- Technical Analysis Indicators -

For Beginners by Trend Mentors

Technical analysis (TA) is the use of several tools and other analytical tools performed on past data to
anticipate future price movement. TA is based on two main components: Chart Patterns and
indicators. But what are indicators?

These are calculations made on the price and volume of the asset. These calculations give an indication
of trends, volatility, momentum, and much more. These calculations provide data points in which they
are then connected with a line, creating an indicator chart. They are derivatives of the price chart, and
thereby, does not imitate what the price does exactly.

Indicators can be used to obtain a better insight of what the future holds for the security. Indicators
can provide buy/sell signals as well. They can provide a perspective of what the security can do that
cannot be seen from the price chart.

Indicators can provide 3 main functionalities:

• Alert – study price action thoroughly

• Confirm – approve other TA tools or a trend
• Predict – analyse what the price may do

Reading indicators is an art. Expertise is only acquired through experience and analysis and will
develop over time.

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Choosing Indicators
It is best to choose indicators that complement each other, rather than generate the same signals.
That being said, an example of redundant indicators used together are the stochastic and the RSI.
These indicators both provide momentum and oversold/overbought levels, making them move in
unison. When choosing which indicators to follow, try to maximise the number of indicators used to
3. It is nearly impossible to have more than 3 indicators that provide the same buy/sell signal at the
same time.

Types of Indicators
There are two main types of indicators, which are the leading indicators and the lagging ones. Both
have their advantages and disadvantages, which will be discussed along.

1. Leading Indicators
• Designed to provide insight of future price movement.
• They use a specified number of periods prior to the present period, others are simply
ignored
• Some popular examples:
i. Commodity Channel Index (CCI)
ii. Momentum
iii. Relative Strength Index (RSI)
iv. Stochastic Oscillator
v. Williams %R
• What are momentum oscillators?
- These oscillators measure the rate of change of the price.
- This means that if the price is slowly turning decreasing the rate of increase,
the oscillator will show this move prior to any price decrease.
- The faster the price increases, the larger the increase in momentum.
- RSI and stochastic are momentum indicators
- Usually, consolidation of price after a sharp increase is actually healthy, since
it decreases the momentum oscillators to moderate levels.
- 𝑅𝑆𝐼 = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑓 𝑎𝑑𝑣𝑎𝑛𝑐𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 −
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑒𝑐𝑙𝑖𝑛𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

Benefits Drawbacks
Early signal for entry/exit Higher returns -> Higher risks
More signals – more opportunities Exposed to false signalling / whipsaws
Best used in trading markets (consolidation)

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 2. Lagging Indicators
• Follow price action
• Aka trend following indicators
• Work best during strong trends, not effective in sideways markets (they may lead to
false signals)
• Some popular examples
i. Moving averages (exponential, simple, weighted, variable)
ii. MACD

Benefits Drawbacks
Catch a move and remain in it Whipsawed in sideways movement
Easy to use Late
Very profitable Skewed risk/reward ratio due to late entry

Indicators must find a balance between sensitivity and consistency. Ideally, an indicator provides
early signals, no false signals, and sensitive to price movements. These features together are
impossible, and a trade-off must be made with each indicator created. Increasing sensitivity
increases the number of early signals, but also increases the number of false signals. Decreasing
sensitivity will result in late signals.

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What are Oscillators?

Oscillators are indicators that fluctuate about set levels that have meanings. A simple example of an
oscillator is the RSI, in which it has two pre-set levels: overbought and oversold levels.

There are two main types of oscillators, which are centred oscillators and banded oscillators.

1. Centred Oscillators
• fluctuate above/below a centre point
• Best used to analyse direction of price momentum.
• Identify strengths/weaknesses or direction of momentum
• Bullish when this oscillator is trading above centre line
• Bearish when this oscillator is trading below centre line
• Examples:
i. Moving Average Convergence/Divergence (MACD)
- Has both lagging and leading elements
a. Moving average is a lagging element
b. Difference between moving averages creates a momentum,
which is a leading element (rate of change)
ii. Rate of Change (ROC)
- Percentage price change over a time period
• These oscillators do not have any bounds, making it difficult to spot
overbought/oversold levels. Therefore, extremes in these oscillators can only be
noted from history.

