1. Making Sense of Acceleration Bands
2. The Best Way to Trade with Acceleration Bands
3. How to Use Acceleration Bands

Well-known investor Price Headley came up with Acceleration Bands near the start of the millennium and it’s a system that he based on the notion that the best time to enter a trade is just at the point when the asset is trending, although it won’t have given any strong indications yet about whether it’s about to move up or down.

The acceleration bands show how volatile the price has been over several bars, and the user can choose how many. The default value is usually 20 bars. The system uses a simple moving average to find the midpoint, which the upper and lower bands are equidistant from, a bit like you see with Bollinger Bands. 

Making Sense of Acceleration Bands

With this indicator, you buy or sell stocks (or any other chartable asset) according to whether the price goes above or below the upper and lower bands. A price that suddenly surges over the top band is said to have broken out, and some would take this as a signal to buy. 

A system with this kind of focus might be a blessing for options traders, where it’s very important to be right about directional strategy and particularly timing, as they trade an instrument with a limited lifespan. When the price re-enters the zone between the acceleration bands you can take this as a signal to get out of a long position.

It’s a strategy based on momentum which is useful for anyone who bases the way they buy and sell shares on fundamentals. Essentially, people who want to invest in good value assets, buying them low and selling them high, can benefit. When a share price heads above the top acceleration band in a big way they’ll know they should be asking themselves if it’s now becoming too expensive. 

Not everyone is the same though. Others may view breakouts above the top acceleration band as confirmation that there is an upward trajectory and so great scope for additional gains, signalling that it still might be worth buying. Conversely, equal and opposite movement could be seen as a sell signal. It all hinges on the notion that volatility will trend over time, causing the price to shift one way in particular. 

The Best Way to Trade with Acceleration Bands 

What kind of stocks are most appropriate for this kind of momentum-centric approach?

• Those where earnings improve by at least 20% a year
• Those in sectors like technology or biotech, which are considered to be growth industries.
• If the stock is already trading near a 52-week high then it’s more likely to see acceleration than a “value” choice would be.

How to Use Acceleration Bands

As we said before, it’s common to look at the last 20 bars, and that covers a month, or around 21 trading days if you apply it to the daily chart. It also covers 4-5 months of informtion for the monthly chart, over 18 months. If the stock is more volatile the acceleration bands will be further apart and get closer together if it is less volatile.

Price Headley has said that he takes two consecutive closes above the top acceleration band to be a buy signal, but he has also said that he does not rely on them alone, applying additional rules and indicators to help shape his investment decisions.

As soon as the price dips back inside the acceleration bands, it’s time to close the trade because the acceleration period is clearly over.

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The Aroon oscillator uses elements of the Aroon indicator to show the strength of a trend and how likely it is set to carry on for. It works by subtraction, taking the down value away from the upper value. The Aroon up amount shows the size of the uptrend and Aroon down indicates the size of the downtrend. 

• “Aroon up” is worked out like this:

((number of periods) – (number of periods since greatest peak)) / (number of periods) x 100

This means that it works out how long it has been since the price hit its latest peak, and it turns this into a convenient percentage. 

• “Aroon down” is worked out like this:

((number of periods) – (number of periods since lowest low)) / (number of periods) x 100

“Aroon down” does the opposite, of course, expressing how long it’s been since the price hit its most recent low.

If you set the period for the Aroon oscillator to 14, (so the calculation uses price information for the most recent 14 candlesticks) and the latest peak was seven candles (or periods) ago, the “Aroon up” amount would be 50 [(14 – 7) / 14 * 100]. If the most recent low was three candles ago, the “Aroon down” value would be 79 [(14 – 3) / 14 * 100].

That would give the Aroon oscillator a value of -29 (50 – 79).

Aroon Oscillator Examples

Example #1

The usual setting for the period of an Aroon oscillator is 14, which means it’s set to use price information from the last 14 candlesticks.

This kind of setting would most likely suit a day trader. The Aroon oscillator keeps traders appraised of the prevailing trend (if there is one) and how potent it is. This can help people who use trend-following approaches to better appraise the potential for trades.

Example #2

A weekly chart of the S&P 500 with an Aroon oscillator period setting of 200 would best suit a longer-term trader, maybe a retired person who wants to hold positions open for a significant amount of time.

Setting the period to 200 gives us an overview of trend information from the previous 200 weeks, so the downtrend that was precipitated by the financial crisis would have gone on right up to 2011. The uptrend through the start of 2018 looked strong (hitting +100 a number of times) before falling back to +50 following February’s correction.

