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Source: http://www.doksinet Indicators Most indicators highlight a particular aspect of price or volume behavior. Newcomers often attach mystical significance to their favorite indicators but none are infallible. When using indicators: • Select a small number of indicators (2 or 3) and use them to confirm signals from each other; • Study their behavior until you know them well. Indicators are like a carpenters tools - skilled use can produce excellent results, unskilled use may lead to injury. • Select indicators that complement each other and are not based on the same data. For example: three indicators based on closing price will tend to confirm each other; while indicators based respectively on closing price, volume and trading range will often conflict and are therefore more reliable when they do confirm each other. • Use a trend indicator in a longer time frame than the cycle being traded (e.g if trading the secondary cycle, use a 150-day moving average to

indicate the direction of the primary trend). Only trade in the direction of the trend signaled Indicator Categories Price/volume indicators As the name suggests, these are based on price and/or volume. • Trend indicators, such as moving averages, are used to indicate the direction of a trend; • Momentum indicators measure the speed at which price is changing; • Volume Indicators are used to confirm the strength of trends; • Volatility Indicators confirm price behavior. Indicator Basics Trending v. Ranging Markets No one indicator is suited to all market conditions. Trend indicators lose money during a ranging market, as fluctuations in a narrow price range whipsaw traders in and Source: http://www.doksinet out of positions. In a trending market, momentum indicators give too many signals and should only be used to confirm trend indicators. Respect If price reverses direction when it reaches a moving average (or trend line) we say that price has respected that

moving average (or trend line). This is significant as it confirms that price is trending. Whipsaws If price fluctuates around a moving average, frequently crossing above and below, this is referred to as whipsawing. Price whipsawing around a moving average signals that price is ranging. Source: http://www.doksinet Divergence Many indicators tend to imitate the peaks and troughs on the price chart with a series of similar highs and lows. Divergence occurs when the indicator fails to imitate the pattern on the price chart, a sign of trend weakness and likely reversal. In an up-trend, if price makes a new High (a higher peak than the last) but the indicator fails to do so, that is a bearish divergence. In a down-trend, if price makes a new Low (a lower trough than the last) but the indicator does not, a bullish divergence occurs. Unless supported by other indicators, ignore weaker divergences where: • Price makes an equal High (a double top) and the indicator makes a lower High

or price makes an equal Low (a double bottom) and the indicator makes a higher Low; or • Price reaches a new High and the indicator makes an equal High or price reaches a new Low and the indicator makes an equal low; or • Peaks or troughs are only marginally different in height (if you need a ruler to distinguish which is higher). Source: http://www.doksinet Failure Swings Failure swings, in overbought or oversold territory, signal that a trend is weakening and likely to reverse. They also add weight to other signals and are identified by either: • A trough [LL] below the oversold level, • followed by an intervening peak that does not reach the overbought level, • then a higher second trough [HL]. • To complete the failure swing the indicator must then rise above the intervening peak. OR • A peak [HH] above the overbought level, • followed by an intervening trough that does not reach the oversold level, • then a lower second peak [LH]. • To

complete the failure swing the indicator must then fall below the intervening trough. This pattern of highs and lows is identical to a trend reversal on a price chart. The signal is strongest when the second peak (or trough) is also above the Overbought level (below the Oversold level), though this is not essential for a valid failure swing. Source: http://www.doksinet Triple Divergence A triple divergence only occurs where a divergence has given an incorrect signal. Instead of reversing direction, price has made a new, higher High (in an up-trend) or lower Low (in a down-trend). If the indicator repeats its signal by making another lower High (in an up-trend) or higher Low (in a down-trend), this is an even stronger signal than the original divergence. Classic Divergence George Lane (Stochastic indicator) identified a weaker form of triple divergence where the third peak is higher than the second. Source: http://www.doksinet Indicator Time Frames Indicators should be adjusted

to reflect the cycle being studied. The same general rule applies to moving averages and oscillators. Alexander Elder (in Trading for a Living), however, gives useful advice for when in doubt: • With trend indicators, make the window period longer; • With oscillators, make the period shorter. Moving Averages Use moving averages (MAs) that are half the length of the cycle: • 200 Day (40 Week) MAs are popular for tracking longer cycles; • 20 to 65 Day ( 4 to 13 Weeks) MAs are useful for intermediate cycles; and • 5 to 20 Days for short cycles. Momentum Indicators Use windows that are half the length of the cycle. Martin Pring ( in Technical Analysis Explained) stresses the importance of using several windows with momentum indicators, in order to highlight patterns occurring in different time frames. He offers the following guidelines: • Primary trend: 12 (recommended), 18 or 24 months; • Intermediate cycle: 3, 6 or 9 months (13, 26 or 39 weeks); and • Short

