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.
Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them.
"Everyone wants in on the next Microsoft," "If this stock ever gets to $50 again, I will buy it," "This company's
technology will revolutionize its industry, therefore this stock will skyrocket" – these are all examples of investor
sentiment repeating itself. To a technician, the emotions in the market may be irrational, but they exist. Because investor
behavior repeats itself so often, technicians believe that recognizable (and predictable) price patterns will develop on
a chart.
Technical analysis is not limited to charting, but it always considers price trends. For example, many technicians
monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they
are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal
could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment. Surveys
that show overwhelming bullishness, for example, are evidence that an uptrend may reverse – the premise being that if
most investors are bullish they have already bought the market (anticipating higher prices). And because most investors
are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the
bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.
Traders generally share the view that trading in the direction of the trend is the most effective means to be profitable in
financial or commodities markets. John W. Henry, Larry Hite, Ed Seykota, Richard Dennis, William Eckhardt, Victor Sperandeo, Michael
Marcus and Paul Tudor Jones (some of the so-called Market Wizards in the popular book of the same name by Jack D. Schwager)
have each amassed massive fortunes via the use of technical analysis and its concepts. George Lane, a technical analyst, coined
one of the most popular phrases on Wall Street, "The trend is your friend!"
There are a lot of different indicators or charts available, however, on Stock Analyzer we calculate
only those, that recommended by Phil Town in his book "Rule#1". Phil Town calls it "The Three Tools": Moving Average, Stochastics and MACD.
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.
Read more...
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.
Read more...
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.
Read more...
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.
Read more...
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.
Read more...
The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price.
Read more...
The Relative Strength is a measure of price trend that indicates how a stock is performing relative to other stocks in its industry. It is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period.
Read more...
|