Example #3

Trend-followers with a very long-term approach to trading may find the Aroon oscillator suggests carrying on with long stocks

The setting which uses trend info from the past 200 15-minute periods (the most recent 50 hours that the asset was being actively traded), is most pertinent for those who will be holding positions for anything from several days up to several weeks.

In this instance, the Aroon oscillator does a fairly decent job of finding trends before they happen. It was right on the money about the uptrend in stocks that came in the latter half of January 2018 and it also caught a slow-down and subsequent about-face for the trend prior to the correction that happened at the start of February 2018.

Interpreting the Outputs

With the Aroon oscillator, anything above zero indicates a present uptrend, while anything less than zero points to a present downtrend. If there’s a cross above the zero line this may point to the start of a new uptrend, and a cross below the zero line may point to the start of the latest downtrend.

The Aroon oscillator is usually shown as a bar chart distribution. Levels that range from +40 to -40 (on a +100 to -100 scale) could suggest a consolidating market without a particularly strong trend in either direction.

Conclusion

As with any technical indicator, you shouldn’t be using the Aroon oscillator instead of doing technical analysis based on price. It should only ever be an additional factor that feeds into your usual practice. The Aroon oscillator is good for helping you spot trends but don’t rely on it exclusively. You should adjust the setting in relation to your expected trading horizon and the time compression of the chart you use the most (5m, 30m, daily, and so on).

If you trade using the daily chart and plan to hang onto positions for months, go for a setting of 25 or more. When you trade off the 5-minute chart and plan to hold positions on an intraday basis, go for a setting near 14. Too low a period will swamp it with noise as the range of possible value readings get compressed. 

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1. What to Use the Donchian Channels For
2. Example
3. To Conclude

The Donchian channels indicator assesses market volatility by taking the biggest high and smallest low of a past period defined by the user (which is normally set to 50). The span of these two points contains channel activity over this duration.

Donchian channels are superimposed over the price chart so that traders can see where the price is sitting at the moment in comparison to the channel’s top and bottom boundaries. You can add a line in the middle to show the midway point in between the channels.

The market has recently experienced various highs and lows in this 50-day timeframe. The Donchian channels show a range between these points to highlight them.

It’s a given that during a shorter period channels will look more squashed. You’ll get broader ranges if you use a bigger dataset.

What to Use the Donchian Channels For

When prices aren’t fluctuating, then Donchian channels will naturally be quite tight, but when prices are more volatile they will tend to open up.

It’s down to the individual trader and their overall strategy as to how they use this information, but since the majority of them will be using directional strategies, some of their profits will hinge on gaming price volatility to their benefit.

Some like to seek opportunities when the market is more quiet, using particular technical analysis strategies that can be advantageous during times when there aren’t so many pronounced price shifsts. There approaches might include using calendar spreads or buying an in-the-money call option and in-the-money put option in a way that maximizes profit if the asset stays within a specific region.

You’re free to use Donchian channels alone for trading directionaly. For instance, if a price breaks north of its X period high, then you can see that as the start point of a long trade. But if it breaks below its X period low, it could suggest that a short trade would be the best tactic.

If price skims the midpoint line this could be viewed as an exit signal, and you can add this by moving the settings, or by getting the signal from another tool.

If you want to look at the Donchian channels in this way, then it automatically makes them a tool suited to following trends.

Example

Looking at a daily chart of the S&P 500 once more, it’s clear that by using a 50-day period for the Donchian channels with the rules we mentioned (go long if you see a close above the channel, and close if it brushes the midline), there are a pair of opportunities in the last nine months. The first one did quite well, and the other did very well.

At the other end, you can use Donchian channels on shorter timeframes like hourly, 15-minute, 5-minute chart or anything inbetween.

As you shorten the timeframe and lower the period of the channels, you’ll get more frequent signals (so long as trade signals are being based on the price closing above and below the channels.) But it’s worth remembering that you won’t automatically get profit just because you use more frequent signals.

To conclude

Donchian channels show market volume by highlighting the gap that separates the high and low points within the most recent number of periods that the user wants to look at.

While they are good for assessing volume, some traders may want to use them for actual signaling, in a trend-following context.

Enter into long trades when there’s a break north of the top band and go with short trades when there is a break under the level band. Exit from trades when you are signaled to by another indicator, when the midpoint line is brushed and you can add that in.

