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.
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.
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).
Bollinger Bands
December 24, 2008
Definition:
Investors use trading bands, lines drawn above and below the moving average, to isolate a range of prices for a given security, based on the concept that a stock generally trades within a predictable range on either side of the moving average. When a stock is near the upper or lower limits of the trading bands is when an investor should pay closest attention, according to conventional wisdom.
Bollinger Bands are considered some of the most useful bands in technical analysis, for they vary in distance from the moving average of a security\’s price based on the security\’s volatility. During periods of increased fluctuation, the bands widen to take this into account, and when the fluctuation decreases, the bands are tapered for a narrower focus to the price range. The upper band is the standard deviation multiplied by a given factor above the simple moving average, and the lower band is the standard deviation multiplied by the same given factor below the simple moving average.
Interpretation:
The standard interpretation is that Bollinger Bands do not give absolute buy and sell signals, but instead indicate whether the price is relatively high or low, allowing for more informed confirmation with other technical indicators.
Bollinger Bands are typically drawn two standard deviations from a twenty day simple moving average for intermediate-term analysis, ten day for short term with 1.5 standard deviations, and fifty for long-term studies with 2.5 standard deviations. According to John Bollinger, for the most accurate average “choose one that provides support to the correction of the first move up off a bottom. If the average is penetrated by the correction, then the average is too short. If, in turn, the correction falls short of the average, then the average is too long. An average that is correctly chosen will provide support far more often than it is broken.”
Mr. Bollinger also contends that:
- Sharp moves tend to occur after the bands tighten to the average, when a stock is less volatile. The greater the period of less volatility, the higher the propensity for a price breakout.
- When the price hits the upper or lower bands, it is suggested to confirm with other indicators whether that price movement shows strength or weakness, respectively, which could indicate a continuation. If indicators do not confirm this movement, it can suggest a reversal.
- Tops or bottoms made outside the bands, followed by the same inside the bands, indicate a trend reversal.
- A move originating at one band tends to go to the other band.
Average True Range
December 24, 2008
Definition:
Average True Range is a measure of volatility, and is measured by taking a moving average of the greatest value of the following:
- The distance between this period’s high & low,
- The distance from last period’s close to this period’s high or
- The distance from last period’s close to this period’s low
Interpretation:
Like other indicators that measure volatility, the conventional interpretation is for high periods or peaks in ATR to sometimes be considered clues that investors are having a bull vs. bear struggle, perhaps signalling that a top or bottom is approaching.
During low periods or valleys in ATR, some investors consider this a sign of consolidation or sideways periods.
For certain volatility studies (because the value of Average True Range is expressed as an average of the distance between two prices rather than a percentage), the value of the ATR should not only be considered relative to itself, but also relative to the price of the stock.
In other words, a change in ATR value from 2 to 3 for a $15 stock represents a move of Price/ATR from 13% to 20%. A change in ATR value from 2 to 3 on a $50 stock represents a move of Price/ATR from 4% to 6%.
The typical moving average used for Average True Range is 14, which matches the default value in IQ Chart. A higher moving average might be used for long-term study while a shorter moving average can be used for very short-term study.
Abel Average
December 24, 2008
Definition:
The Abel Average was developed by Paul Abel and is a form of an “adaptive moving average” and is intended to provide buy and sell signals when prices break out of a range or break out of a sideways market. It is displayed as an overlay.
Formula:
Although the Abel average starts from the idea of tracking the average price over a given number of periods, it is intended to reduce the “trend-following” characteristics associated with typical moving averages.
Input: Periodicity
Constant: Yesterday\’s_Factor=(1/Periodicity), DragFactor=(1-Yesterday\’s_Factor)
Variables: DragValue
First bar: AbelAvg=(Open+Close)/2, and record AbelAvg and H,L,C for tomorrow\’s calc.
Second bar and thereafter…
DragValue=(Yesterday\’s_AbelAvg*DragFactor)
AbelAvg=(DragValue)+(Yesterday\’s_Low*Yesterday\’s_Factor)
Unless (Yesterday\’s_Close is less than Yesterday\’s_AbelAvg), in which case… AbelAvg=(DragValue)+(Y\’s_High*Yesterday\’s_Factor)
Interpretation:
Abel Averages can be interpreted like a moving average, but the conventional interpretation is that an upturn could be considered bullish and a downturn could be considered bearish.
Because it is designed to be less “trend-following” then many overlays, it does not need to wait for a crossover to price or another moving average according to some traders.
