Force Index
December 28, 2008
Definition:
The ForceIndex indicator relates price to volume by multiplying net change and volume.
Formula:
ForceIndex = Volume(today) * (Close(this period) - Close(last period))
ForceIndex is typically presented as two smoothed averages (slow and fast) to reduce the likelihood of false signals.
Interpretation:
ForceIndex is used by some investors as a running total of where money is flowing. Because this indicator multiplies price movement in a period by the volume of that period, the value of ForceIndex will change the most when net change is accompanied by higher relative volume. Investor can use this index to both (a) compare current price movements to past ones and (b) evaluate the current trend.
The periods used are a moving average of the ForceIndex values, which reduces choppiness. Generally, investors use periods which match the length of the trends in which they are studying. The longer-average will be the intermediate or longer-term trend and the shorter-average will be a shorter-term trend. Some conventional interpretations follow:
One interpretation is to look for a confirmation or divergence between ForceIndex and the price. When ForceIndex moves up with price increases or down with price decreases, it can indicate that the current trend is has momentum. When ForceIndex diverges from price, it can indicate that the trend may change.
Another interpretation is to receive signals based on a crossover of the two lines. When the slow line crosses above the slow line and they are both increasing, it can be considered a confirmation of an uptrend. Conversely, when the fast line crosses below the slow line and they are both decreasing, it can be seen as confirmation of a downtrend. When a crossover occurs when the lines are going in opposite directions, it can indicate a trend reversal.
Some traders seek to eliminate some false signals by using only the signals which correspond to the direction of the intermediate to long term trends.
Fisher Transform (FISH)
December 28, 2008
Definition:
Fisher Transform (FISH) is based on the article “Using The Fisher Transform” by John Ehlers that will be available in the November 2002 issue of Stocks and Commodities Magazine. FISH has sharp and distinct turning points that occur in a timely fashion.
Interpretation:
It is based on the assumption that prices do not have a Gaussian probability density function (PDF), but you can create a nearly Gaussian PDF for prices by normalizing price, or an indicator such as RSI, and applying the Fisher Transform. The resulting peak swings clearly identify price reversals.
Filtered Wave
December 28, 2008
Definition:
Filtered Wave automatically draws lines between the top and bottom of a price movement that is at least 10%. This percentage can be changed in SwingTracker by clicking “Utilities” >> “Parameters” and selecting “Filtered Wave” in the resulting pop-up window.
Interpretation:
The Filtered Wave does not have any predictive value in it of itself. However, it is useful in studying the degree of retracements during major price movements and can be used alongside other types of indicators (such as Elliot Wave analysis or Fibonacci Retracements).
Equivolume - Equi Volume
December 28, 2008
Definition:
On conventional stock charts, the horizontal axis is represented by time where each period measures the same amount of time. In equivolume, the horizontal axis is represented by volume. For each price period (depicted by a bar or candlestick), the width of the body represents volume and the height of the body represents price.
Equivolume charts were developed by Richard Arms.
Interpretation:
To some traders, Equivolume is a more complete picture of supply and demand for since it incorporates volume within the price chart.
Periods that are long and thin (where price moves more freely relative to volume) can indicate that the price is moving within the given trend or without much opposition in the marketplace.
Periods that are square or nearly square (where the height of the price is close to the width of the volume) can indicate periods of consolidation.
Periods that are short and thick can indicate either an oversupply or overdemand of stock, and may be the bottom or top of a price movement.
Another interpretation for Equivolume can be for confirmation of price breakouts. If the price penetrates support or resistance with high volume (wider bar or candlestick) it can be interpreted as confirmation. If penetration occurs with low volume, it could indicate that the price change does not fundamentally change the supply and demand equation that is currently defining the trend.
Envelope - Envelopes
December 28, 2008
Definition:
The envelope study is a derivation of the moving average study. The parameters used to compute the study are:
• The period, the number of bars used to calculate the moving average, basis the close
• Percent, a percentage deviation from the moving average
Formula:
Top Band = * ((100+P)/100)
Bottom Band = MA * ((100-P)/100)
MA = Moving Average basis the close
P = percentage offset
Interpretation:
This indicator needs to be tuned to each individual market, beginning with a Moving Average that needs to be applied to smooth the volatility of the market. The percentage offset then needs to be ascertained so that the bands envelope the previous or recent trading activity. Half the average daily range or a little above is a good starting point, using a daily bar chart.
The theory is that when the market is stretched to an extreme price, relative to recent activity, it’s either trending or about to change direction. In general, the market spends most of the time not trending. It varies from market to market, but as a rule of thumb (basis a half hour chart) markets trend for only about 20% of the time. The rest of the time, about 80% of the time, is spent oscillating within a trading range.
If the market is trending, then it should be obvious or we can use another trend type indicator, like the ADX, to determine this state. If it\’s not trending then we can assume that as price approaches the top band it will attract sellers and as it approaches the bottom band it will be advertising to buyers. In simple terms we can say that there is a buying opportunity at the lower band and a selling opportunity at the higher band.
On the other hand, if it is determined that the market is trending or in a position to start a new trend, then price moving outside the envelope is actually a signal to go with the market.
Elder Ray
December 28, 2008
Definition:
The Elder Ray Indicator is a measure of bullish and bearish “power” and is a rather simple calculation of comparing the daily high and low to an exponential moving average.
Formula:
Bull Power = Daily High - n-period EMA
Bear Power = Daily Low - n-period EMA
Interpretation:
There are many possible interpretations of the Elder Ray Indicator since it is a simple way of comparing daily range to a smoothed average.