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1. Calculation of the Ease of Movement Indicator
2. How to Use Ease of Movement
3. Conclusion

Ease of movement is the name of a momentum indicator. It highlights how an asset’s volume relates to the rate of change in its price and you can use it with the daily chart and also for longer duration charts too.

As the name might suggest, the greater the size of the indicator, the easier the price movement is deemed to be, and that points to a strong trend.

A bigger positive value is indicative of a price that’s shifting upward on the back of relatively low volume. On the flip side, a bigger negative amount suggests that the price is heading south on low volume that is not proportionate. In line with this, you would use the ease of movement indicator to give you an idea of how much volume would be required to precipitate a price shift.

When the indicator shows a value that is more than zero, this can be taken to infer that a lot of buying is going on. In the opposite scenario, when the value is less than zero, it suggests that selling is happening. In the language of technical analysis, it’s worth noting that buying is referred to as “accumulation” while selling is called “distribution.”

Calculation of the Ease of Movement Indicator

There are three steps to an ease of movement calculation. Number one involves working out the difference between the high band and the lower band for this particular asset.

Secondly, we work out how much the price has moved during any particular timeframe and the volume change that’s transpired during that period of time. The final step involves working out price movement in relation to volume, so we can then get a moving average by taking into account several data points.

Distance is worked out using both present and previous price inputs.

Distance = (High + Low) / 2 – (Previous High + Previous Low) / 2

The indicator uses volume and the current high-to-low range to find the “box ratio”, worked out like this:

Box Ratio = (Volume / X) / (High – Low)

X here is an integer factor that’s used to normalize the number, i.e constrain it to something that is easily understandable, within the normal range that people encounter, as anything too high or too low becomes effectively meaningless. The value is usually between one million and 100 million since that’s how many shares will normally change hands on a typical day.

A single-period ease of movement is worked out by dividing the distance we arrived at in the first step by the box ratio, like this:

Single-Period Ease of Movement = Distance/Box Ratio

But we work out ease of movement using the same idea that we use to get a moving average. So various single-period ease of movement measurements are added together and divided by the number of periods under consideration.

Over time, this helps to level out any kinks from the indicator, making it easier to identify trends and also any areas where there seem to be convergent or diverging activity.

(An area of convergence is one where the price runs in one direction and ease of movement travels the same way after they’ve been apart for a while. A divergent area is one where the price of the indicator is running in opposition.)

How to Use Ease of Movement

Example #1

You can also use ease of movement to confirm other indicators.

For instance, you can use ease of movement that goes above or below zero in the pertinent direction to confirm a breakout above or below the Bollinger bands, any time you’re using them as a trading signal.

You’d exit the trade either when there’s a break under zero (or whatever level you specified) on the ease of movement or a brush with the middle band on the Bollinger bands.

Example #2

Some market players will enter a trade when they see a break either below or above the zero line. Above means bullish, so you’d want to buy or go along with it, while less than zero bearish, and means you might be better off with a sell or short trade.

To minimize the risk of reacting to bad signals, some traders will set a certain threshold above or below the zero line, and this is particularly necessary for certain consolidating markets where zero-crossings happen much more frequently.

For instance, on the S&P 500 daily chart, it might be prudent to only go long when the ease of movement indicator hits more than 10,000, or short when it goes below -10,000. That value is just a ‘for instance’. The actual number will vary according to which asset you’re looking at.

The space inside the initial pair of vertical white lines is indicative of a buy/go long signal when the indicator rises past 10,000 and to close when it returns under 10,000 again. The other pair of lines is a sell/short signal when it’s below -10,000 and a close when it heads back above it once more.

Conclusion

The ease of movement indicator is designed to track price in relation to volume.

The higher the value the more potent the uptrend, as suggested by a positive price change that’s of greater magnitude compared to volume. In the same way, when the negative value is greater it’s pointing towards a more potent downtrend, as evidenced by the price falling by a greater amount than the volume is rising.

Seeing the price move in one direction more easily (by which we mean that each unit of volume takes it further in one direction compared to another) might influence a trader towards trading in that particular direction. The indicator going over zero might be taken for a bullish signal, while less than zero points to a bearish signal.

The ease of movement indicator is a useful tool, but you shouldn’t be tempted to use it on its own. It’s the same story with any indicator. You can use it most effectively by running it in tandem with other indicators, where it can be used to help reach a consensus on signals.

