Parabolic SAR

Parabolic SAR

Parabolic SAR provides a useful tool for catching new trends early, offering excellent buy and sell signals.

Overview

• The Parabolic SAR (stop and reverse) is a trend-following system that sets "stop-losses."
• It works well in trending markets, but tends to whipsaw during non-trending, sideways phases.
• A parabola below the price is generally bullish.
• A parabola above the price is generally bearish.

The Parabolic System, developed by Welles Wilder who also developed the Relative Strength Index (RSI), is usually referred to as the Parabolic "SAR" (stop-and-reverse). Mr Wilder designed this indicator to supplement the other trend-following systems.

The Parabolic SAR is a "stop-loss" system used to set trailing price stops. The name of the system is derived from its parabolic shape, which follows the price movements in the form of a dotted line. When the parabola follows along below the price, the trader should be buying or going long. A parabola above the price suggests selling or going short.

The particular value of the Parabolic SAR is that it allows traders to catch new trends relatively early. If the new trend fails, the parabola quickly switches from one side of the price to the other, thus generating the stop and reverse signal.

Mr. Wilder built an acceleration factor into the Parabolic system. To allow the trend time to become established, the movement of the indicator starts off slowly - with the dots close together. As acceleration increases, the parabola move faster (with the dots further apart) until it catches up to the price action.

As with most indicators, Parabolic SAR performs best in trending markets, and is less reliable during sideways or congestive phases.

Signals

The Parabolic SAR is an outstanding indicator for providing exit points - offering sell signals when the parabola moves above the price. Buy signals are generated when the parabola falls below the price. Of course, these signals need to be confirmed by the price action itself and other, complementary indicators.

It is always useful to examine different time periods; using daily, weekly and monthly charts.

Combining Parabolic SAR with DMI

John Murphy, author of Technical Analysis of the Financial Markets, recommends using a filter to complement the Parabolic system. He suggests using the Directional Movement Index (DMI) to help eliminate whipsaws and false signals in the more sensitive Parabolic system. As a simple rule of thumb, he observes that the DMI and Parabolic SAR indicators can complement one another as follows: "When the +DI line is above the -DI line, all Parabolic sell signals can be ignored." We can see the effectiveness of this strategy below. (The ADX line is essentially the smoothed difference between the +DI and -DI lines.)

Refer to Welles Wilder's book New Concepts in Technical Trading Systems for a thorough discussion of Parabolic SAR.

ADX

For in-depth understanding please refer to

-Next step to share trading success by Leon Wilson

ADX Directional Movement Index

Overview

• The higher the DMI (on a scale of 0-100) the better the trend potential of a move.
• The DMI system is made up of three lines; ADX and +DI & -DI.
• DMI can be used either as a system on its own or as a filter for a trend-following indicator (i.e., Parabolic SAR).

The Directional Movement Index, DMI, is an effective and frequently used trend indicator. This system was designed by Welles Wilder Jr. and is made up of three lines:

1. The +DI indicates the up average.
2. The -DI indicates the down average.
3. The ADX, average directional movement index, shows whether a trend is in effect by smoothing the difference between the +DI and -DI.

In the example above two clear buy signals have been generated. The first could have been ignored because ADX was very close to 25 - a potential danger signal. The second was perhaps more significant, even though ADX was trending downwards. It did provide a clear indication of the beginning of a very strong move in this market.

Buy and sell signals are given when +DI and -DI cross. The time periods most commonly used in the complex formula are 10 or 14 days.

According to Wilder the DMI should be used with the ADX as a filter.

• A rising ADX line means the market is trending and a better candidate for a trend-following system.
• A falling ADX line indicates a non-trending market.
• Some traders also look for an ADX greater than 20 or 25 to confirm that the market is trending. When the ADX line starts to drop from above the 40 level, that is an early sign that the trend is weakening. A rise back above 20 is often a sign of the start of a new trend.

Signals

Generally speaking, the two main buy and sell signals generated by DMI are as follows:

• A buy signal is given when +DI crosses above the -DI line.
• A sell signal is given when +DI crosses below the -DI line.

However, some refinements are suggested by experienced traders:

• The crossing of DI lines only provides an early warning signal; other criteria must be fulfilled for the actual signal.
• The ADX should be between the upper DI line and the lower one.
• An ADX below 25 is a strong warning to avoid trading.