2. Banded Oscillators
• Fluctuate between two set levels (overbought and oversold).
• Best used to identify these levels and trade accordingly.
• Allows trader to easily identify overbought/oversold conditions
• Examples:
i. Relative Strength Index (RSI)
- Overbought – 70
- Oversold – 30
- Ranges from 0-100
ii. Stochastic Oscillator
- Overbought – 80
- Oversold – 20
- Ranges from 0-100
iii. Commodity Channel Index (CCI)
- Has no range boundaries
• Although the overbought/oversold conditions are usually pre-set, they may be
needing some fine tuning for some securities.

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How to know which oscillator to use?

Centred Oscillator Banded Oscillator

Identify strength or direction of momentum Identify extreme conditions

Although you should use the oscillators to identify buy and sell signals, other identifiers should be
used such as volume, price patterns and support/resistance levels.

Positive/Negative Divergences
These are warning signals that a trend is about to change. There are two types of divergences, which
are bullish and bearish.

Bearish divergence occurs when the price makes a higher high, but the indicator shows a lower high.
This shows signs that momentum is slowing in the upside direction and gives a warning for a bearish
reversal.

Bullish divergence occurs when the price makes a lower low, but the indicator shows a higher low.
This shows signs that momentum is slowing in the downside direction and gives a warning for a bullish
reversal.

These divergences must be taken lightly in strong trends, since they may result in many false signals.

Overbought/Oversold Extremes
Banded oscillators provide information about these two conditions. Difficult to identify these
extremes in a trending market. Best observed in trading markets.

Some of the best approaches in a trending market:

• In a strong uptrend, buy at the oversold level

o Selling at the overbought level may be risky without confirmation, which leads to
smaller profits
• In a strong downtrend, short at the overbought level
• Be wary of divergences in strong trends – they may provide false signals

When indicator is in one of these extremes, monitor other TA tools, such as volume,
support/resistance, trend, price pattern, etc.

Another method to provide robust signals:

• Check for oversold conditions

• Wait for oscillator to leave this condition
• Check for divergences
• Wait for confirmation from moving average
• Buy

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Centreline Crossovers
• Used with banded oscillators to validate a divergence/signal
• Examples of centred oscillators:
o Chaikin Money Flow
o MACD
o Rate of Change
• Crossover can be interpreted as a buy/sell signal
• Movement across the centreline indicates momentum
• Some argue that these signals are late
• The centred oscillators can be used to verify a signal obtained from banded oscillators or to
show that a current trend still avails.
• Example of how to use this oscillator:
o Wait for a higher low on the oscillator (potential bullish divergence)
o Wait for MA crossover
o Wait for centreline crossover
• Although using this example will reduce profits, it will also reduce risks in avoiding false signals
• CMF can be used in the same manner, but it has only a centreline, which when trading above
it, it is a bullish sign, and it means that accumulation is present. When CMF is below zero,
there are signs of distribution, and if price continues rising, it shows a clear bearish signal.

Advantages/Disadvantages of Oscillator Signals

Advantages
Banded ones are used to identify
overbought/oversold conditions
Multiple oscillators used together increases
robustness
Can confirm trends or change in trends using
chart pattern analysis on oscillators
Effective when used with pattern analysis and
support/resistance levels
Disadvantages
Overbought/Oversold signals do not mean
sell/buy signals – false signals
Dangerous signals can be obtained against
strong trends
Oscillators may have different meanings in
different circumstances, even though pattern is
the same

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On-Balance Volume
• Focuses on the importance of volume with price
• Shows how it can affect the security’s momentum
• Volume precedes price movement
o If OBV is increasing, volume is increasing at increasing price
o If OBV is decreasing, it means that volume is used to sell and drop the price
• 𝑂𝐵𝑉 = 𝑂𝐵𝑉𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 + 𝑉𝑜𝑙𝑢𝑚𝑒𝑐𝑢𝑟𝑟𝑒𝑛𝑡
o If price is trading above previous period, a positive value is assigned
o If price is trading below previous period, a negative value is assigned
• If price is decreasing, but volume is increasing:
o Increased buying pressure
o Buy signal
• OBV should not be looked at a certain data point only, but should be seen as a trend
• If OBV is moving in same direction of trend, strength of trend is still strong.
• If OBV moves opposite of trend, it shows a sell signal (reversal signs)

Accumulation/Distribution Line (A/D line)

