC CCI
Type Oscillator
Trend &
Momentum
Oscillator Rate of Change Oscillator
Best for
Overbought/
Oversold
Trend
confirmation
Overbought/
Oversold
Price speed Trend Strength
Overbought Signal Above 70 Above Signal Line Above 80 High ROC Above 100
Oversold Signal Below 30 Below Signal Line Below 20 Low ROC Below -100
Divergence Use? Yes Yes Yes Yes Yes

Technical Momentum
Pro Tips for Using Momentum Indicators
✔ Combine Indicators → Use RSI with MACD or Stochastic for confirmation.
✔ Look for Divergence → If price and momentum don’t align, reversal may be near.
✔ Adjust Timeframes → Higher timeframes give stronger signals, lower timeframes are more noise-sensitive.
✔ Use with Volume → High volume + momentum breakout = Stronger confirmation.
✔ Test Strategies Before Live Trading → Back test before committing real money.
Pros & Cons of Momentum Trading
Pros Cons
Captures strong trends False signals in choppy markets
Works well with other indicators Lagging nature can delay entries
Helps confirm breakouts May require additional filters
Useful in multiple timeframes Less effective in sideways markets

Rate of Change (ROC)
Presented By :

Rate Of Changes (ROC)
1. Key Facts About Rate of Change (ROC)
✅ Measures Momentum → It calculates how fast a stock or asset price is changing.
✅ Formula:
✅ Zero-Line as Reference:
• Positive ROC (> 0): Indicates upward momentum (bullish).
• Negative ROC (< 0): Indicates downward momentum (bearish).
✅ Volatility Sensitivity: More volatile in shorter timeframes.
✅ Divergence Can Indicate Reversals: If ROC is declining while price rises, momentum is weakening.
✅ Best Used With Other Indicators: Combine with moving averages, RSI, or MACD for confirmation.

ROC Indicator Quick Comparison
Indicator ROC RSI MACD Stochastic Oscillator
Measures
Price speed &
direction
Overbought/Oversold
Trend strength &
crossovers
Price relative to
range
Formula
Percentage change
in price over time
Relative strength of
gains/losses
Difference between
two EMAs
% of price within
recent high-low
range
Best for
Confirming trends &
breakouts
Mean reversion &
trend strength
Identifying trend
shifts
Overbought/Oversold
signals
Zero Line? Yes (0) No Yes (0) No
Overbought/Oversold? No clear level
RSI > 70 (overbought),
< 30 (oversold)
No
Above 80
(overbought), Below
20 (oversold)

How to Interpret ROC Signals
ROC Movement Interpretation
ROC > 0 & Rising Strong bullish momentum (price increasing quickly)
ROC < 0 & Falling Strong bearish momentum (price decreasing quickly)
ROC Peaks & Falls While Price Rises Bearish divergence, potential reversal
ROC Bottoms & Rises While Price Falls Bullish divergence, potential reversal
ROC Around Zero Weak momentum, sideways market
Pros Cons
Simple and easy to calculate No overbought/oversold levels
Identifies trend strength and direction Can be volatile in short-term periods
Helps confirm breakouts & trends Prone to false signals in sideways markets
Useful for divergence analysis Needs confirmation from other indicators
Pros & Cons of Using ROC

Pro Tips for Using ROC Effectively
✅ Use with Trend Indicators → Combine with Moving Averages, MACD, or RSI
for confirmation.
✅ Avoid Short Timeframes → Longer periods (e.g., ROC(14) or ROC(25))
reduce noise.
✅ Look for Divergence → If price and ROC are moving in opposite directions,
expect a reversal.
✅ Volume Matters → Strong ROC moves with high volume = stronger signal.
✅ Zero Line Crossovers Are Key → A move above/below zero signals
momentum shift.

Moving Average Convergence Divergence (MACD)
Presented By :

1. Key Facts About MACD
✅ MACD = (12-period EMA - 26-period EMA) → Measures trend momentum.
✅ Signal Line = 9-period EMA of MACD → Helps confirm buy/sell signals.
✅ Zero Line as Reference:
• MACD > 0: Bullish momentum.
• MACD < 0: Bearish momentum.
✅ Divergence is Important → When price moves in the opposite direction of
MACD, a reversal may occur.
✅ Histogram Represents Strength → Distance between MACD & Signal Line.

MACD Indicator Breakdown
Component Formula/Definition Interpretation
MACD Line (12-EMA - 26-EMA) Positive MACD → Bullish, Negative MACD → Bearish
Signal Line 9-EMA of MACD Crossing MACD gives buy/sell signals
Histogram MACD Line - Signal Line Expanding histogram = Strong trend, Contracting = Weak trend
Zero Line Baseline at 0 Above = Bullish, Below = Bearish
MACD Indicator Breakdown
MACD Signal Interpretation
MACD > 0 & Rising Strong bullish trend
MACD < 0 & Falling Strong bearish trend
MACD Crossover Above Signal Buy signal (bullish)
MACD Crossover Below Signal Sell signal (bearish)
Histogram Expanding Strengthening trend
Histogram Contracting Weakening trend
Divergence Between Price & MACD Possible trend reversal