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1. What you can do with the Elliott Wave Oscillator
2. Trading Examples with the Elliott Wave Oscillator
3. Conclusion

The Elliott Wave Oscillator (EWO) is what you get when you take a 35-period simple moving average (SMA) away from a 5-period based on the close of each candlestick.

As a formula it looks like this:

EWO = SMA (5-period, candle-close) – SMA (35-period, candle-close)

What you can do with the Elliott Wave Oscillator

You can understand what the Elliott Wave Oscillator is telling you by considering the outputs of its discrete components.

A 5-period moving average will respond to price much better than a 35-period moving average can manage because it doesn’t have as many price data points. The 35-period moving average doesn’t react as quickly to price because the prior closing price only amounts to around 2.9% of its total value (about one thirty-fifth) In contrast, the 5-period moving average is based on one-fifth of the previous candle’s closing price, giving it much greater scope for assessment.

This means that if the price is experiencing an uptrend that was showing greater strength over the preceding five candles rather than the 35 prior, then the Elliott Wave Oscillator will show a plus reading. If it’s up-trending but it’s had a more potent overall uptrend for the duration of that 35 candle stretch in relation to the last five, the EWO will be in the minus camp.

We can apply the same sort of approach to downtrends too. More potent downtrends for the duration of the preceding five candles as they relate to the past 35 will return a minus amount for the EWO. A downtrend over the last five candles that hasn’t shown as much fortitude as the one over the preceding 35 candles will also return a minus EWO amount.

This means that we can make interpretations either for or against the EWO values in different ways:

Positive EWO value

1. a) More potent trend OR
2. b) Less potent downtrend

Negative EWO value

1. a) More potent downtrend OR
2. b) Less potent uptrend

Trading Examples with the Elliott Wave Oscillator

At its root, the Elliot Wave Oscillator is fundamentally a trend-following indicator and there are two ways that we can look at it, with the plus and minus values it returns or rate of change serving as indicators.

When the EWO is positive and also on the rise, this is a double-fronted sign of bullishness. The near-term trend is bullish and the uptrend is gaining strength.

If the EWO is both negative and going up, this is doubly bearish. The near-term trend is bearish and the downtrend is increasing in strength.

If we stipulate that those two conditions need to be met as a minimum before embarking on a trade, this should prove to be more accurate. The simple view of this scenario might be that going long is prudent when the indicator is positive and going short is best when it’s showing a minus. But the only problem with that is, it isn’t sensible to base trades on signals that lag price. You’re better off with requiring a multitude of factors to converge in order to assist in the confirmation of your apparent trade signals. To do this you could throw in price, support and resistance levels, various technical analysis indicators, and fundamental market analysis too. Whatever suits. The more quantitative factors the merrier.

By itself, the Elliott Wave Oscillator will give you loads of signals to chew over because crossovers happen as a matter of course with 5-SMA and 35-SMA, but you have to filter them religiously to get anything useful out of the nfo maelstrom. You can pair it with a longer moving average like 50- or 100-period SMA and take trades that run the same way as the trend and the indicator for more dependable results.

On top of that, instead of relying on just any plus value for the EWO, we can make it more reliable for long and short trades by setting specific plus and minus thresholds. In consolidating markets this helps where frequent shifts in either direction beyond the indicator’s zero line could generate the unhelpful clutter of multifarious weak signals. 

Elliott Wave Oscillator Trading Criteria

Let’s examine how well the Elliott Wave oscillator might have fared using some chart examples and the following criteria below:

1) Long trade: Positive EWO value (of +X amount) + escalating EWO value + positively sloped 50-period simple moving average

2) Short trade: Negative EWO value (of –X amount) + decreasing EWO value + negatively sloped 50-period simple moving average

Exit strategy:

1) Exit long: EWO magnitude begins going down or simple moving average turns negative

2) Exit short: EWO magnitude starts going up or simple moving average becomes positive

In a nutshell, to trade long, it helps us if the EWO is not just actively on the plus side but it’s a plus that’s increasing. The trend, as implied by the simple moving average, also needs to be positive.

To trade short, the EWO shouldn’t just be a minus, it should be an increasing minus, and we want the simple moving average to be a minus too.

The time to exit would be when any one of these signals is tripped.

Conclusion

The Elliott Wave Oscillator generates trade signals using the basic concept of a moving average crossover. Fundamentally, it’s a trend-following, momentum indicator.