cycle:10 to 30 days. Cycles often vary in length - regularly check that the window that you are using is still appropriate. Trend Indicators Bar chart signals often conflict and it is difficult to separate the trend from the surrounding noise. Trend indicators attempt to provide an objective measure of the Source: http://www.doksinet direction of the trend. Price data is smoothed and the trend is represented by a single line, as in the case of a moving average. Because of the smoothing process the indicators tend to lag price changes and are often called trend following indicators. Trend Indicators Bar chart signals often conflict and it is difficult to separate the trend from the surrounding noise. Trend indicators attempt to provide an objective measure of the direction of the trend. Price data is smoothed and the trend is represented by a single line, as in the case of a moving average. Because of the smoothing process the indicators tend to lag price changes and are often

called trend following indicators. Trending v. Ranging Markets Most trend indicators lose money during a ranging market as fluctuations in a narrow price band tend to whipsaw traders in and out of their positions. It is important to identify whether the market is trending or ranging and to employ indicators suited to the purpose: trend indicators for trending markets and the faster momentum indicators for ranging markets. Types of Trend Indicators Moving Average - Closing Price Moving average Two Moving Averages Three Moving Averages Moving Average Oscillator MACD MACD Histogram TRIX Indicator Smoothed Rate of Change Moving Average - Overbought / Oversold Price Envelope Bollinger Bands Source: http://www.doksinet Directional Movement Directional Movement System Stop and Reverse System Parabolic SAR Closing price compared to Moving Average Commodity Channel Index Detrended Price Oscillator Price Averages Median Price Typical Price Weighted Close Price Comparison Price

Comparison Price Ratio Price Differential Moving Averages Moving averages provide an objective measure of trend direction by smoothing the price data. Normally calculated using closing prices, moving averages can also be used on median, typical and weighted closing prices as well as other indicators (see Indicator Smoothing). Time Frames Shorter length moving averages (MAs for short) are more sensitive and identify new trends earlier, but also give more false alarms. Longer moving averages are more reliable but only pick up the big trends. It is best to use a moving average that is half the length of the cycle that you are tracking. If the peak-to-peak cycle length is roughly 30 days then a 15 day moving average is appropriate. If 20 days, then a 10 day moving average is appropriate You will, however, often find traders using 14 and 9 day MAs for the above cycles in the hope that they will generate signals slightly ahead of the market. • 200 Day (40 Week) moving averages are

popular for tracking longer cycles; Source: http://www.doksinet • 20 to 65 Day ( 4 to 13 Week) moving averages are useful for intermediate cycles; and • 5 to 20 Days for short cycles. Cycles vary in length over time - always check that the moving average you are using is still appropriate. Trading Signals Click on the following links for details of the various moving average trading systems: Single Moving Average Compares price to a single moving average. The system is often used with filters Filters Filters are used to eliminate uncertain signals by objectively measuring when price has crossed the moving average. Moving Average Directional Filter Uses the slope of the moving average as a filter. Two Moving Averages Uses a fast moving average instead of a filter. Three Moving Averages The third moving average identifies when price is ranging. Multiple Moving Averages A series of five fast moving averages and five slow moving averages. Single Moving Average This is the

simplest of the moving average systems. The system needs to be combined with a system that identifies ranging markets, when price whipsaws back and forth across the Moving Average, resulting in losses. Trading Signals Signals are generated when price crosses the Moving Average: • Go long when price crosses to above the moving average from below. Source: http://www.doksinet • Go short when price crosses to below the moving average from above. Filters Filters are used to eliminate uncertain signals. They objectively measure if price has crossed the moving average. Commonly used filters are: • Closing Price - either one, two or three closes must cross the Moving Average; • Typical price, Median price or Weighted close; • The entire bar must cross the moving average; • Two or three bars (in succession) must cross the moving average; or • Moving Average Direction Moving Average Directional Filter Trades are only entered if the moving average is sloping in the