Pros & Cons of MACD
Pro Tips for Using MACD Effectively
✅ Use with RSI or Stochastic → MACD confirms trend, RSI/Stochastic confirms overbought/oversold.
✅ Look for Strong Histogram Expansions → Bigger histogram = stronger momentum.
✅ Avoid Using MACD Alone → Combine with moving averages for trend confirmation.
✅ Adjust Timeframes → Shorter EMAs (e.g., 5 & 20) for day trading, standard (12 & 26) for swing trading.
✅ Check Volume Alongside MACD → High volume with MACD crossover = stronger confirmation.
Pros Cons
Works in trending markets Can give false signals in sideways markets
Useful for trend confirmation Lags behind price action
Easy to understand crossovers Doesn't provide overbought/oversold signals
Effective in combination with other indicators Needs additional confirmation tools

Presented By :

1. Key Facts About RSI
✅ RSI Formula:
RSI=100−(1+RS100)
Where RS (Relative Strength) = Average Gain / Average Loss over a given period
(default = 14).
✅ Range: RSI fluctuates between 0 and 100.
✅ Key Levels:
• Above 70 → Overbought (potential reversal downward).
• Below 30 → Oversold (potential reversal upward).

✅ 50 Level as Trend Indicator:
• RSI > 50 → Bullish trend.
• RSI < 50 → Bearish trend.
✅ Divergence Matters:
• Bullish Divergence: Price makes a lower low, but RSI makes a higher low
→ Potential upward reversal.
• Bearish Divergence: Price makes a higher high, but RSI makes a lower
high → Potential downward reversal.

RSI Interpretation & Trading Signals
RSI Signal Interpretation
RSI > 70 Overbought (possible reversal or pullback)
RSI < 30 Oversold (possible reversal or bounce)
RSI Crosses Above 50 Bullish confirmation
RSI Crosses Below 50 Bearish confirmation
Bullish Divergence (RSI Rising, Price
Falling)
Possible uptrend reversal
Bearish Divergence (RSI Falling, Price
Rising)
Possible downtrend reversal

Pros & Cons of RSI
Pros Cons
Identifies overbought & oversold conditions Can give false signals in strong trends
Works in multiple timeframes RSI alone is not enough—needs confirmation
Helps spot trend reversals with divergence Can stay overbought/oversold for extended periods
Simple to use & widely available Less useful in highly volatile or erratic markets
Pro Tips for Using RSI Effectively
✅ Combine RSI with MACD or Moving Averages → RSI shows momentum, MACD confirms trends.
✅ Use Divergence as a Strong Signal → Combine it with volume analysis.
✅ Adjust Timeframes for Better Accuracy →
 RSI(14) = Standard setting (default).
 RSI(7) = More sensitive for short-term traders.
 RSI(21) = Smoother for long-term analysis.
✅ Avoid Trading Based Solely on 70/30 Levels → Look for confirmation from price action and other indicators.
✅ Check RSI Behavior in Different Market Conditions → Works best in ranging markets, needs filters in strong
trends.

Presented By :

The Stochastic Oscillator is a momentum indicator that compares a security's closing price to its
price range over a specific period. It helps traders identify overbought and oversold conditions
and potential reversals.
Range: 0 to 100
✅ Key Levels:
• Above 80 → Overbought (potential downward reversal).
• Below 20 → Oversold (potential upward reversal).
✅ Two Main Components:
• %K Line → Fast-moving main line.
• %D Line → Slower signal line (3-period moving average of %K).

✅ Crossover Signals:
• %K crossing above %D → Bullish signal.
• %K crossing below %D → Bearish signal.
✅ Divergence Can Indicate Reversals:
• Bullish Divergence: Price makes a lower low, Stochastic makes a higher low →
Possible uptrend.
• Bearish Divergence: Price makes a higher high, Stochastic makes a lower high
→ Possible downtrend.

✅ Stochastic Oscillator Formula:

Stochastic Interpretation & Trading Signals
Stochastic Signal Interpretation
%K > 80 Overbought (potential reversal down)
%K < 20 Oversold (potential reversal up)
%K Crosses Above %D Bullish signal (buy)
%K Crosses Below %D Bearish signal (sell)
Bullish Divergence (Price Falling, Stochastic Rising) Possible upward reversal
Bearish Divergence (Price Rising, Stochastic
Falling)
Possible downward reversal

Pros & Cons of Stochastic Oscillator
Pros Cons
Excellent for detecting
overbought/oversold levels
Gives false signals in strong trends
Works well in ranging markets
Can stay overbought/oversold for a long time in
trending markets
Useful for divergence detection Needs confirmation from other indicators
Provides early signals Less reliable in highly volatile markets

Pros & Cons of Stochastic Oscillator
Pros Cons
Excellent for detecting
overbought/oversold levels
Gives false signals in strong trends
Works well in ranging markets
Can stay overbought/oversold for a long
time in trending markets
Useful for divergence detection Needs confirmation from other indicators
Provides early signals Less reliable in highly volatile markets

Pro Tips for Using Stochastic Effectively
✅ Use with RSI or MACD → Stochastic signals overbought/oversold, RSI confirms strength, MACD
confirms trend.
✅ Adjust Timeframes for Different Trading Styles:
• Stochastic(14,3,3) = Standard setting.
• Stochastic(5,3,3) = Faster signals (for short-term traders).
• Stochastic(21,5,5) = Smoother signals (for long-term traders).
✅ Avoid Trading Against Strong Trends → In trending markets, overbought/oversold signals alone are
not enough.
✅ Look for Crossovers Near 20 or 80 Levels → Stronger signals occur when crossovers happen in
extreme zones.
✅ Use Divergence with Volume Analysis → If divergence is supported by increasing volume, the reversal
is more likely.