Trades are put together so that they run in the direction of the indicator, which means EWO readings in the plus range elicit long trades and negative EWO readings elicit short trades. Useful as it is though, you can’t rely on this indicator alone to guide your trades, so always include other forms of analysis to round out the intelligence used in your trades.

Any indicator that integrates previous data lags price by default. They might be good at assessing recent price history, but that doesn’t automatically mean that they can shed any light on upcoming events.

More typically, the EWO and other moving average crossover indicators are used for confirmation of trade ideas produced from the price chart. That said, they are useful, and we can employ the EWO across numerous charting timeframes, from 1-minute to monthly, or whatever upper limit your software has in place.

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1. Trading examples using the Fisher Transform indicator
2. Critiquing the Fisher Transform
3. Conclusion

The Fisher Transform indicator turns a price into a Gaussian normal distribution, and it’s usually used to uncover over buying and overselling situations in the market which could point towards possible reversal points that can be exploited by the trader.

Price is converted into a normal distribution (or bell curve) which is where the trailing ends are thin (and in theory, this means that the chances of them occurring are not very likely). This means large swings or excessive values in the indicator shouldn’t be all that common.

In the event that this kind of behavior does take place it might augur an imminent reversal in price. Because of this, traders like the Fisher Transform because it can sniff out possible opportunities like this virtually ‘live’ in the moment, with more up-to-the-minute accuracy than laggy indicators can provide, and the peaks it uses to alert the trader are prominent and hard to ignore, a boon to those who favor the efficiencies of automated trading.

The Fisher Transform can (and probably should) be used in tandem with other technical indicators like the moving average convergence divergence (MACD) and relative strength index (RSI), boosting the quality an accuracy of predictions. 

Calculating the Fisher Transform:

Fisher Transform = ½ * ln [(1 + X) / (1 – X)]

Where:

ln is the shorthand form of the natural logarithm.

X stands for price change to a level between -1 and 1 to make for easier calculation.

Trading examples using the Fisher Transform indicator

Fisher Transform signals include the touching or breaching of a particular level, and for anyone doing it this way, the idea behind it is that you should act quickly with reversals because if you wait too long for confirmation that the indicator has peaked, you’re likely to have missed the moment for that asset. The level you choose will vary according to the market, the duration, and your own preferences.

A reversal in the indicator itself can also signal a potential trade opportunity. Rather than sticking to a set breach of a level, you could just take a trade once that happens. Of course, the caveat here is that you should never use a single indicator in isolation since it’s much more effective to factor in the agreement of other technical indicators and fundamental analysis results.

We’ll look at trade signals based on these rules:

Short trades

Fisher Transform must be positive (for instance, price thought of as overly bullish)

The trade occurs after a reversal in the direction of the Fisher Transform

But if we take a look at how it fares on its own using this daily chart for the S&P 500, it tends to come unstuck. Inside the white vertical lines, you can see buy (“long”) and sell (“short”) trades. The trade opens at the white line where the candle on the left closes, and the exit point is at the white line on the candle on the right.

The result would have been four successes and four failures which overall would have meant a ‘breakeven’ result.

Revising the system so it includes the rules we set out along with the stipulation that trades are only taken in the direction of the prevailing trend – as stipulated by a 50-period moving average – there will be a big improvement in precision.

The initial trade doesn’t do so well, the second more or less breaks even while the last two do succeed. Once again, use the Fisher transform with other indicators and you get much more pertinent results.

Long trades

Fisher Transform has to be negative (which is to say that the more negative the indicator becomes the more price will be “stretched” or overly bearish)

Taken after a reversal of the Fisher Transform from negatively sloped to positively sloped (for example, rate of change from negative to positive)

Critiquing the Fisher Transform

Financial information doesn’t usually fit the normal distribution all that well. A few markets, like developed market equities, will have a tendency to consistently rise over time because the companies that underpin them make money. 

Normal distributions mirror each other around the mean. Even assets like commodities, which don’t produce cash in the same way that companies do, still go up in line with inflation, showing slight directionality over time instead of symmetry in their price fluctuations.

Also, financial info has a tendency to be more evenly distributed, which is to say that the “tails” of the curve will be broader compared to a typical distribution. But it’s inadvisable for us to work under the assumption that financial markets follow a normal distribution because this can lull the trader into underestimating the chance of outliers showing up.

