Technical Indicators
Technical analysis is the study of market action, primarily through the use of charts, for the purpose of
forecasting future price trends. In its purest form, technical analysis considers only the actual price behavior of
the market or instrument, based on the premise that price reflects all relevant factors before an investor becomes aware
of them through other channels. Technicians say that a market's price reflects all relevant information, so their analysis
looks more at "internals" than at "externals" such as news events. Price action also tends to repeat itself because
investors collectively tend toward patterned behavior - hence technicians' focus on identifiable trends and conditions.
There are bunch of different indicators or charts available, however, we focus only on those, that recommended by
Phil Town in his book "Rule#1". Phil Town calls it "The Three Tools".
The Three Tools is a set of Technical Indicators - Moving Average, Stochastics and MACD. They are very useful once
we have identified a wonderful business that passes all Four Ms (Meaning, Moat, Management and Margin of safety) and
we want to buy.
In statistics, a moving average or rolling average is one of a family of similar techniques used to analyze time series
data. It is applied in finance and especially in technical analysis. It can also be used as a generic smoothing operation,
in which case the raw data need not be a time series.
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The idea behind this indicator is the prices tend to close near their past highs in bull markets, and near their lows in
bear markets. Transaction signals can be spotted when the stochastic oscillator crosses its moving average.
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MACD, which stands for Moving Average Convergence / Divergence, is a technical analysis indicator created by Gerald Appel
in the 1960s. It shows the difference between a fast and slow exponential moving average (EMA) of closing prices.
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An exponential moving average (EMA), sometimes also called an exponentially weighted moving average (EWMA), applies
weighting factors which decrease exponentially. The weighting for each older data point decreases exponentially, giving
much more importance to recent observations while still not discarding older observations entirely.
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What Does MACD Do? MACD Bullish Signals: Positive Divergence, Bullish Moving Average Crossover, Bullish Centerline
Crossover, Using a Combination of Signals. Bearish Signals: Negative Divergence, Bearish Moving Average Crossover,
Bearish Centerline Crossover, Combining Signals.
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