Coppock Curve
Presented By :

Coppock Curve
Where:
• ROC (Rate of Change) measures the
percentage change in price over 14 & 11
months.
• WMA (Weighted Moving Average)
smooths out fluctuations over 10 months.
The Coppock Indicator (Coppock Curve) is a long-term momentum indicator
used to identify major market bottoms and buying opportunities in stock indices. It
was developed by Edwin Coppock in 1962 and is mainly used for investing rather
than trading, as it focuses on long-term trends.

Coppock Curve

Coppock Curve
✅ Purpose: Detects long-term buy signals after market downturns.
✅ Interpretation:
• Above zero & rising → Bullish trend (Good time to buy).
• Below zero & falling → Bearish trend (Wait for confirmation).
✅ No Sell Signals: The indicator was designed only for identifying buying
opportunities, not for timing exits.

Coppock Curve
2. Coppock Indicator Interpretation & Trading Signals
💡 Key Insight:
• A turn upward from below zero is the most reliable long-term buy signal.
• A turn downward from above zero suggests slowing momentum, but does not signal a sell.
Coppock Signal Interpretation
Curve below zero & turning upward Strong buy signal (bullish reversal)
Curve above zero & rising Market in strong uptrend
Curve above zero & flattening Momentum slowing (watch for weakness)
Curve below zero & falling Market still bearish (wait for a turn)

Coppock Curve
3. Coppock vs. Other Momentum Indicators
Indicator Coppock Curve MACD RSI Stochastic
Type
Long-term
momentum
Trend & momentum Overbought/Oversold Overbought/Oversold
Best For
Identifying major
market bottoms
Trend confirmation &
reversals
Short-term
overbought/oversold
Short-term reversals
Timeframe Monthly (Long-term) Daily/Weekly Daily/Hourly Daily/Hourly
Buy Signals?
Yes (curve turns
upward)
Yes (MACD
crossover)
Yes (RSI < 30) Yes (Stochastic < 20)
Sell Signals? No
Yes (MACD
crossover)
Yes (RSI > 70) Yes (Stochastic > 80)
Best For
Investing in stock
indices
Trading & trend
detection
Swing trading Short-term trading

Coppock Curve
4. Pros & Cons of the Coppock Curve
Pros Cons
Excellent for identifying long-term
market bottoms
No sell signals (not useful for shorting)
Eliminates short-term noise & false
signals
Best suited for stock indices, not
individual stocks
Simple to interpret Not useful for short-term trading
Works best for long-term investors
Requires patience—signals take
months to form

Coppock Curve
5. Pro Tips for Using the Coppock Curve Effectively
✅ Best Used for Index Investing → Works well for major indices like S&P 500, Dow Jones, Nasdaq.
✅ Combine with Trend Filters → Use moving averages (e.g., 200-day MA) to confirm long-term trends.
✅ Avoid Using for Short-Term Trading → Coppock is designed for months to years, not for daily trades.
✅ Pair with Other Indicators for Sell Signals → Use MACD crossovers or RSI overbought levels to time exits.
✅ Don’t Buy on Every Dip → Wait for the curve to turn up from below zero before entering a position.
Final Thoughts
The Coppock Curve is a powerful tool for long-term investors looking to buy at major market bottoms. While it
doesn’t provide sell signals, it works well when combined with trend-following indicators like moving averages
or MACD.

Volume Indicators
Presented By :

Volume Indicators
1. Key Facts About Volume Indicators
Volume Indicators
Volume Indicators measure the number of shares or contracts traded in a given
period, providing insight into market strength, trends, and potential reversals. High
volume confirms trends, while low volume signals weakness.
✅ Basic Interpretation:
• Increasing Volume + Rising Price → Strong bullish trend (Buy confirmation).
• Increasing Volume + Falling Price → Strong bearish trend (Sell confirmation).
• Decreasing Volume + Rising Price → Weak uptrend (Possible reversal down).
• Decreasing Volume + Falling Price → Weak downtrend (Possible reversal up).

Volume Indicators
✅ Common Volume Indicators:
• On-Balance Volume (OBV) – Measures buying vs. selling pressure.
• Volume Weighted Average Price (VWAP) – Tracks the average price based on volume.
• Accumulation/Distribution (A/D) Line – Identifies buying or selling strength.
• Chaikin Money Flow (CMF) – Measures buying and selling pressure over time.
• Money Flow Index (MFI) – RSI-like indicator that includes volume.
• Ease of Movement (EMV) – Measures price movement relative to volume.