Conclusion

The Fisher Transform converts a price into a Gaussian normal distribution and isolates possible reversals of price in the market. The clarity of the signals is a definite benefit. It’s limited by the fact that application of the normal distribution to financial information will most likely give inaccurate results, but it does have value as an adjunct to other indicators and tools. 

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1. Calculation for the Keltner Channels
2. Using Keltner Channels
3. Examples with the Keltner Channels
4. Conclusion

Keltner channels act as a price reversal indicator. The indicator measures how volatile the market is by focusing on price moves in bands formed by high and low moving averages, in a way that resembles the action of the envelope channel. The overall trend of the market is signaled by the direction of the Keltner channels.

When a price trends above the high band, it’s a sign of overbuying, and when it dips under the lower band it points to overselling.

When a trader sees the price head over the high band, they may take it as a signal to sell short, and a dip under the low band as a signal to buy long.

Calculation for the Keltner Channels

The calculation for Keltner channels relies on the average true range, which means whichever value produced by these alternatives comes out highest:

1. The present period’s high, minus its low
2. The difference between the prior period’s close and its high
3. The difference between the current period’s close and its low

This differs from other tools like Bollinger bands which use standard deviation to work out the limits of the high and low boundaries. The envelope channel features two bands whose distance from an n-period moving average of the price is calculated as a fixed percentage.

The Keltner channels are calculated as a function of a moving average of the “typical price” and a multiple of the average true range. The usual price comes from adding the high, low, and close amounts together and dividing the result by three.

Since the Keltner channels utilize average true range, the bands don’t react so quickly to price comparison in the same way as something like Bollinger bands. This generally means more overbuying and overselling signals will be produced but this will vary according to the chosen settings (you might adjust the moving average of the typical price and average true range, for instance).

Bollinger bands are still used more than Keltner channels, relying on standard deviation, which is thought to be more useful from a statistical point of view than the average true range.

For instance, when price moves beyond Bollinger bands with a standard deviation of three, traders will know that it should only occur 0.2% of the time, but if it moves beyond some multiple of the average true range and becomes less certain outside of some multiple of the average true range then the statistical meaning of that becomes less clear.

Using Keltner Channels

The higher you set the moving average of the typical price and average true range, the wider the bands will be. Set the moving average of the typical price and average true range lower and the width of the bands decreases. Wider bands deliver more conventional signals but not so many of them, while bands that are closer together will create a higher number of lower quality signals.

Your results will depend on how much you rely on the Keltner channels to create trade signals. If you are heavily dependent, then it makes more sense to use wider bands so you don’t get swamped with duff signals. Either way, it’s best to use Keltner Channels in conjunction with other tools and forms of analysis to better inform your trading decisions.

Examples with the Keltner Channels

Example #1

As we said, you can set the Keltner channels however you like so they fit the needs of the market you’re trading in, the time period, and the signal quality that you’re after.

I our example, it’s set to a 20-period simple moving average of the usual price and a 4x multiple on the average true range. This is a somewhat severe setting which cannot calculate the chances of a price falling beyond this range. It will vary according to the asset, charting timeframe, and volatility of the market, and maybe some other factors too, but it’s going to be below half a percent in this case.

The market only broke out of the channel once between April and October 2016, at the point when the UK voted to leave the EU.

Keltner channels created a signal due to the dip under the lower band, and a concurrent touch of a psychological support level of 2,000 in this market.

Example #2

You can see two or three other signals if you look further out in this market (according to whether you add to positions on any touch occurring later on a different candle). All are short opportunities triggered by a touch and breach of the top band.

Trend followers may not have taken advantage of these opportunities, and that’s all right because that means they were sticking to their own approaches in a disciplined fashion, which is very important for any trader. The success of these trades depends on the point where they were exited. They could have been winners, but they could also have turned into losers if they were held onto for too long.

You can use a different technical indicator such as MACD, Relative Strength Index, or another one to determine your point of exit. You can use candlestick patterns or areas of support and resistance on shorter timeframes and you might even rely on market opinions derived from fundamental analysis.

Additionally, for instance, you can plot a center line in the Keltner channel and use this as the point where you take profit. This is the moving average of the usual price over the period of concern (20 periods in this instance). Doing it this way gives some small wins.

Although trend followers may choose to pass on these opportunities, short positions can be used to hedge net-long exposure to stocks in any other trades that they may have open elsewhere.