Wilder himself developed a refinement to take care of whipsawing (when the DI lines cross back and forth over a short period, providing unreliable signals). He called it his Extreme Point Rule.

The Extreme Point Rule is derived by noting the high or low point on the day when the +DI and the -DI cross one another. +DI determines the high or low point (if +DI is above -DI the Extreme Point is the high of the day, if +DI is below -DI, the Extreme Point is the low for the day).

The extreme point is then used for the actual buy or sell signal. For example, if the price once again rises above the Extreme Point price level you have a buy signal. If the price fails to rise above the extreme point, you should continue to stand aside. The converse holds true for sell signals.

ADXR

An additional indicator, the average directional movement index rating (ADXR), was created by Wilder as a measuring tool for the strength of ADX. ADXR is the average of the current ADX and the ADX 14 days ago. ADXR is typically plotted alongside ADX on the same chart.

-Never trade a Long position when the DI-is greater than the DI+.

-Never trade a Short position when the DI + is greater than the DI-

-Directional movement is not a stand alone technique.

The ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.

ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.

When ADX begins to weaken from above 40 and moves below 40, it is a sign that the current trend is losing strength and a trading range could develop.

Positive/Negative Directional Indicators

The ADX is derived from two other indicators, also developed by Wilder, called the Positive Directional Indicator (sometimes written +DI) and the Negative Directional Indicator (-DI).

When the ADX Indicator is selected, SharpCharts plots the Positive Directional Indicator (+DI), Negative Directional Indicator (-DI) and Average Directional Index (ADX). With the Red, White and Green color scheme on SharpCharts, ADX is the thick black line with less fluctuation, +DI is green and -DI is red. +DI measures the force of the up moves and -DI measures the force of the down moves over a set period. The default setting is 14 periods, but users are encouraged to modify these settings according to their personal preferences.

In its most basic form, buy and sell signals can be generated by +DI/-DI crosses. A buy signal occurs when +DI moves above -DI and a sell signal when -DI moves above the +DI. Be careful, though; when a security is in a trading range, this system may produce many whipsaws. As with most technical indicators, +DI/-DI crosses should be used in conjunction with other aspects of technical analysis.

The ADX combines +DI with -DI, and then smooths the data with a moving average to provide a measurement of trend strength. Because it uses both +DI and -DI, ADX does not offer any indication of trend direction, just strength. Generally, readings above 40 indicate a strong trend and readings below 20 a weak trend. To catch a trend in its early stages, you might look for stocks with ADX that advances above 20. Conversely, an ADX decline from above 40 might signal that the current trend is weakening and a trading range is developing.

RSI

 

RS=Average of x days up closes/Average of x days down closes

-The shorter the time period, the more sensitive the oscillator becomes and wider the amplitude.

-RSI works best when its fluctuations reach the upper and lower extremes.

-RSI lends itself well to trend line placement and is prone to experiencing divergence.

• A bullish divergence occurs when prices are declining but indicator values are increasing.
• A bearish divergence occurs when prices are increasing but indicator values are decreasing.
• Divergence carry greater significance when they appear at extreme RSI values.

-Stocks can spend extended periods of time in overbought and oversold regions and in reality this reflects on going strength and weakness.

• A 50% value of the RSI indicates that the average number of up-days is comparable to the average number of down days.
• A 70% value would actually reflect a 60% increase in the average number of up days compared to the number of the down days.
• A 30% index value would then reflect a 60% increase in the number of the down days compared to the number of the up-days for the same period.

-During an uptrend RSI will concentrate bulk of its action in the top half to two-thirds of the index value. As all healthy trends generally experience regular pauses in price action what is RSI going to do?Of course, its going to return back to the neutral region of 50% crossing the overbought region value of 70% .So every time a price action slows RSI gravitates back to the neutral region.

         I must understand that such retracement of RSI does not guarantee trend conclusion.Only act on RSI divergence if prices are still trending. Divergence occurring during the periods of consolidation are treated with caution.

-Examine RSI for extreme values when considering position entry.