Volume Indicators
Indicator Type Best For Key Interpretation Best Timeframe
On-Balance Volume
(OBV)
Cumulative Volume
Identifying
Buying/Selling
Pressure
Rising OBV = Buying Pressure,
Falling OBV = Selling Pressure
Daily, Weekly
VWAP (Volume
Weighted Average Price)
Volume-Based
Average
Institutional Trading,
Day Trading
Price above VWAP = Bullish,
Price below VWAP = Bearish
Intraday
Accumulation/
Distribution (A/D) Line
Trend Confirmation
Measuring Strength of
Trends
Upward A/D = Accumulation,
Downward A/D = Distribution
Daily, Weekly
Chaikin Money Flow
(CMF)
Momentum
Identifying
Bullish/Bearish
Momentum
Positive CMF = Bullish, Negative
CMF = Bearish
Daily
Money Flow Index (MFI) Volume-Based RSI
Overbought/Oversold
Conditions
MFI > 80 = Overbought, MFI <
20 = Oversold
Daily, Weekly
Ease of Movement
(EMV)
Price-Volume
Relationship
Measuring Trend
Strength
High EMV = Easy price
movement, Low EMV = Struggle
to move
Daily

Volume Indicators
✅ Volume Indicator Interpretations & Trading Signals
Volume Condition Interpretation
High Volume + Uptrend Strong bullish confirmation
High Volume + Downtrend Strong bearish confirmation
Low Volume + Uptrend Weak uptrend (watch for reversal)
Low Volume + Downtrend Weak downtrend (possible reversal)
Volume Spike + Price Breakout Strong trend continuation
Divergence (Price Up, Volume Down) Weak trend (possible reversal)

Volume Indicators
5. Pros & Cons of Volume Indicators
Pros Cons
Confirms price trends Needs context (price action, trend strength)
Helps detect strong breakouts & reversals Can be misleading in low-liquidity markets
Works well with technical indicators like
MACD, RSI
Volume spikes can be due to news, not trend
confirmation
Useful in all timeframes Requires experience to interpret properly

Volume Indicators
6. Pro Tips for Using Volume Indicators Effectively
✅ Use volume in combination with trend indicators → Confirm price trends with MACD, RSI, or Moving
Averages.
✅ Look for volume spikes at key levels → Support, resistance, and breakouts should be backed by high
volume.
✅ Avoid trading low-volume breakouts → False breakouts often happen on weak volume.
✅ Check volume divergence for early trend reversals → If volume weakens while price moves in a trend, a
reversal might be near.
✅ VWAP is powerful for intraday trading → Helps day traders determine if the market is bullish or bearish.
Final Thoughts
Volume indicators are essential tools for confirming trends, detecting reversals, and filtering out false
signals. They work best when combined with price action and other technical indicators.

On-Balance Volume (OBV)
Presented By :

✅ Concept:
 Rising OBV → Buying pressure (bullish signal)
 Falling OBV → Selling pressure (bearish signal)
 OBV diverging from price → Potential trend reversal
✅ Key Characteristics:
 Leading Indicator → OBV often moves before price
changes.
 Trend Confirmation → Rising OBV confirms uptrends;
falling OBV confirms downtrends.
 Divergence Detection → If price moves one way but
OBV moves the other, a reversal may be coming.

OBV Interpretation & Trading Signals
💡 Key Insight:
• A rising OBV suggests smart money accumulation.
• A falling OBV suggests distribution (selling pressure).
• If OBV leads price, a breakout or breakdown is likely coming.
OBV Condition Interpretation
Rising OBV + Rising Price Strong bullish trend (buy confirmation)
Falling OBV + Falling Price Strong bearish trend (sell confirmation)
OBV Divergence (Price Up, OBV Down) Weak uptrend (possible reversal down)
OBV Divergence (Price Down, OBV Up) Weak downtrend (possible reversal up)
OBV Breakout Before Price Breakout Early signal of a big move

Pros & Cons of OBV
Pros Cons
Leading indicator for predicting
breakouts
Can give false signals if used alone
Helps confirm trends No fixed overbought/oversold levels
Works well in all timeframes Not as effective in low-volume stocks
Simple and easy to use
Best when combined with other
indicators

Pro Tips for Using OBV Effectively
✅ Combine OBV with trend indicators → Moving Averages, MACD, or RSI for stronger signals.
✅ Look for OBV leading price → If OBV moves before price, a trend change is likely coming.
✅ Avoid using OBV in isolation → Use it with support/resistance levels or other technical indicators.
✅ Divergence is powerful → If OBV diverges from price, be cautious of trend continuation.
✅ Check for OBV confirmation on breakouts → A breakout on low volume is more likely to fail.
Final Thoughts
On-Balance Volume (OBV) is a powerful tool for identifying accumulation and distribution, making it
useful for trend confirmation and early reversal detection. It works best when combined with other
technical indicators and price action analysis.

Price and Volume Indicators
Presented By :

Price and volume indicators
Price and volume indicators help traders confirm trends, detect reversals, and measure market strength.
Price indicators analyze price movements, while volume indicators assess buying and selling activity.
1. Key Facts About Price and Volume Indicators
Price Indicators:
✅ Analyze price trends, momentum, and overbought/oversold conditions.
✅ Key types:
• Trend Indicators (Moving Averages, Bollinger Bands)
• Momentum Indicators (RSI, MACD, Stochastic Oscillator)
• Volatility Indicators (ATR, Bollinger Bands)
✅ How to interpret price indicators?
• Identify trends (uptrend, downtrend, sideways).
• Measure momentum (is price movement strong or weak?).
• Detect potential reversals (overbought/oversold levels).

Volume Indicators:
✅ Measure buying and selling pressure based on trade volume.
✅ Key types:
• Cumulative Indicators (On-Balance Volume, Accumulation/Distribution Line)
• Momentum Volume Indicators (Chaikin Money Flow, Money Flow Index)
• Relative Volume Indicators (VWAP, Volume Oscillator)
✅ How to interpret volume indicators?
• Confirm trends: Rising volume supports price trends, falling volume weakens them.
• Spot reversals: Divergence between price and volume may signal a trend change.
• Identify breakouts: Strong volume on a breakout confirms its validity.