direction of the trade: • Go long if price crosses a rising moving average from below. • Go short if price crosses a falling moving average from above. Exit when price re-crosses the Moving Average. Moving Average Direction can be used in conjunction with other filters such as closing price. Example Intel Corporation is plotted with a 63 day exponential moving average. The single moving average is used with two filters: • Moving average direction, and • The moving average must be crossed by closing price on two consecutive days. Source: http://www.doksinet 1. Go short - two closes below a falling Moving Average 2. Go long - moving average is now rising and price has closed above the moving average for 2 days. The following dip below the moving average (in early January) is filtered out. 3. The long trade is exited as there are two closes below the moving average No short trade is entered as the moving average is sloping upwards. 4. Go long - two closes above a

rising moving average 5. Go short as there are two closes below a falling moving average 6. Go long - two closes above a rising moving average 7. Go short - two closes below a falling moving average 8. Go long - moving average is rising again and there are 2 closes above it Note how profitable the long trade [2] is during the strong upward trend, compared to when price whipsaws around the relatively flat moving average, frequently switching you in and out of trades. Trend indicators are normally unprofitable, and should be avoided, during ranging markets. Two Moving Averages Source: http://www.doksinet An alternative approach to using filters is to use a fast moving average to represent the price line. The fast moving average used is normally 5 days and the slow moving average is selected according to the length of the cycle being traded. The system still has the same weakness as the single moving average system: unprofitable trades are signaled during ranging markets. Trading

Signals Signals are generated when the moving averages cross: • Go long when the fast moving average crosses the slow moving average from below. • Go short (reverse your position) when the fast moving average crosses the slow moving average from above. You can always identify the fast Moving Average by its higher peaks and troughs. Take a look at the chart below. Example Intel Corporation is plotted with 5 day and 63 day exponential moving averages. Source: http://www.doksinet 1. Go short when the fast Moving Average crosses to below the slow moving average. 2. Go long when the fast moving average crosses to above the slow moving average. 3. No action is taken as the MAs have not crossed 4. Go short 5. Go long 6. Go short 7. Go long The system reduces whipsaws but still signals losing trades during a ranging market. Trailing Stops may help to eliminate unprofitable trades. Three Moving Averages The Three Moving Average system attempts to identify ranging markets which

are then avoided as they tend to be unprofitable when traded with trend indicators. Trading Signals The system features three moving averages: fast, middle and slow. Entry points are determined by the middle moving average crossing the long moving average and exit points by the fast moving average crossing the middle moving average: Go long when: • middle Moving Average crosses to above slow moving average from below; AND • fast moving average is above middle moving average. Close long when fast Moving Average crosses to below middle moving average from above. Go short when: • middle Moving Average crosses to below slow moving average from above; AND • fast moving average is below middle moving average. Close short when fast Moving Average crosses to above middle moving average from below. Source: http://www.doksinet Example Intel Corporation chart with 5 day (fast), exponential moving averages. 21 day (middle), and 63 day (slow) 1. Close previous long trade as

the fast Moving Average has fallen below the middle moving average. 2. Go long as the middle moving average has risen above the slow moving average (and the fast moving average above the middle moving average). 3. Close long trade - fast moving average has fallen below middle moving average 4. We are whipsawed in and out of a long position as the fast moving average crosses to above then back under the middle moving average. 5. Another whipsaw 6. Go long as the fast moving average crosses to above the middle moving average (and the middle moving average is above the slow moving average). Whipsaws are not entirely eliminated. Using trailing stops to time entry and exit points may further reduce unprofitable trades. MACD: Moving Average Convergence Divergence Source: http://www.doksinet The MACD is basically a refinement of the two moving averages system and measures the distance between the two moving average lines. Signals are taken when MACD crosses its signal line, calculated as

a 9 day exponential moving average of MACD. The indicator is primarily used to trade trends and should not be used in a ranging market. Trading Signals First check whether price is trending. If MACD is flat or stays close to the zero line, the market is ranging and signals are unreliable. Trending Market • Go long when the MACD line crosses the signal line from below. • Go short when the MACD line crosses the signal line from above. Signals are far stronger if there is either: • a divergence on the MACD line; or • a large swing above or below the zero line. Unless there is a divergence, do not go long if the signal is above the zero line, nor go short if the signal is below zero. Place stop-losses below the last minor Low when long, or the last minor High when short. Example Microsoft Corporation chart with: MACD, and MACD signal line. Source: http://www.doksinet 1. Go short [S] - MACD crosses to below the signal line after a large swing 2. Go long [L] when MACD

