Technical Analysis categories / approaches
Technical Analysis could be put into five major categories:
• Price indicators (oscillators, eg: Relative Strength Index (RSI))
• Number theory (Fibonacci numbers, Gann numbers)
• Waves (Elliott'sulatory theory)
• Gaps (high-low, open-closing)
• Trends (following moving average).
[a] Price indicators
Relative Strength Index (RSI): The RSI measures the ratio of up-moves to down-moves and normalizes the calculation, in order that the index is expressed in an array of 0-100. In the event the RSI is 70 or greater, then an instrument is assumed to be overbought (a position during which prices have greater greater than market expectations). An RSI of 30 or less is taken like a signal the instrument can be oversold (a position in which prices have fallen more (a) the market expectations).
Stochastic oscillator: This is used to indicate overbought / oversold conditions over a scale of 0-100%. The indicator is founded on the observation that in the strong up-trend, period closing prices tend to concentrate within the higher part of the period's range. Conversely, as prices fall in a fundamental down-trend, closing prices are typically near the extreme low of the period range. Stochastic calculations produce two lines,% K and% D, which can be estimated to indicate overbought / oversold elements of a chart. Divergence between your stochastic lines as well as the price action of the undering instrument provides a powerful trading signal.
Moving Average Convergence / Divergence (MACD): This indicator involves plotting two momentum lines. The MACD line is the main difference between two exponential moving rates as well as the signal or trigger line, that's an exponential moving average of the difference. If your MACD and trigger lines cross, then this is taken like a signal that an alteration in the excitation is probably.
[b] Number theory:
Fibonacci numbers: The Fibonacci number sequence (1, 1, 2, 3, 5, 8, 13, 21, 34 …) Is constructed with the addition of the first two numbers to arrive at the third.
The ratio of numerous to another location larger number is 61.8%, that is a popular Fibonacci retracement number. The inverse of 61.8%, that's 38.2%, can be used like a fibonacci retracement number (and also extensions of this ratio, 161.8%, 261.8%). Wave patterns and behavior, identified in Forex currency trading, correlation (in some degree) with relationships in the Fibonacci series.
The tool is used in technical analysis of stock trends that mixes various numbers of Fibonacci retracements, all of which are utilized by different ups and downs.
Fibonacci clusters are indicators that happen to be typically located on the side of your price chart and search as being a combination of horizontal bars with some other examples of shading. Each retracement level that overlaps with another, makes all the horizontal bar privately darker at that price level. The most important numbers of support and resistance find the spot that the Fibonacci cluster will be the darkest. This tool helps gauging the relative strength of the support or resistance of various price levels a single quick glance. Traders often absorb the actual through the identified levels to verify the potency of the support / resistance.
Gann numbers: WD Gann would be a stack along with a commodity trader doing work in the '50s, who reputedly made over $ 50 million from the markets. He made his fortune using methods that he developed for trading instruments according to relationships between price movement and time, referred to as time / price equivalents. There is not any easy explanation for Gann's methods, playing with essence he used angles in charts to ascertain support and resistance areas, and to predict the occasions of future trend changes. He also used lines in charts to predict support and resistance areas.
Elliott's wave theory: The Elliott Undulatory theory can be a procedure for market analysis that may be based on repetitive wave patterns and the Fibonacci number sequence. A great Elliott wave pattern shows a five-wave advance and then a 3-wave decline.
Gaps can be created by factors for instance regular buying or selling pressure, earnings announcements, a general change in an analyst's outlook or any other style of the news release.
An up gap is in the event the lowest price over a trading day is over the best a lot of the previous day. A down gap is actually created in the event the highest cost of the morning is gloomier than the lowest expense of the prior day. An up gap is generally a sign of market strength, while a down gap is typically a sign of market weakness. A breakaway gap is a price gap that forms about the completion a significant price pattern. It usually signals the beginning of a vital price move. A runaway gap is really a price gap have a tendency to occur about the midpoint of the important market trend. Consequently, it is usually termed as measuring gap. An exhaust gap is a price gap that occurs at the end of your important trend and signals which the trend is ending.
A trend returns back to the direction of prices. Rising lows and highs institute an up trend; falling peaks and troughs institute a downtrend that determines the steepness with the current trend. The breaking of your trend line usually signals a trend reversal. Horizontal peaks and troughs characterize an investment range.
In the main, Charles Dow categorized trends in 3 categories: (a) Bull trend (up-trend: a number of highs and lows, where each high is more than the prior one); (b) Bear trend (down-trend: some highs and lows, where each low is leaner compared to the previous one); (c) Treading trend (horizontal-trend: several highs and lows, where peaks and lows are about just like the prior peaks and lows).
Moving rates are employed smooth price information in order to confirm trends and support-and-resistance levels. They are also valuable in choosing a trading strategy, particularly in futures trading or possibly a market with a strong up or down trend. Recognizing a trend could be done using standard deviation, the way of measuring volatility. Bollinger Bands, as an example, illustrate trends using this approach. If the markets you have to be volatile, the bands widen (move even further away through the average), while during less volatile periods, the bands contract (move closer to the standard).
Various Trend lines
Pattern recognition in Trend lines, which detect and draw the next patterns: ascending; descending; symmetrically & extended triangles; wedges; trend channels.
Source by Alexandar Portman