Interpretation & Trading Signals
Indicator Condition Interpretation
Price Indicators Price above Moving Average Bullish trend
Price below Moving Average Bearish trend
RSI > 70
Overbought (possible reversal
down)
RSI < 30 Oversold (possible reversal up)
MACD Crossover Buy/sell signal
Volume Indicators High Volume + Price Up Strong bullish trend
High Volume + Price Down Strong bearish trend
Low Volume + Price Up
Weak uptrend (possible
reversal)
OBV Divergence Trend may reverse soon

Comparison of Price and Volume Indicators
Category Indicator Type Example Indicators Purpose Best Use Case
Price Indicators Trend
Moving Averages,
Bollinger Bands
Identify trend direction
Confirm
uptrend/downtrend
Momentum RSI, MACD, Stochastic
Measure strength of
price movement
Identify
overbought/oversold
levels
Volatility ATR, Bollinger Bands Track price fluctuations
Detect potential
breakouts
Volume
Indicators
Cumulative
OBV,
Accumulation/Distributio
n
Track
accumulation/distributio
n
Confirm trends
Momentum-Based
Chaikin Money Flow,
Money Flow Index
Show buying/selling
pressure
Detect trend strength
Relative Volume VWAP, Volume Oscillator
Compare current
volume to past volume
Confirm intraday
trends

Pros & Cons of Price & Volume Indicators
Pros Cons
Helps confirm trends Can give false signals in choppy markets
Volume confirms price movements Some indicators lag behind price action
Works in all timeframes Needs combination with other indicators
Useful for spotting reversals Requires experience to interpret correctly

Pro Tips for Using Price & Volume Indicators Effectively
✅ Combine price and volume indicators for stronger confirmation.
✅ Check for divergence between price and volume to spot early reversals.
✅ Avoid trading on low-volume breakouts, as they are likely to fail.
✅ Use VWAP for intraday trading and trend confirmation.
✅ Monitor OBV and A/D Line for accumulation/distribution signals.
Final Thoughts
Using price and volume indicators together provides a complete market picture,
helping traders filter false signals, confirm trends, and detect early reversals. These
indicators work best when used together with support/resistance levels and
candlestick patterns.

Accumulation/Distribution (A/D) Line
Presented By :

Key Facts About the Accumulation/Distribution (A/D) Line
✅ Formula:
• A rising A/D Line → Accumulation (Buying pressure).
• A falling A/D Line → Distribution (Selling pressure).
• A/D divergence from price → Potential trend reversal.
• Tracks cumulative buying and selling pressure over time.
• Combines price and volume to gauge the strength of a trend.
• Helps confirm uptrends, downtrends, and potential reversals.

💡 Key Insight:
• A rising A/D Line suggests accumulation by smart money.
• A falling A/D Line suggests distribution and potential downtrend.
• Divergence between price and A/D can indicate an upcoming reversal.
A/D Line Condition Interpretation
Rising A/D + Rising Price Strong bullish trend (buy confirmation)
Falling A/D + Falling Price Strong bearish trend (sell confirmation)
A/D Divergence (Price Up, A/D Down) Weak uptrend (possible reversal down)
A/D Divergence (Price Down, A/D Up) Weak downtrend (possible reversal up)
A/D Flat While Price Trends Trend may lack conviction, watch for reversal

Pro Tips for Using the A/D Line Effectively
✅ Combine A/D Line with trend indicators → Moving Averages, MACD, or RSI for stronger
signals.
✅ Look for A/D leading price → If A/D moves before price, a trend change is likely coming.
✅ Avoid using A/D in isolation → Use it with support/resistance levels or other technical
indicators.
✅ Divergence is powerful → If A/D diverges from price, be cautious of trend continuation.
✅ Check for A/D confirmation on breakouts → A breakout on low volume is more likely to fail.
Final Thoughts
The Accumulation/Distribution (A/D) Line is a powerful tool for identifying buying and selling
pressure, making it useful for trend confirmation and early reversal detection. It works best
when combined with other technical indicators and price action analysis.

Money Flow Index (MFI)
Presented By :

The Money Flow Index (MFI) is a volume-weighted momentum indicator that measures buying and
selling pressure by combining price and volume. It is similar to the Relative Strength Index (RSI) but
incorporates volume data, making it a stronger confirmation tool for overbought and oversold
conditions.
✅ Interpretation:
• MFI above 80 → Overbought (possible reversal down).
• MFI below 20 → Oversold (possible reversal up).
• MFI Divergence with Price → Trend may be weakening.
• MFI above 50 → Buying pressure is stronger.
• MFI below 50 → Selling pressure is stronger.

✅ Formula:
• Combines price and volume to assess buying/selling strength.
• Helps detect trend reversals earlier than RSI.
• Used in stock, forex, and crypto markets.