 

 

 

Interpretation
When Wilder introduced the RSI, he recommended using a 14-day RSI. Since then, the 9-day and 25-day RSIs have also gained popularity. Because you can vary the number of time periods in the RSI calculation, I suggest that you experiment to find the period that works best for you. (The fewer days used to
calculate the RSI, the more volatile the indicator.)
The RSI is a price-following oscillator that ranges between 0 and 100.

A popular method of analysing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns
down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal.

In Mr. Wilder's book, he discusses five uses of the RSI in analysing commodity
charts. These methods can be applied to other security types as well.

• Tops and Bottoms.
  The RSI usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart.
• Chart Formations.
  The RSI often forms chart patterns such as head and shoulders (page 215) or triangles (page 216) that may or may not be visible on the price chart.
• Failure Swings
  (also known as support or resistance penetrations or breakouts). This is where the RSI surpasses a previous high (peak) or falls below a recent low (trough).
• Support and Resistance.
  The RSI shows, sometimes more clearly than price themselves, levels of support and resistance.
• Divergences.
  As discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the RSI. Prices usually correct and move in the direction of the RSI.

Overbought/Oversold

Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal. Some traders identify the long-term trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could mark potential entry points.

Divergences

Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. For example, consider a falling stock whose RSI rises from a low point of (for example) 15 back up to say, 55. Because of how the RSI is constructed, the underlying stock will often reverse its direction soon after such a divergence. As in that example, divergences that occur after an overbought or oversold reading usually provide more reliable signals.

Centreline Crossover

The centreline for RSI is 50. Readings above and below can give the indicator a bullish or bearish tilt. On the whole, a reading above 50 indicates that average gains are higher than average losses and a reading below 50 indicates that losses are winning the battle. Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals.

MACD-H

 

MACDH=MACD-Signal

 

MACDH is a derivative of MACD indicator and not the price so there

On the chart above, we can see that the MACD-Histogram movements are relatively independent of the actual MACD. Sometimes the MACD is rising while the MACD-Histogram is falling. At other times, the MACD is falling while the MACD-Histogram is rising. The MACD-Histogram does not reflect the absolute value of the MACD, but rather the value of the MACD relative to its 9-day EMA. Usually, but not always, a move in the MACD is preceded by a corresponding divergence in the MACD-Histogram.

1. The first point shows a sharp positive divergence in the MACD-Histogram that preceded a Bullish Moving Average Crossover.

2. On the second point, the MACD continued to new Highs but the MACD-Histogram formed two equal Highs. Although not a textbook case of Positive Divergence, the equal High failed to confirm the strength seen in the MACD.

3. A Positive Divergence formed when the MACD-Histogram formed a higher Low and the MACD continued lower.

4. A Negative Divergence formed when the MACD-Histogram formed a lower High and the MACD continued higher.

 

 

Usage

Thomas Aspray designed the MACD-Histogram as a tool to anticipate a moving average crossover in the MACD. Divergences between MACD and the MACD-Histogram are the main tool used to anticipate moving average crossovers. A Positive Divergence in the MACD-Histogram indicates that the MACD is strengthening and could be on the verge of a Bullish Moving Average Crossover. A Negative Divergence in the MACD-Histogram indicates that the MACD is weakening, and it foreshadows a Bearish Moving Average Crossover in the MACD.

In his book, Technical Analysis of the Financial Markets, John Murphy asserts that the best use for the MACD-Histogram is in identifying periods when the gap between the MACD and its 9-day EMA is either widening or shrinking. Broadly speaking, a widening gap indicates strengthening momentum and a shrinking gap indicates weakening momentum. Usually a change in the MACD-Histogram will precede any changes in the MACD.

Signals

The main signal generated by the MACD-Histogram is a divergence followed by a moving average crossover. A bullish signal is generated when a Positive Divergence forms and there is a Bullish Centerline Crossover. A bearish signal is generated when there is a Negative Divergence and a Bearish Centerline Crossover. Keep in mind that a centerline crossover for the MACD-Histogram represents a moving average crossover for the MACD.

Divergences can take many forms and varying degrees. Generally speaking, two types of divergences have been identified: the slant divergence and the peak-trough divergence.