Conclusion

Keltner channels are good at helping you to measure how volatile a market is, and are an effective indicator of price reversal. The strength of the resultant signals comes down to the settings that you use on the indicator. A price that leaves the wider bands is going to give you fewer signals but these will be more reliable ones. A price that shifts beyond the narrow bands will give you fewer signals but ones with greater reliability.

You can filter your signals even more by aligning the direction of trades with the trend. Use other indicators fundamental analysis to confirm your trades.

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1. Moving Averages Types
2. Where You will Find Moving Averages Used
3. Trade Examples
4. Conclusion

You can’t talk about technical analysis without mentioning moving averages, because they’re quite possibly the most important and demonstrably the most frequently used kind of indicator out there. Moving averages are popular because many other types of indicators like the Moving Average Convergence Divergence (MACD) depend on them.

A moving average is sometimes used as a support/resistance line, and frequently as one component of a trend-following system. Its function is to average out a fluctuating price into a single convenient line that moves in tandem with it, smoothing out the peaks and troughs. It uses past prices as a basis for its calculations and this makes it a ‘lagging’ indicator.

Moving Averages Types

SMA

The two kinds of indicators that you see most often are the simple moving average (SMA) and the exponential moving average (EMA).

The SMA averages price for a specific time period, so for instance, if you had a 10-period SMA on your chart it would add together the last 10 closing prices and divide the result by 10, giving you your current SMA figure.

You will typically see periods of 50, 100, and 200 being used to explore longer-term market trends and they’re followed very carefully by traders and analysts. They consider the 50-period to be ‘fast’ as it’s more responsive to price, and the 200-period to be ‘slow’ as it’s less so, with the responsiveness of the 100-period sitting somewhere in between. Technical analysts will often give great weight to a clear break from a commonly followed moving average, so when a “fast” SMA crosses above or below a “slow SMA” they may take it as proof of a clear shift in the trend.

EMA

Some traders prefer the EMA or exponential moving average. Traders typically use the same time periods as they do for SMAs preferring it because it’s often more responsive to price action. It uses a greater number of multiplying factors than the SMA and describes greater importance to newer data points, giving traders and analysts more up-to-the-minute signalling.

The MACD indicator has made 12- and 26-day EMAs very popular in volatile markets, especially among day traders who tend to be market gadflies, entering and exiting positions swiftly in response to rapid price changes.

Where You will Find Moving Averages Used

Moving averages shouldn’t be confused with crystal balls. They can’t tell the future, because all they are doing is averaging out past data points to produce a line that might give you some clues about future movements. So, by the time you see a moving average slope flattening out the price action has probably already moved on because the indicator comes with an intrinsic lag.

If you use any form of support and resistance to come up with your entry points and you’re also looking towards moving average crossovers for confirmation to seal the deal, then unfortunately that ship will have already sailed by the time you react. Even if it returns to the same level the moving averages may have shifted again.

So, if you’re always missing the boat, what’s the point? Well, moving averages can still help you confirm trend direction or give you a visible measure of its size, so it’s more suited to a support role than one on the frontline.

Moving averages do find use by some traders as support and resistance levels, while others will use a mixture of different moving averages crossovers to confirm entry points of trend shifts. This is good basic practice, avoiding reliance on one or another tool, instead using an array of them. You’re looking for mutual confirmation between the majority of indicators before you place a trade, rather than just trusting one.

Moving averages are well-suited to trending markets. Traders pay particular attention to direction, slope, and rate of change. They are better visual cues than candles alone for spotting momentum shifts and trend changes.

It’s common for market players to only trade in the direction that the moving average has identified for the trend. For instance, if 50-, 100-, and 200-period moving averages all feature a positive slope, the trader may go long on every position.

Trade Examples

So, without depending on moving averages entirely for trade signals, you can run a system based on moving averages and also apply indicators to support and resistance. The result is that you will take trades around likely reversal points and in the general direction that the moving averages suggest.

Levels of support are areas that price will drop to before rebounding for long trades. Similarly, levels of resistances are areas where the price will rise and may reverse for short trades.

We’re going to use a crossover strategy to apply our moving averages, using periods of 10 (which is two weeks of trading days) and 42 (two months of trading days), with crossovers used to confirm trend changes.

We’ll also use an SMA rather than an EMA, but we can change this later if necessary. The 10-period SMA is our “fast” moving average, so-called because it will react faster to price in an uptrend than the slower EMA.