One common interpretation is to view it as bullish when (a) bear power is below zero but rising and (b) the previous bull power peak is higher than the previous peak.
Conversely, it can be considered bearish when (a) bull power is above zero but falling and (b) the previous bear power trough is lower than the previous trough.
DMI - Directional Moving Index
December 28, 2008
Definition:
The Directional Movement Index (DMI) is a trend-following indicator developed by J. Welles Wilder, Jr., designed to determine whether a security is in a trending or non-trending market. Since the market is in a strong trend only about 30% of the time and in sideways about 70% of the time, this indicator is used to capture the period when the market shows significant trending or directional behavior.
The calculation of the DMI is fairly complex, and consists of three lines:
- +DI: current positive directional index, the range of highs divided by the price range over the last day and previous close, smoothed over a given number of periods.
- -DI: current negative directional index, the range of lows divided by the price range over the last day and previous close, smoothed over a given number of periods.
- ADX: modified moving average of the difference of +DI and -DI divided by the sum of +DI and -DI, multiplied by 100.
Interpretation:
When the +DI rises above the -DI, it can be considered a signal for an uptrend. When the +DI crosses below the -DI, it can be considered a signal for a downtrend.
According to conventional interpretation, three criteria should be met for a signal to be considered valid in most circumstances.
- ADX should be rising
- ADX should be above 50
- Confirmation from another indicator is encouraged pointing towards strong trending or volatility characteristics.
A more strict interpretation of the Directional Moving Index calls for a fourth criterion to be met. For an uptrend to be valid, the price of the security must rise above the high of the day that the +DI crossed above the -DI. For a downtrend to be valid, the price of the security must dip below the low of the day that the +DI crossed under the -DI.
Detrended Price Oscillator
December 25, 2008
Definition:
The Detrended Price Oscillator attempts to isolate short-term trends by “filtering out” longer-term trends. It does so by comparing the closing price to a prior moving average.
The purpose of the indicator is to look at overbought or oversold conditions within a longer trend.
Formula:
The formula for a Detrended Price Oscillator is as follows:
Detrended Price Oscillator = [Closing Price – (Moving Average of (N / 2 – 1) days ago]
Interpretation:
The Detrended Price Oscillator has several uses and interpretations, primarily designed to take advantage of overbought and oversold conditions within part of a large trend:
One interpretation is to identify past oversold and overbought conditions in the price chart, and use that as a baseline for what is considered overbought and oversold.
For example, let’s say overbought conditions are at +1.5 and oversold conditions are at -1.5. When the indicator goes above 1.5 and then dips back below, it could be considered overbought and trending downwards as an intermediate trend within an overall larger trend. Conversely, when the indicator goes below -1.5 and then spikes above, it could be considered oversold and trending upwards as an intermediate trend within an overall larger trend.
A second interpretation is to look for divergences in DTO vs. the main price chart or against a longer moving average. If peaks or valleys in the DTO are higher or lower then they are in the main price chart or longer moving average, it could indicate an intermediate trend change. A higher valley or trough could indicate a bullish trend while a lower peak could indicate a bearish trend.
Finally, some traders simply use a crossover of 0 as indication of a trend change.
Davids Double RSI
December 25, 2008
Definition:
Developed by Andrew Cardwell in the early 1990s, this indicator is a good identifier of short-term divergence in RSI and price, and when combined with bar reversals (on long trades, when high is greater than low, and on short trades when low is greater than high).
Interpretation:
David B use it to identify Fibonacci patterns that have hit and bounced off of a key level, and is ready to run in a given direction to a new price resistance or to a new Fibonacci target.
The indicator can also be used to identify key divergences in price in 21-period or fewer timeframes. Typically those divergences also end in Fibonacci pattern.
Darvas Box
December 25, 2008
Definition:
The Darvas Box is considered by some to be a trading system wrapped up into a single indicator. The indicator uses a series of “states” to determine the upper and lower lines of a box by finding highs and lows.
Formula:
The calculation of a Darvas box is complex and is based on a series of states, and a box is not formed until all states have been met.
Essentially, the Darvas Box requires the successful “finding” of a high and low over a set of three periods for each. Bar charts or candlestick charts are required because the high and low of a period is needed for the calculation.
State 1 can start with any bar, and establishes the high (or BoxTop, which is simply a horizontal line crossing the high).
A bar moves to State 2 when the period’s high is lower than the State 1 period, otherwise it remains in State 1 and forms a new BoxTop.
A bar moves to State 3 when the period’s high is lower than the State 2 period, otherwise it returns to State 1 and forms a new BoxTop. In State 3 a BoxBottom is formed, which is simply a horizontal line crossing the low.
A bar moves to State 4 when the period’s low is higher than the State 3 period, otherwise it remains in State 3 and forms a new BoxBottom. (If the period’s high is higher than the BoxTop, form a new BoxTop and return to State 1.)
A bar moves to State 5 when the period’s low is higher than the State 4 period, otherwise it returns to State 3 and forms a new BoxBottom. (If the period’s high is higher than the BoxTop, form a new BoxTop and return to State 1.)
Only after State 5 is reached is a box formed on the chart.
Interpretation:
The prevailing interpretation of a Darvas Box is to locate breakouts above established highst an lows. Some traders consider it bullish when the price breaks above a BoxTop and bearish when it breaks below a BoxBottom.
Some traders also use the Box as a stop-loss by setting it as the BoxBottom in a long position or the BoxTop in a short position (or a percentage above/below the BoxBottom/BoxTop).