Slant Divergence

A Slant Divergence forms when there is a continuous and relatively smooth move in one direction (up or down) to form the divergence. Slant Divergences generally cover a shorter time frame than divergences formed with two peaks or two troughs. A Slant Divergence can contain some small bumps (peaks or troughs) along the way. The world of technical analysis is not perfect and there are exceptions to most rules and hybrids for many signals.

Peak-Trough Divergence

A peak-trough divergence occurs when at least two peaks or two troughs develop in one direction to form the divergence. A series of two or more rising troughs (higher lows) can form a Positive Divergence and a series of two or more declining peaks (lower highs) can form a Negative Divergence. Peak-trough Divergences usually cover a longer time frame than slant divergences. On a daily chart, a peak-trough divergence can cover a time frame as short as two weeks or as long as several months.

Usually, the longer and sharper the divergence is, the better any ensuing signal will be. Short and shallow divergences can lead to false signals and whipsaws. In addition, it would appear that Peak-trough Divergences are a bit more reliable than Slant Divergences. Peak-trough Divergences tend to be sharper and cover a longer time frame than Slant Divergences.

MACD-Histogram Benefits

The main benefit of the MACD-Histogram is its ability to anticipate MACD signals. Divergences usually appear in the MACD-Histogram before MACD moving average crossovers do. Armed with this knowledge, traders and investors can better prepare for potential trend changes.

The MACD-Histogram can be applied to daily, weekly or monthly charts. (Note: This may require some tinkering with the number of periods used to form the original MACD; shorter or faster moving averages might be necessary for weekly and monthly charts.) Using weekly charts, the broad underlying trend of a stock can be determined. Once the broad trend has been determined, daily charts can be used to time entry and exit strategies.

In Technical Analysis of the Financial Markets, John Murphy advocates this type of two-tiered approach to investing in order to avoid making trades against the major trend. The weekly MACD-Histogram can be used to generate a long-term signal in order to establish the tradable trend. Then only short-term signals that agree with the major trend would be considered. If the long-term trend were bullish, only negative divergences with bearish centerline crossovers would be considered valid for the MACD-Histogram. If the long-term trend were bearish, only positive divergences with bullish centerline crossovers would be considered valid.

On the IBM weekly chart, the MACD-Histogram generated four signals. Before each moving average crossover in the MACD, a corresponding divergence formed in the MACD-Histogram. To make adjustments for the weekly chart, the moving averages have been shortened to 6 and 12. This MACD is formed by subtracting the 6-week EMA from the 12-week EMA. A 6-week EMA has been used as the trigger. The MACD-Histogram is calculated by taking the difference between MACD (6/12) and the 6-day EMA of MACD (6/12).

1. The first signal was a Bearish Moving Average Crossover in January, 1999. From its peak in late November, 1998, the MACD-Histogram formed a Negative Divergence that preceded the Bearish Moving Average Crossover in the MACD.

2. The second signal was a Bullish Moving Average Crossover in April. From its low in mid-February, the MACD-Histogram formed a Positive Divergence that preceded the Bullish Moving Average Crossover in the MACD.

3. The third signal was a Bearish Moving Average Crossover in late July. From its May peak, the MACD-Histogram formed a Negative Divergence that preceded a Bearish Moving Average Crossover in the MACD.

4. The final signal was a Bullish Moving Average Crossover, which was preceded by a slight Positive Divergence in the MACD-Histogram.

The third signal was based on a Peak-trough Divergence Two readily identifiable and consecutive lower peaks formed to create the divergence. The peaks and troughs on the previous divergences, although identifiable, do not stand out as much.

MACD-Histogram Drawbacks

The MACD-Histogram is an indicator of an indicator or a derivative of a derivative. The MACD is the first derivative of the price action of a security, and the MACD-Histogram is the second derivative of the price action of a security. As the second derivative, the MACD-Histogram is further removed from the actual price action of the underlying security. The further removed an indicator is from the underlying price action, the greater the chances of false signals. Keep in mind that this is an indicator of an indicator. The MACD-Histogram should not be compared directly with the price action of the underlying security.