💡 Key Insight:
• MFI reacts faster than RSI due to volume integration.
• Divergences are powerful signals for potential trend reversals.
• A break of 50 level can confirm the trend direction.
MFI Condition Interpretation
MFI > 80 Overbought, possible reversal down
MFI < 20 Oversold, possible reversal up
MFI > 50 Buying pressure dominant
MFI < 50 Selling pressure dominant
Bullish Divergence (MFI Up, Price Down) Potential price reversal upward
Bearish Divergence (MFI Down, Price Up) Potential price reversal downward

Pro Tips for Using the MFI Effectively
✅ Combine MFI with RSI for stronger confirmation of overbought/oversold conditions.
✅ Check for divergence between MFI and price → This often signals upcoming reversals.
✅ Use MFI with trend indicators (e.g., Moving Averages, MACD) for better trade execution.
✅ Avoid trading on MFI alone → Look at overall market conditions before making decisions.
✅ Watch for MFI crossovers at key levels (20 and 80) → These are high-probability reversal points.
Final Thoughts
The Money Flow Index (MFI) is a powerful volume-based momentum indicator that helps traders
confirm trends, identify overbought/oversold conditions, and detect reversals through divergence. It is
particularly useful when combined with other technical indicators for more accurate trade signals.

Normalized Indicator Construction
Presented By :

Normalization in Technical Indicators
What is Normalization in Technical Indicators?
Normalization in technical analysis ensures that indicators scale values within a fixed range
(e.g., 0-100) to make comparisons across different assets and timeframes easier. It is
commonly used in momentum and oscillating indicators to highlight overbought and oversold
conditions.
Key Facts About Normalized Indicators
✅ Purpose:
• Standardizes indicator values within a predefined range (e.g., 0 to 100, -1 to +1).
• Helps compare stocks, forex, and cryptocurrencies on the same scale.
• Identifies extremes in market conditions, such as overbought and oversold levels.

Key Facts About Normalized Indicators
✅ Common Normalized Indicators:
• Relative Strength Index (RSI) – Measures momentum between 0-100.
• Stochastic Oscillator – Compares closing price to price range over a period.
• Money Flow Index (MFI) – Volume-weighted RSI.
• Williams %R – Identifies overbought and oversold levels on a -100 to 0 scale.
• CCI (Commodity Channel Index) – Measures deviation from the mean but is not bounded.
Normalized vs. Non-Normalized Indicators
Feature Normalized Indicators Non-Normalized Indicators
Scaling Range Fixed (e.g., 0-100, -1 to +1) No fixed range
Comparison Across Assets Easy to compare More difficult to compare
Best for
Identifying extremes
(overbought/oversold)
Trend confirmation
Examples RSI, Stochastics, Williams %R, MFI
Moving Averages, MACD, Bollinger
Bands, A/D Line

💡 Key Insight:
• Normalization allows traders to use a universal approach to different markets.
• Breakouts confirmed by normalized indicators are stronger signals.
• Using multiple normalized indicators together improves accuracy.
Normalized Indicator Condition Interpretation
Value Near 100 (or -0.5 to +1 in some cases) Overbought → Possible Reversal Down
Value Near 0 (or -1 to -0.5 in some cases) Oversold → Possible Reversal Up
Crossing Above 50 Bullish Momentum Increasing
Crossing Below 50 Bearish Momentum Increasing
Divergence Between Price & Indicator Possible Trend Reversal

Pro Tips for Using Normalized Indicators Effectively
✅ Combine normalized indicators with trend indicators (e.g., Moving Averages, MACD) for stronger
confirmations.
✅ Use divergence between price and indicator as a leading signal for reversals.
✅ Check different timeframes to confirm signals → Use higher timeframes for trend, lower timeframes for entry
points.
✅ Avoid trading solely based on overbought/oversold conditions → Use additional confirmations.
✅ Use 50-level crossovers in momentum trading strategies.
Final Thoughts
Normalized indicators provide traders with a standardized approach to analyzing different markets. They are
highly effective for momentum trading, overbought/oversold detection, and spotting divergences. However,
they work best when combined with non-normalized indicators for trend confirmation.

Percentage Price Oscillator (PPO)
Presented By :

The Percentage Price Oscillator (PPO) is a normalized version of the Moving Average Convergence Divergence
(MACD), measuring the percentage difference between two Exponential Moving Averages (EMAs). It helps
traders compare momentum across different assets, making it more useful than MACD when comparing
securities with varying price levels.
✅ Interpretation:
• PPO > 0 → Short-term momentum is stronger than long-term momentum (bullish).
• PPO < 0 → Short-term momentum is weaker than long-term momentum (bearish).
• PPO crossing above Signal Line → Buy signal (bullish momentum increasing).
• PPO crossing below Signal Line → Sell signal (bearish momentum increasing).
• Divergence between PPO and price → Possible trend reversal.
✅ Why Use PPO Instead of MACD?
• MACD values are absolute → Harder to compare across different price levels.
• PPO values are percentages → Standardized across assets, making comparisons easier.
• Ideal for comparing stocks with different prices and volatility.

