• Trend Indicators
  • Momentum Indicators
  • Combining Indicators 

Trend Indicators

Trend Indicators are designed to show us the trend of a security, among the many indicators available we will discuss:

  • Moving Averages
  • MACD
  • Ichimoku Kinko Hyo
  • ADX

Moving Averages

  • The moving average is a trend following indicator
  • It does not predict future market action but follows it
  • Moving Averages are used to identify the direction of the trend and define potential support and resistance levels
  • It can be viewed as a curving trendline

Types of Moving Averages

  • The only significant difference between the various types of moving averages is the weight assigned to the data
  • Simple moving averages apply equal weight to all prices
  • Exponential and weighted averages apply more weight to recent prices
  • Triangular averages apply more weight to prices in the middle  of the time period
  • Variable moving averages change the weighting based on the volatility of prices

Interpretation - Bullish Price Crossover

  • Compare the relationship between the price and its moving average
  • A bullish signal is given when prices rise above the moving average

Interpretation - Bearish Price Crossover

  • Compare the relationship between the price and its moving average
  • A bearish signal is given when prices fall below the moving average

Moving Average Convergence/Divergence

  • Also known by traders as “M-A-C-D”
  • Developed by Gerald Appel in the late seventies, the MACD is considered one of our best mathematical tools
  • It is a hybrid indicator that can be used as a trend following or even momentum indicator

MACD - Calculation

  • The MACD is made up of two plots
  • MACD Line: (12-period EMA – 26-period EMA)
  • Signal Line: 9-period EMA of MACD Line

Interpretation - Centerline Crossover

  • Centerline Crossover – MACD Line VS Zero Line used for trend direction
  • Bullish centerline crossover occurs when the MACD moves above the zero line to turn positive
  • Bearish centerline crossover occurs when the MACD moves below the zero line to turn negative

Interpretation II - Signal Line Crossover

  • Signal Line Crossover – MACD Vs Signal Line  used for price corrections
  • Bullish crossover occurs when the MACD turns up and crosses above the signal line
  • Bearish crossover occurs when the MACD turns down and crosses below the signal line

Ichimoku kinko Hyo

  • The Ichimoku Kinko Hyo was developed by Goichi Hosoda and offered to the public when he published his book in 1969
  • Ichimoku translates as “a glance” or “one look”
  • Kinko Hyo translates as “the table of equilibrium” or “balance table”
  • Defines supports and resistances, identifies trend direction, reflects momentum, and provides trading signals
  • It is made of 5 different plots but these lines are interpreted together as a single indicator for signal generation

Ichimoku kinko Hyo Plots

  • Tenkan-sen
  • Kijun-sen
  • Senkou Span A
  • Senkou Span B
  • Chikou Span

Ichimoku kinko Hyo - Conclusion

  • Movements above or below the cloud define the overall direction
  • Within the trend, the cloud changes colour as the trend ebbs and flows
  • Crossover of Tenkan-Sen and Kijun-Sen generates signals
  • Movements above or below the Chikou Span can be used to generate signals
  • All 5 plots of the Ichimoku Kinko Hyo can be used as supports and resistances

Directional Movement System

  • Is it trending or is it not?
  • (ADX), (-DI) and (+DI) represent the “Directional Movement System”
  • Identifies whether the market is trending
  • Categorizes securities by their trending characteristics

Interpretation – Trend Strength

  • ADX determines if a security is trending or not
  • A strong trend is present when ADX is above 25
  • No trend is present when ADX below 20

Interpretation – Trend Direction

  • Plus DI and Minus DI determine trend direction
  • Bullish signal when +DI crosses above -DI
  • Bearish signal when +DI crosses below -DI

Momentum Indicators

  • “Momentum” refers to the velocity or the rate-of-change of a security’s price
  • Momentum indicators oscillates above or below an equilibrium line
  • All momentum indicators compare price changes
  • They measure if a rising trend is accelerating or decelerating or whether prices are declining at a faster or slower pace from a period to another

Three Dimensions Analysis

  • Direction – Bullish or Bearish
  • Area – Overbought or Oversold
  • Divergence – Bullish or Bearish

Direction - Bullish or Bearish

  • The same techniques that are used for analyzing price trends can be applied to momentum
  • When the indicator goes below its trendline we have a bearish signal
  • When the indicator goes below its moving average we have a bearish signal and vice versa
  • A trend reversal in momentum is not always associated with a similar reversal in the price – PRICE IS THE BOSS

Area - Overbought & Oversold

  • The financial markets are essentially driven by psychological forces
  • Our emotions move from one extreme to another, from fear to greed, from hope to despair
  • This is what causes momentum indicators to fluctuate from oversold to overbought levels
  • Momentum reflects crowd psychology and measures the intensity of the emotions of market participants
  • Banded oscillators fluctuate between 0% and 100%
  • For RSI and IMI extreme levels are those beyond 70% and 30%
  • For Stochastic extreme levels are those beyond 80% and 20%
  • Other oscillators are unbanded and traders must manually identify overbought and oversold lines
  • Extreme levels are manually determined and marked where the indicator previously toped or bottomed

Indicators Analysis

We will combine the above indicators to analyze three main aspects of a security:

  • Main Trend – Bullish or Bearish
  • Current Move – Bullish or Bearish
  • Extremes – Overbought or Oversold

Main Trend Analysis

  • If 5 Indicators are Bullish, Current Move is Strong Up and vice versa
  • If 4 Indicators are Bullish, Current Move is Up and vice versa
  • If 3 Indicators are Bullish, Current Move is Weak Up and vice versa

Main Trend Analysis - Example

  • Price > SMA 100 = Bullish Signal
  • Price > EMA 55 = Bullish Signal
  • MACD > Zero = Bullish Signal
  • Price > Ichimoku Cloud = Bullish Signal
  • Momentum > 100 = Bullish Signal

Current Move Analysis

  • If 5 Indicators are Bullish, Current Move is Strong Up and vice versa
  • If 4 Indicators are Bullish, Current Move is Up and vice versa
  • If 3 Indicators are Bullish, Current Move is Weak Up and vice versa

Current Move Analysis - Example

  • MACD < EMA 9 = Bearish Signal
  • RSI > SMA 8 = Bullish Signal
  • ROC < SMA 8 = Bearish Signal
  • %K > %D = Bullish Signal
  • +DI < -DI = Bearish Signal

Extremes Analysis

  • If 2 Indicators are Overbought, Price is Overbought
  • If 2 Indicators are Oversold, Price is Oversold
  • Else, Price is Neutral

Extremes Analysis - Example

  • 30 < IMI < 70 = Neutral
  • 30 < RSI < 70 = Neutral
  • -100 < CCI < 100 = Neutral

Example - Conclusion