Because MACD-Histogram was designed to anticipate MACD signals, there is a temptation to jump the gun. The MACD-Histogram should be used in conjunction with other aspects of technical analysis. This will help to alleviate the temptation for early entry. Another means to guard against early entry is to combine weekly signals with daily signals. Of course, there will be more daily signals than weekly signals. However, by using only the daily signals that agree with the weekly signals, there will be fewer daily signals to act on. By acting only on those daily signals that are in agreement with the weekly signals, you are also assured of trading with the longer trend and not against it.

Be careful of small and shallow divergences. While these may sometimes lead to good signals, they are also more apt to create false signals. One method to avoid small divergences is to look for larger divergences with two or more readily identifiable peaks or troughs. Compare the peaks and troughs from past action to determine significance. Only peaks and troughs that appear to be significant should warrant attention.

Case Studies:

MACD

My Analysis:

-Buy signal is generated when solid line crosses dotted line in Metastock.

-the dotted line is signal line which is EMA [9] of MACD indicator.

-Its easy to read this indicator but please read the MACD.pdf in trading E-books\MACD.pdf it explains clearly how to handle dips and hooks in MACD and trade it along with ADX.

Leon wilson

MACD-TrendTrading 3*

MACD-H-Reversal Trading 3* and Breakout Trading 2*

The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day Exponential Moving Averages (EMAs).

A signal line (or trigger line) is then formed by smoothing this with a further EMA. The standard period for this is 9 days,

The difference between the MACD and the signal line is often calculated and shown not as a line, but a solid block histogram style. This construction was made by Thomas Aspray in 1986. The calculation is simply

histogram = MACD − signal

MACD generates bullish signals from three main sources:

1. Positive Divergence

2. Bullish Moving Average Crossover

3. Bullish Centerline Crossover

MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals:

1. Negative Divergence

2. Bearish Moving Average Crossover

3. Bearish Centerline Crossover

Most Authors suggest using of MACD with other Indicators the following extract describes how to use MACD with ADX/Stochastic

 

Trading the MACD
There is a nice article in Trading E-books/MACD.pdf please refer to that, it explains using ADX and stochastics with MACD.

 

Most of the authors are warning on using just MACD/MACD-H as deciding factor to enter/exit the trade.

Entry and exit signals are rarely symmetrical. The indicator that gives you good entry signals is usually not the best indicator for exits; some other tool will do a better job. MACD lines give entry signals when the fast line crosses the slow line. If the fast line crosses above, it gives a signal to go long. When it crosses below, it gives a signal to sell short. Waiting for a crossover in the
opposite direction to close out a position is not a good idea because by that time a lion’s share of profits will have evaporated.

“According to Gerald Appel the creator of MACD, a single MACD study should never be used alone.At a minimum u need two MACD studies.if a single study is used, the MACD in a downtrend, for instance will generally develop a late buy signals and premature sell signals.So two studies are needed.The default periods of 12-26-9 are offered as a starting guideline by the originator of the study,appel. A short MA pairing might be near 6-19-9, and the longer study may use periods close to the default like 13-26-9.As the markets to advance faster than they advance.you may need 4 MACD studies two MACD studies using faster MA pairings in declining markets and two MACD studies using slower MA pairings in raising markets.So  the bear market studies may need two studies that use 6-19-9 and 13-26-9, while the bull market may nees two studies that use 5-24-8for ione and 5-34-5 or 19-39-9 for the other.You need to do your own testing to select suitable values for you.It is important to know that trend is present before applying MACD.To determine the trend is present Appel uses 50 day MA on prices.The above extract is taken from Appel seminars.”

From

Technical Analysis for the Trading Professional

By Constance M. Brown

MACD Benefits
One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend in one indicator. As a trend-following indicator, it will not be wrong for very long. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security. By using Exponential Moving Averages (EMAs), as opposed to Simple Moving Averages (SMAs), some of the lag has been taken out.

As a momentum indicator, MACD has the ability to foreshadow moves in the underlying security. MACD divergences can be key factors in predicting a trend change. A Negative Divergence signals that bullish momentum is waning, and there could be a potential change in trend from bullish to bearish. This can serve as an alert for traders to take some profits in long positions, or for aggressive traders to consider initiating a short position.