• Similar to OBV, but accounts for the trading range of period, rather than closing price only
((𝑐𝑙𝑜𝑠𝑒−𝑙𝑜𝑤)−(ℎ𝑖𝑔ℎ−𝑐𝑙𝑜𝑠𝑒))
• 𝐶𝐿𝑉 = ℎ𝑖𝑔ℎ−𝑙𝑜𝑤
o CLV – Close Location value
▪ Reflection of closing price relative to the range of the candle
▪ Ranges between -1 and +1
▪ +1 means that the closing value is the high of the candle
▪ -1 means that the closing value is the low of the candle
▪ 0 means that the closing value is exactly in the middle of the highest and the
lowest price of the candle
• CLV is then multiplied by the volume to obtain something similar to OBV, but more weight is
given to the money flowing in and out of the security
• When line is trending up, it is a sign of increasing buying pressure
o Stock is closing above the halfway point of the candle
• When line is trending down, it is a sign of increasing selling pressure
o Stock is closing below the halfway point of the candle
• Can be used to determine strength of trend
o Price and A/D line must move in the same direction
• Can be used to identify divergences
o Price and A/D line must move in opposite directions

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Average Directional Index (ADX)
• Measures strength/momentum of trend
• Does not care about the direction of the trend
• Price moves faster than ADX – therefore, should only be used as a trend indicator
• Made up of 3 components
o The ADX line
▪ 𝐴𝐷𝑋 = 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑒𝑥𝑝𝑜𝑛𝑒𝑛𝑡𝑖𝑎𝑙 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝐷𝑋
+𝐷𝐼−(−𝐷𝐼)
▪ 𝐷𝑋 = +𝐷𝐼+(−𝐷𝐼)
o The Positive Directional Indicator (+DI)
▪ Measures the strength of upward trend
o The Negative Directional Indicator (-DI)
▪ Measures the strength of downward trend
• Bounded between 0 to 100
• Standard period = 14
• When 𝐴𝐷𝑋 > 40 – strong trend
• When 𝐴𝐷𝑋 < 20 – weak trend
• Falling below 40 shows a possible reversal
• Advancing above 20 shows a possible trend
• Signals are also provided when +DI and -DI cross each other.
o Buy signal when +DI exceeds -DI
o Sell signal when +DI falls below -DI

AROON
• Measures if security is in trend
• Measures the magnitude of the trend
• Can also indicate when a new trend is set to begin
• 2 components:
o Aroon-up
▪ Measures the amount of time since the highest price (of the period)
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠−𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑠𝑖𝑛𝑐𝑒 ℎ𝑖𝑔ℎ𝑒𝑠𝑡 𝑝𝑟𝑖𝑐𝑒
▪ 𝐴𝑟𝑜𝑜𝑛𝑢𝑝 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
× 100
o Aroon-down
▪ Measures the amount of time since the lowest price (of the period)
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠−𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑠𝑖𝑛𝑐𝑒 𝑙𝑜𝑤𝑒𝑠𝑡 𝑝𝑟𝑖𝑐𝑒
▪ 𝐴𝑟𝑜𝑜𝑛𝑑𝑜𝑤𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
× 100
• Uptrend when 𝐴𝑟𝑜𝑜𝑛𝑢𝑝 > 70 and 𝐴𝑟𝑜𝑜𝑛𝑢𝑝 > 𝐴𝑟𝑜𝑜𝑛𝑑𝑜𝑤𝑛
• Downtrend when 𝐴𝑟𝑜𝑜𝑛𝑑𝑜𝑤𝑛 > 70 and 𝐴𝑟𝑜𝑜𝑛𝑑𝑜𝑤𝑛 > 𝐴𝑟𝑜𝑜𝑛𝑢𝑝
• Consolidation when two lines are near each other and 30 < 𝐴𝑟𝑜𝑜𝑛 < 70
• When the Aroon falls below 50, it shows that the trend is weakening
• The Aroon oscillator is simply the difference between the up and down. The centreline is
considered the signal line, which when crossed over, signals a buy or sell signal