So, when the 10-period SMA crosses above the 42-period SMA, we get a bullish sign, and when it crosses below, we get a bearish sign, causing us to focus more on short rates.

Here’s a summary of our rules:

Long Trades

1. 10-period SMA goes over 42-period SMA

2. Bounce off a recent support level, as determined by previous price history

Short Trades

1. 10-period SMA goes under 42-period SMA

2. Bounce off a recent resistance level, as determined by previous price history

It’s a sign to exit a trade…

1. When the moving averages cross back, meaning the trend is over

or

2. There’s a break past the particular support or resistance level

Conclusion

The moving average is one of the most widely used indicators in trading, and it underpins the function of many other indicators too.

The SMA averages together all prices and the EMA gives weighting only to the most recent price information.

Trend following systems gain the most from moving averages, which offer the possibility of clear identification of a trend’s direction, its rate of change, and its magnitude. They have plenty of scope for price reversals and moving average crossover strategies too, and they are always best used in conjunction with other tools.

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1. Calculating the Negative Volume Index
2. Using the Negative Volume Index
3. Trading the Negative Volume Index
4. Conclusion

The Negative Volume Index (NVI) is one of the oldest trading indicators in use and it tries to put a number on trading volume for either an individual stock or a whole index. Why would you want to do that? The idea is that volume can reveal something about the intentions of the best traders, those in the know, a.k.a., “the smart money.” It’s believed that they will be most active in moments when there isn’t much trading volume or market activity and that everyone else (the not so smart) will be more active when the opposite scenario is in effect: lots of volume and lots of activity. Smart traders are thought to be less interested in the more reactive end of the market, while ‘hustlers’ revel in it.

If your charting software doesn’t include volume on certain assets and markets (like forex) then you can’t use the negative volume indicator.

The first edition of the indicator added net advances when volume was under from one period to the next. To work out the net advance you take away the number of stocks in an index that goes down from the number in one that rises. For instance, if an index contains 28 stocks and 21 go up while 7 go down, the net advance would be 14, or 21 minus 7.)

Using NVI inventor Paul Dysart’s formula, the indicator would go up from period to period if volume were to rise, and down if net advances dropped at the same time as volume. In this way, the indicator totally ignores price moves on volume increases.

A slightly altered newer version came out more recently and it’s now the predominant Negative Volume Index that charting software comes with. In place of net advances, its inventor, Norman Fosback used the amount of price change in the market expressed as a percentage instead of net advances. This is thought to be a better way of conveying the strength of the moving market.

Calculating the Negative Volume Index

We can work out the Negative Volume Index quite easily:

NVI starts at 1,000

If volume falls, add the index, or stock’s percentage price change to 1,000.

If volume rises, there’s no change to the indicator.

Also, to represent the trend in the indicator for the past year a 255-day exponential moving average (EMA) gets added to the chart. (255 represents the actual number of trading days during any given year.)

Using the Negative Volume Index

The NVI is best suited to daily charting. It can work on other timespans but the shorter duration is best.

Fosback pointed out that when the NVI goes over the 255-day EMA you’re looking at an uptrend or Bull market, and when it goes below, you’re looking at a downtrend or bear market.

This doesn’t mean that there are symmetrical odds though. From his own research, Fosback concluded that there is a 96% chance of a bull market when the NVI goes over the 255-day EMA, but a bear market only has a 53% chance if it goes below. It’s assumed that he ran his tests with share indexes as they tend to rise over time.

There might be more symmetrical odds if he had tested in the currency markets because they don’t feature the same kind of long-term directional bias as you see with shares and commodities.

The NVI may notice discrepancies between certain shares and the indexes they inhabit.

Trading the Negative Volume Index

The main trading signal for the NBI hinges on its relationship with its 255-day exponential moving average. A break over the 255-day EMA is a bull signal. One under the 255-day EMA is a bear signal.

But none of this suggests that you should be using the NVI in isolation, as it will tend to be noisy if not strictly filtered. Whatever kind of trader you are it can give you a great overview, and trading in its current direction can improve your statistical chances of a successful trade.

Conclusion

The Negative Volume Index blends price inputs and volume to reveal useful insights into the trading activity of others. Volume is a binary input, either going up or going down, and the indicator changes on drops between periods. You’ll use it on the assumption that smart money traders are most active when the volume is down, and it will locate those lower volume periods for you. It was created for market indexes or any other type of asset associated with volume information. It works less well with thinly traded assets, but certainly shouldn’t be used on its own.

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