MACD can be applied to daily, weekly or monthly charts. MACD represents the convergence and divergence of two moving averages. The standard setting for MACD is the difference between the 12 and 26-period EMA. However, any combination of moving averages can be used. The set of moving averages used in MACD can be tailored for each individual security. For weekly charts, a faster set of moving averages may be appropriate. For volatile stocks, slower moving averages may be needed to help smooth the data. Given that level of flexibility, each individual should adjust the MACD to suit his or her own trading style, objectives and risk tolerance.

MACD Drawbacks
One of the beneficial aspects of the MACD is also one of its drawbacks. Moving averages, be they simple, exponential or weighted, are lagging indicators. Even though MACD represents the difference between two moving averages, there can still be some lag in the indicator itself. This is more likely to be the case with weekly charts than daily charts. One solution to this problem is the use of the MACD-Histogram.

MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels that historically represent overbought and oversold levels, MACD does not have any upper or lower limits to bind its movement. MACD can continue to overextend beyond historical extremes.

MACD calculates the absolute difference between two moving averages and not the percentage difference. MACD is calculated by subtracting one moving average from the other. As a security increases in price, the difference (both positive and negative) between the two moving averages is destined to grow. This makes its difficult to compare MACD levels over a long period of time, especially for stocks that have grown exponentially.

Moving Average

MA is essentially a trend following device, it is a follower not a leader.

Simple Vs Exponential:

From Come into my trading room by Alexander Elder

The trouble with a simple MA is that each price affects it twice—when it comes in and when it drops out. A high new value pushes up the moving average, giving a buy signal. This is good; we
want our MAs to respond to new prices. The trouble is that 10 days later, when that high number drops from the window, the MA also drops, giving a sell signal. This is ridiculous because if we shorten a simple MA by one day, we’ll get that sell signal a day sooner, and if we lengthen it by a day, we’ll get it a day later. We can engineer our own signals by fiddling with the length of a simple MA! An exponential moving average (EMA) overcomes this problem. It reacts only to incoming prices, to which it assigns more weight. It does not drop old prices from its time window, but slowly squeezes them out with
the passage of time.

An exponential moving average is slow but steady, like a directional indicator on a steamroller. EMA works in all timeframes but shines on the weeklies, where it helps you stay with the major trend no matter how hard it tries to shake you off. Trading in the direction of a weekly moving average should help you get ahead of many traders. You can position yourself in the direction of the EMA and hold, or else trade in and out,
using daily charts.

After a bit of studying at the i am feeling i should use EMA, if you look at MACD it uses EMA in its calculations as SMA does not give importance to recent price actions have to see how i will go….

 

A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5.

10+ 11 + 12 + 13 + 14 = 60

(60 / 5) = 12

Exponential moving average :In order to reduce the lag in simple moving averages, technicians often use exponential moving averages (also called exponentially weighted moving averages). EMA's reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the specified period of the moving average. The shorter the EMA's period, the more weight that will be applied to the most recent price. For example: a 10-period exponential moving average weighs the most recent price 18.18% while a 20-period EMA weighs the most recent price 9.52%. As we'll see, the calculating and EMA is much harder than calculating an SMA. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average. Here's the calculation formula.

Google around for the calculation of this moving average

the exponential moving average is more sensitive to changes to price than a simple moving average but less than weighted moving average.

What Data to Average? Traders who rely on daily and weekly charts usually apply moving averages to closing prices. This makes sense, because they reflect the final consensus of value, the most important price of the day. The closing price of a five-minute or an hourly bar has no such special meaning. Day-traders are better off averaging not closing prices, but anaverage price of each bar. For example, they can average Open + High + Low + Close of each bar, divided by four, or High + Low + Close divided
by three.We can apply moving averages to indicators, such as Force Index (seebelow). A raw Force Index reflects price changes and volume for the day.Averaging produces a smoother plot and reveals a longer-term trend ofForce Index.

