Chart Indicators
Contrary to the illusion that there are many indicators, most are simply variations based on the same data. Using too many similar
indicators adds little new information and may even reinforce the wrong message.
Moving Averages - filtering noise
Moving averages are one of the oldest and most useful of indicators since they remove irrelevant fluctuations and show the direction
and strength of a trend in any time frame by varying the period. An improvement in the usefullness of moving averages is the use of
the convergence or divergence of moving averages to measure the change in the acceleration of a trend like the familiar Moving
Average Convergence-Divergence or MACD. A further improvement over MACD is the Percent Price Oscillator or PPO which is similar to
MACD but expressed in percentages, which is the way traders actually think and is the most useful measure of potential profit and
loss on a chart. Extreme events like in 2000 affect the PPO less negatively than it does MACD and gives useful standard values that
can be compared with other extreme events with the same or other security. More about the PPO and its differences with MACD can be found
here
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Relative Strength Index - measuring trends
Another acceleration indicator is Wilder's RSI which measures the accelaration in price by dividing the average rally day by the average
down day expressed as a percentage of the price. Wilder's RSI is a moving average of the values and like the moving avergae based
PPO is slower to move. It also behaves a lot like the PPO as shown above but the PPO shows acceleration as potential profit or loss
in percentage and is more natural for risk/reward trading decisions. More on Wilder's RSI can be found
here
Stochastics - measuring optimism
Stochastics measure optimism by looking at how high the closing price is compared to recent highs and lows expressed as a percentage
of the range. The assumption is that a high closing price shows expectations of even higher prices very soon. Stochastics are available
in fast and slow versions which are smoothed by moving averages of the values. More on Stochastics can be found
here
Stochastics can also be calculated from an indicator instead of price like the StochRSI which measures the Stochastics of acceleration.
It can be seen from the overlaid Fast Stochastics and StochRSI below, that they act similarly, however the StochRSI can be faster to
react since it is based on the acceleration in price. More on StochRSI can be found
here
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com