💡 Key Insight:
• PPO is more useful for comparing stocks than MACD because it normalizes values.
• A rising histogram confirms a trend, while a falling histogram signals weakening momentum.
PPO Condition Interpretation
PPO > 0 and rising Strong bullish momentum
PPO < 0 and falling Strong bearish momentum
PPO crosses above Signal Line Bullish signal (buy)
PPO crosses below Signal Line Bearish signal (sell)
PPO Histogram rising Bullish confirmation
PPO Histogram falling Bearish confirmation
Bullish Divergence (PPO Up, Price Down) Possible price reversal upward
Bearish Divergence (PPO Down, Price Up) Possible price reversal downward

Pro Tips for Using PPO Effectively
✅ Use PPO with trend indicators (e.g., Moving Averages, Bollinger Bands) for stronger confirmations.
✅ Check PPO divergence for early reversal signals.
✅ Use PPO Histogram changes to confirm momentum shifts.
✅ Combine PPO with RSI for better overbought/oversold identification.
✅ Avoid trading PPO signals alone → Use other indicators for confirmation.
Final Thoughts
The Percentage Price Oscillator (PPO) is a powerful momentum indicator that improves upon MACD
by expressing momentum in percentage terms, making it easier to compare different stocks and
assets. It is particularly useful in identifying trend strength, momentum shifts, and divergences

Normalized Volume
Presented By :

Normalized Volume
Normalized Volume is a technique used in technical analysis to adjust volume data,
making it easier to compare across different stocks, timeframes, and market
conditions. By standardizing volume, traders can identify unusual activity more
effectively.
✅ Key Uses in Trading:
• Detects accumulation & distribution (smart money activity).
• Confirms trend strength → High volume confirms price direction.
• Identifies breakout potential → High volume often precedes price movement.
• Filters false breakouts → If volume is low, price moves might be weak.

Normalized Volume
Normalized Volume vs. Raw Volume.
Feature Normalized Volume Raw Volume
Comparability
Easier to compare across stocks &
timeframes
Harder to compare directly
Detecting Unusual Activity Highlights volume spikes Needs manual comparison
Filters Noise
Removes effects of market-wide
changes
Can be misleading in changing
market conditions
Best For
Identifying strong trends &
breakouts
Basic volume analysis
Examples
Volume Ratio, Z-Score,
Percentage Change
Daily volume, tick volume

Normalized Volume
💡 Key Insight:
• Volume should confirm price moves → If price rises on high normalized volume, it’s a stronger bullish sign.
• Volume spikes without price change → Watch for potential breakouts or fake moves.
Normalized Volume Condition Interpretation
Normalized Volume > 1.5 (or Z-score > 2) Unusual volume surge → Possible breakout
Normalized Volume < 0.8 Weak market interest → Low conviction
High volume with price increase Bullish confirmation
High volume with price decrease Bearish confirmation
Low volume during price uptrend Weak trend → Possible reversal
High volume at key support/resistance Strong breakout/reversal signal

Normalized Volume
Pro Tips for Using Normalized Volume Effectively
✅ Combine normalized volume with trend indicators (e.g., Moving Averages, MACD) to confirm signals.
✅ Look for spikes in normalized volume to detect breakouts and institutional activity.
✅ Use normalized volume with RSI or Stochastics to confirm overbought/oversold levels.
✅ Monitor divergence between price and volume for early trend reversal signals.
✅ Be cautious of news-related volume spikes that may cause short-lived moves.
Final Thoughts
Normalized Volume provides a clearer picture of market participation by adjusting for scale differences
between assets and timeframes. It is highly effective in detecting breakouts, accumulation/distribution
patterns, and trend confirmations. However, it should always be used alongside price action and other
indicators to avoid false signals.

Trend Strength Indicator Construction
Presented By :

Trend Strength Indicators
Trend strength indicators help traders determine how strong and sustainable a trend is, whether it is
gaining or losing momentum, and when a potential reversal might occur. These indicators measure
price movement consistency and volatility to assess trend strength.
Key Facts About Trend Strength Indicators
✅ Purpose:
• Identify the strength of a current trend (bullish/bearish).
• Filter out weak trends and avoid false breakouts.
• Confirm trend continuation or potential reversal.
• Confirms trend direction and strength before entering trades.
• Helps filter out sideways markets where trend-following strategies fail.
• Assists in determining stop-loss placement based on trend strength.

Trend Strength Indicators Comparison
Indicator Type Best For Key Interpretation
Trend Strength
Detection
ADX Trend Strength
Identifying strong
trends
ADX > 25 → Strong
trend
Yes
RSI (50-level method) Momentum
Confirming trend
direction
RSI > 50 → Uptrend Yes
Moving Averages
(Slope/Distance)
Trend Strength Measuring trend slope
Steep slope → Strong
trend
Yes
Rate of Change (ROC) Momentum
Measuring trend
acceleration
High ROC → Strong
trend
Yes
Bollinger Band Width
(BBW)
Volatility
Confirming trend
breakout
Expanding bands →
Strong trend
Yes

💡 Key Insight:
Stronger trends = More reliable breakouts and price moves.
Weaker trends = Higher chance of choppy price action and false breakouts.
Trend Strength Condition Interpretation
ADX > 25 and rising Strong trend (bullish/bearish)
ADX < 20 Weak trend (range-bound market)
RSI > 50 and rising Bullish trend gaining strength
RSI < 50 and falling Bearish trend gaining strength
Moving Average slope increasing Trend gaining strength
Moving Average slope flattening Trend weakening
ROC high and rising Trend accelerating
Bollinger Bands expanding Trend strengthening

Pro Tips for Using Trend Strength Indicators Effectively
✅ Combine multiple trend strength indicators for better accuracy.
✅ Use trend strength indicators with price action (higher highs/lows confirm trends).
✅ Avoid trading weak trends (low ADX, flat moving averages).
✅ Watch for divergences (e.g., ADX falling while price is rising = weak momentum).
✅ Use Bollinger Band Width to confirm whether a breakout has strong backing.
Final Thoughts
Trend Strength Indicators help traders identify when a trend is strong enough to trade and when to
avoid weak trends. They are essential for trend-following strategies and help in setting realistic profit
targets and stop-loss levels.