How Long a Moving Average? Moving averages help identify trends. A rising MA encourages you to maintain longs, whereas a falling MA tells you to hold shorts. The wider the time window, the smoother is a moving average. That benefit has a cost. The longer a moving average, the slower it responds to trend changes. The shorter a moving average, the better it tracks prices, but the more subject it is to whipsaws, temporary deviations from the main trend. If you make your moving average very long, it will
miss important reversals by a wide margin. Shorter MAs are more sensitive to trend changes, but those shorter than 10 bars defeat the purpose of a trend-following tool.
At the time I wrote Trading for a Living, I was using 13-bar MAs, but in recent years I switched to longer moving averages to catch more important trends and avoid whipsaws. To analyze weekly charts, start with a 26-week moving average, representing half a year’s worth of data. Try to shorten that number and see whether you can do it without sacrificing the smoothness of your MA. On the daily charts, start with a 22-day MA, reflecting roughly
the number of trading days in a month, and see whether you can make it shorter. Whatever length you decide to use, be sure to test it on your own data. If you track just a handful of markets, you’ll have enough time to try different lengths of moving averages until you get smoothly flowing lines.The width of any indicator time window is best expressed in bars rather
than days. The computer doesn’t know whether you are analyzing daily, monthly, or hourly charts; it sees only bars. Whatever we say about a daily MA applies to the weekly or the monthly. It’s better to call it a 22-bar MA rather than a 22-day MA.
Mathematically savvy traders can look into using adaptive moving averages whose length changes in response to market conditions, as advocated by John Ehlers, Tushar Chande, and Perry Kaufman. Ehlers’ latest book, Rocket Science for Traders, delves into adapting all indicators to current market conditions.

Self-Analysis

Don't try to conclude from a chart if it goes up or down, isolate yourself from noise and just write down what volume says and then write down what MACD says like that and finally on your reading of all these u decide what will be the next price action

I need to definitely follow top down analysis,

How can i find stocks that are resisting this down trend?

I can recollect i had a very good luck by looking for stocks in news paper IIF and there was other  stock that i didn't buy because i thought it had moved too much.

i think i need to wait after i had my position calculated and stop loss in place, the key is i need to wait for the trade to take effect.

 

Problems in me 

-Not buying stock thinking it moved too high.

-found myself buying stock just as i want to getting into trading

-I am not placing a stop loss after i bought a stock.

-there is lot of emotional drama in once i buy a stock

-My journal is not reflecting my reasons i bought them.

-Every book i read seems to be right and i am ending up reading book after book.
-I need to develop detachment from market as darvas

Trading with OBV/Volume

** Golden Rules of VOLUME**

Summary:Volume/traders if agree with price direction participate more

Raising Volume and Raising Price-Bullish

Falling Volume and Falling Price-Bullish

Raising Volume and Falling Price-Bearish

Falling Volume and Raising Price-Bearish

My analysis:

• Before you plot OBV make sure it has liquidity, i make sure that a stock is trading at least 2 million before i can plot OBV.
• While using OBV use trend lines to identify slope an trend direction.
• I found it easier to see OBV behaviour in weekly and monthly charts than daily charts.
• OBV/ Volume adds as a support from market especially important during breakout.
• Associate OBV with candlestick reversal patterns.
• A technique as per Leon Wilson is when OBV is greater than 13 period MA of OBV then its a positive sign. An upward cross over of the OBV indicator above its MA is considered Bullish or buy signal and vice versa for Sell signal.

 

Volume:

*To state and rule more precisely volume should increase or expand in the direction of existing trend.In an uptrend,volume should be heavier as the price moves higher, and should decrease or contract on price dips.As long as this pattern continues, volume is said to be confirming the price trend.

OBV:

OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers.

If the OBV is moving in the same direction as the existing trend, it is a signal that the strength of the trend remains. When the OBV starts to move against the trend, it is a signal that the existing trend is weakening and may reverse.

Possible combinations of OBV with Price

1. OBV sloping Up with Price
2. OBV Sloping Down with Price
3. OBV is sloping Down while the price of an asset is trending upward

1.OBV sloping Up with Price: Use an upward sloping OBV to confirm an uptrend

2.OBV Sloping Down with Price: Use an downward sloping OBV to confirm an downtrend

3.OBV is sloping Down while the price is trending upward : IF OBV is sloping downward while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming.

If the security's price movement precedes OBV movement, a "non-confirmation" has occurred. Non-confirmations can occur at bull market tops (when the security rises without, or before, the OBV) or at bear market bottoms (when the security falls without, or before, the OBV).