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MACD
• Signals both trend and momentum
• 2 components:
o 2 exponential moving averages (EMA)
▪ By default, 12-period and 26-period
o Difference between the 2 EMAs
▪ Measures short-term momentum
• 𝑀𝐴𝐶𝐷 = 𝐸𝑀𝐴𝑠ℎ𝑜𝑟𝑡 − 𝐸𝑀𝐴𝑙𝑜𝑛𝑔
• Histogram – difference between MACD and signal line (centreline)
o Higher the bars – higher the momentum
• Buy/sell signals
o Crossover
▪ When fast MA line crosses over slow MA line (bars on histogram)
▪ When the MACD line crosses the centreline
o Divergence
▪ Momentum of security is moving in opposite direction of trend, showing
weakening trend, and possibly reversal
• If MACD is moving up while price is moving down – bullish
• If MACD is moving down while price is moving up – bearish

RSI
• Range between 0 and 100
• 100 – highest overbought condition
• 0 – highest oversold condition
• Measures strength of up moves vs strength of down moves
• Signals buying or selling pressure over a period
• Standard – 14 periods
100
• 𝑅𝑆𝐼 = 100 − 1+𝑅𝑆
𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒𝑠 𝑜𝑓 𝑢𝑝 𝑑𝑎𝑦𝑠𝑛
o 𝑅𝑆 =
𝑠𝑢𝑚 𝑜𝑓 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒𝑠 𝑜𝑓 𝑑𝑜𝑤𝑛 𝑑𝑎𝑦𝑠𝑛
o 𝑤ℎ𝑒𝑟𝑒 𝑛 𝑖𝑠 𝑡ℎ𝑒 𝑡𝑟𝑎𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
• Overbought line = 70
• Oversold line = 30
• 2 ways to generate signals:
o Crossovers
▪ RSI breaks above the oversold line
▪ RSI breaks below the overbought line
▪ RSI breaks above/below the centreline (50) – better used to confirm the
other crossovers, rather than on its own
o Divergence
▪ RSI going higher, but price moving lower – end of a downtrend
• Buying pressure is increasing
▪ RSI is decreasing during an uptrend – reversal
• Selling pressure is decreasing

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Stochastic Oscillator
• Closing price should close in the same direction of prevailing trend
o During uptrend – price should close near highs of trading range of the period
o During downtrend – price should close near lows of trading range of the period
o Momentum continues in the same direction when this happens
• Range from 0 to 100
• Overbought conditions > 80
• Oversold conditions < 20
• Made up of two lines:
o %K – raw measure of momentum
o %D – moving average of %K
• %D line is considered more important as it produces better signals
• Standard – 14 periods
𝑐𝑙𝑜𝑠𝑒−𝑙𝑜𝑤𝑒𝑠𝑡 𝑝𝑟𝑖𝑐𝑒 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
• %𝐾 = ℎ𝑖𝑔ℎ𝑒𝑠𝑡 𝑝𝑟𝑖𝑐𝑒 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑−𝑙𝑜𝑤𝑒𝑠𝑡 𝑝𝑟𝑖𝑐𝑒 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 × 100
• %𝐷 = 3 𝑝𝑒𝑟𝑖𝑜𝑑 𝑚𝑜𝑣𝑖𝑛𝑔 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 %𝐾
• 2 methods of signalling
o Crossover
▪ When %K crosses through the %D line
o Divergence
▪ Using the %D line:
• When the oscillator increases while price decreases – buy signal
• When the oscillator decreases while price increases – sell signal
▪ If the buy signal is obtained when oscillator is oversold, signal is much
stronger
▪ If the sell signal is obtained when oscillator is overbought, signal is much
stronger
• Commonly paired with the MACD

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Bollinger Bands
• Two standard deviations away from simple moving average
• Standard deviation = measure of volatility
o When market becomes volatile, bands widen
o When market becomes less volatile, bands become narrow
• Squeeze
o Constricts the moving average
o Period of low volatility
o Potential sign of increased volatility
o Bands give no indication when the change may take place or which direction
• Breakouts
o 90% of price action occurs in the Bollinger Bands
o Breakout above/below the band is a major event
o Breakout is not a trading signal
• The Bollinger Bands is not to be used alone
o It simply gives the trader an indication of the price volatility
• Often used with:
o MACD
o OBV
o RSI
• Price continuously touching upper band – overbought -> sell signal
• Price continuously touching lower band – oversold -> buy signal
• Strategy
o Buy when price crosses below Bollinger Bands to take advantage of oversold
conditions and make small profits
o May not be always beneficial – many false signals

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