Directional Movement Indicator (DMI)
Presented By :

The Directional Movement Indicator (DMI) is a trend strength and direction indicator developed by J.
Welles Wilder. It consists of three components: +DI (Positive Directional Indicator), -DI (Negative
Directional Indicator), and ADX (Average Directional Index).
1. Key Facts About DMI
✅ Purpose:
• Identifies trend direction and trend strength.
• Helps determine whether bulls or bears are in control.
• Works well in trending markets (less effective in sideways markets).
✅ Components of DMI:
1. +DI (Positive Directional Indicator): Measures bullish strength.
2. -DI (Negative Directional Indicator): Measures bearish strength.
3. ADX (Average Directional Index): Measures the trend strength (not direction).

Formula
The Directional Movement Indicator (DMI) is a trend strength indicator developed by J. Welles Wilder.
It consists of three components:
+DI (Positive Directional Indicator) – Measures upward strength.
-DI (Negative Directional Indicator) – Measures downward strength.
ADX (Average Directional Index) – Measures overall trend strength.

DMI vs. Other Trend Indicators
Feature DMI (+DI, -DI, ADX) ADX Alone Moving Averages MACD
Measures Trend
Strength?
Yes (ADX) Yes Indirectly Indirectly
Measures Trend
Direction?
Yes (+DI, -DI) No Yes Yes
Identifies Trend
Reversals?
Yes (+DI/-DI
crossover)
No Yes (crossovers) Yes (crossovers)
Best Used For
Trend following &
breakout confirmation
Confirming strong
trends
Identifying trend
direction
Measuring
momentum &
reversals
Works Well in
Sideways Markets?
No No Sometimes Sometimes

💡 Key Insight:
• +DI > -DI + ADX rising → Strong uptrend.
• -DI > +DI + ADX rising → Strong downtrend.
• ADX below 20 → Weak trend (avoid trading trends).
DMI Condition Interpretation
+DI crosses above -DI Bullish signal (Buy)
-DI crosses above +DI Bearish signal (Sell)
ADX > 25 and rising Strong trend (bullish or bearish)
ADX < 20 Weak trend or ranging market (avoid trend trades)
ADX falling Trend losing strength (possible reversal or consolidation)

Pro Tips for Using DMI Effectively
✅ Use ADX to filter out weak trends before entering trades.
✅ Confirm DI crossovers with ADX to avoid false signals.
✅ Combine with other indicators like RSI or MACD for extra confirmation.
✅ Avoid using DMI in low ADX environments (range-bound markets).
✅ Watch for ADX divergence to detect trend weakening early.
Final Thoughts
The Directional Movement Indicator (DMI) is a powerful tool for identifying strong trends and filtering
out weak market conditions. It works best when +DI/-DI crossovers are confirmed by a rising ADX.
However, it should be combined with other indicators like Moving Averages, RSI, or MACD for higher
accuracy.

Average Directional Index (ADX)
Presented By :

The Average Directional Index (ADX) is a trend strength indicator developed by J. Welles Wilder.
It helps traders determine whether a trend is strong or weak but does not indicate trend direction.
ADX is often used alongside Directional Movement Indicators (+DI and -DI).
✅ Purpose:
• Measures trend strength (not direction).
• Helps traders filter out weak trends and avoid sideways markets.
• Used to confirm trend-following signals.
✅ ADX Components:
1. ADX Line → Measures trend strength on a scale of 0 to 100.
2. +DI (Positive Directional Indicator) → Measures bullish strength.
3. -DI (Negative Directional Indicator) → Measures bearish strength.

• DX (Directional Index) measures the difference between +DI and -DI.
• Smoothed over a period (usually 14 days) to get the ADX value.
• Identifies strong vs. weak trends.
• Confirms trend continuation or weakening.
• Works best with other indicators (RSI, Moving Averages, MACD, etc.).
ADX Formula:

💡 Key Insight:
• ADX > 25 → Indicates a strong trend (bullish or bearish).
• ADX < 20 → Weak trend (choppy price action).
• ADX rising → Trend gaining strength.
• ADX falling → Trend losing strength (potential reversal).
ADX Value Trend Strength Trading Interpretation
0 – 20 Weak / No trend Range-bound market, avoid trend strategies
20 – 25 Weak trend Caution, trend may be forming
25 – 50 Strong trend Good for trend-following strategies
50 – 75 Very strong trend Strong price movement, trend trades preferred
75 – 100 Extremely strong trend Rare, but signals extended trends

Pro Tips for Using ADX Effectively
✅ Use ADX to confirm trend strength before entering trades.
✅ Combine with +DI/-DI crossovers for better accuracy.
✅ Avoid using ADX alone – pair it with RSI, MACD, or Moving Averages.
✅ Watch for ADX falling while price rises – signals weakening trend.
✅ Use ADX in conjunction with Bollinger Bands to confirm breakout strength.
Final Thoughts
The ADX indicator is a powerful tool for measuring trend strength. While it does not indicate trend
direction, it helps traders confirm whether a trend is worth following. It works best when combined
with other indicators like RSI, Moving Averages, or MACD.

Next Chapter 3 - Introduction to Bollinger Bands
Section 5 – Technical Indicators
Presented By :

Section 5 - Chapter 2 - Technical Indicator Construction

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