The OBV is in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Likewise, the OBV is in a falling trend when each successive peak is lower than the previous peak
and each successive trough is lower than the previous trough. When the OBV is moving sideways and is not making successive highs and lows, it is in a doubtful trend. [See Figure 47]
Figure 47

 

Once a trend is established, it remains in force until it is broken. There are two ways in which the OBV trend can be broken.

The first occurs when the trend changes from a rising trend to a falling trend, or from a falling trend to a rising trend.
The second way the OBV trend can be broken is if the trend changes to a doubtful trend and remains doubtful for more than three days.

Thus, if the security changes from a rising trend to a doubtful trend and remains doubtful for only two days before changing back to a rising trend, the OBV is considered to have always been in a rising trend. When the OBV changes to a rising or falling trend, a "breakout" has occurred. Since OBV breakouts normally precede price breakouts, investors should buy long on OBV upside breakouts. Likewise, investors should sell short when the
OBV makes a downside breakout. Positions should be held until the trend changes (as explained in the preceding paragraph).
This method of analyzing On Balance Volume is designed for trading short-term cycles. According to Granville, investors must act quickly and decisively if they wish to profit from short-term OBV analysis.

Example
The following chart shows Pepsi and the On Balance Volume indicator. I have
labeled the OBV Up, Down, and Doubtful trends.
A falling trend, as you will recall, is defined by lower peaks and lower troughs.
Conversely, a rising trend is defined by higher peaks and higher troughs.

 

From

Technical Analysis of the Financial Markets By John J. Murphy

 

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JAPANESE CANDLESTICK CHARTING TECHNIQUES -by STEVE NISON

OBV is also used in lateral price ranges. If OBV escalates and prices are stable (preferably at a low price area) it would exhibit a period of accumulation. This would bode well for advancing prices. If prices are moving sideways and OBV is declining it reflects distribution. This would have bearish implications, especially at high price levels.

 

OBV with Candlesticks
As illustrated in Exhibit 15.3, the June 13 heavy selloff of silver was followed by a small real body. This harami pattern converted the strong downtrend into a lateral trend. The market traded sideways for the next few weeks. During that time, OBV was ascending reflecting a bullish accumulation. June 25 saw new price lows. These lows did not hold as evidenced by the hammer line formed on that session. The positive divergence in OBV, the failure of the bears to hold the new lows, and the hammer line supplied signs of a near-term bottom.

Trading plan

stochastics 8,3,3 is a 3rd check list in trading plan

Now i understand how to do topdown analysis

20 Components of Trading Plan from youtube informmedia.com

Why trading?
What do you hope to gain?
What separates you?
your weakness?
plan to address those areas?
time to devote for trading?
your style of trading?
Markets you will Trade?
Time Management Plan?
Entry Criteria?
Exit Criteria?
Money Management Criteria?
Strategy Monitoring plan-how r u willing to know if your strategy stops working
strategy for adjusting plan
Trading Software/Budget
What broker you plan to use and why
Will you add your money periodically
will you reinvest your profits
can you support yourself
starting balance of your account

 

 

Psychology Trading Plan

Don't buy or sell with our MACD cross over

 

Break out Trading

Resources:

definition leon wilson “The business of share trading” page 344

The Longer the inaction, the greater the reaction.

 

Secondary Analysis:

• Bollinger bands –4*
• OBV
• MACD-H
• Stochastic

Observations

More money is involved i am getting panicked

 

 

 

 

 

 

January 7th 2009

 

Comments/Results of these trades 14th March 2009: All the positions below went in loss i need to change my filtering conditions.

Mistakes

-Not having a proper position size calculation

-didn't put risk in place

-not having a trading plan

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On January 7th i started trading this is my first trade after 2006.

I traded this day as i was feeling the need i should start trading as its been long and there was a sense of urgency i should get back to trading

 

 

Tick	Order	Price	Placed Stop Loss	Exec	Comments	Calculated SL
BKN	600	3.3	NO	Yes		All mental SL and i don't even remember the values now
AED	2000	1.175	NO	No	Missed it as it moved to 1.2 very quickly	All mental SL and i don't even remember the values now
MND	300	7.5	NO	Yes		All mental SL and i don't even remember the values now

All i looked at is volume and if MA was trending up, i.e is if price action was above 30 day MA and then if 8day MA crossed 30 day MA.

 

 

BKN

MND

AED