crosses to above the signal line 3. Strong short signal [S] - the MACD crosses after a large swing and bearish divergence (shown by the trendline). 4. Go long [L] Flat MACD signals that the market is ranging - we are more likely to be whipsawed in/out of our position. 5. Exit long trade [X] but do not go short - MACD is significantly below the zero line 6. Re-enter your long trade [L] Setup The default settings for the MACD are: • Slow moving average - 26 days • Fast moving average - 12 days • Signal line - 9 day moving average of the difference between fast and slow. • All moving averages are exponential. Captions and trendlines: Use MACD Histogram if you want to draw trendlines or place captions on the histogram. Otherwise, they are left "hanging in the air" if you zoom or change time periods. Source: http://www.doksinet MACD Histogram The signals from the MACD indicator tend to lag price movements. The MACD Histogram attempts to address this problem

by plotting the distance between MACD and its signal line. Because of this, the histogram signals trend changes well in advance of the normal MACD signal, but is less reliable and should be confirmed by other indicators. Only trade with Histogram signals when the market is trending. The MACD Histogram can also be used to track longer cycles, using weekly or monthly data. Trading Signals Use Stop Losses with all trades. Ranging Markets Signals are stronger if • There is a bullish divergence on the Histogram; or • The signal occurs far from the zero line. Disregard signals close to the zero line unless confirmed by a divergence. • Go long when the MACD Histogram turns up below zero. Close the position when there is a signal to go short. • Go short when MACD Histogram turns down above zero. Close the position when there is a signal to go long. Trending Markets Only trade in the direction of the trend. Signals close to the zero line are accepted provided the trend is

intact. • Go long when the MACD Histogram turns up below zero. • Go short when MACD Histogram turns down above zero. Source: http://www.doksinet Use a trend indicator, such as a moving average, to exit from trends. Example Intel Corporation is shown with MACD histogram and average. Trendlines show divergences 21-day exponential moving 1. Price is ranging - indicated by the flat MA Go long [L] when the histogram turns up (far from the zero line). Place a stop below the recent Low 2. Go short [S] as the histogram turns down (far from the zero line) Place a stop above the recent High. 3. Go long [L] - the histogram turns up and is reinforced by a bullish divergence Place a stop below the recent Low. 4. Go short [S] as the histogram turns down - reinforced by a bullish divergence Place a stop above the recent High. 5. Ignore the signal as it is too close to the zero line 6. Go long [L] as the histogram turns up when well below zero Place a stop below the recent Low. 7. A

further signal to go short [S] Place a stop above the recent High 8. Go long [L] - the histogram has turned up and is reinforced by a bullish divergence. Price has broken clear of the trading range and the MA is rising - exit [X] when price closes below the MA. Source: http://www.doksinet Setup The default settings are: • Slow moving average - 26 days • Fast moving average - 12 days • Signal line - 9 day moving average of the difference between fast and slow. • All moving averages are exponential. To alter the default settings - see Edit Indicator Settings. See Indicator Panel for directions on how to set up an indicator. Captions and trendlines: Do not use MACD if you want to draw trendlines or place captions on the histogram. These are left "hanging in the air" if you zoom or change time periods. Smoothed Rate of Change Smoothed Rate of Change was first introduced by Fred G Schutzman in Futures magazine, April 1991. The oscillator performs a similar

function to the Momentum and Rate Of Change indicators but avoids some of the weaknesses: • Because of the smoothing the indicator is less erratic and gives fewer false signals; • The exponential moving average ensures that the indicator only "barks" once. See Momentum Construction for more detail. Smoothed Rate of Change (SROC) first calculates a 13-day exponential moving average of closing price. Then calculate a 21-day Rate of Change of the exponential moving average. Trading Signals Trading rules are similar to Momentum and Rate Of Change. Trending Markets First, identify the trend direction using a trend indicator. Smoothed Rate of Change tends to stay above zero during an up-trend and below zero during a down-trend. Only take signals in the direction of the trend. Source: http://www.doksinet • In an up-trend, go long if SROC turns upwards when below zero. • In a down-trend, go short if SROC turns downward when above zero. Divergences add strength to

buy and sell signals. Exit using a trend indicator. Use trailing buy and sell stops to time your entry and exit. Example Australian Stock Exchange Limited (ASX) is shown with average (EMA) and Smoothed Rate of Change. 21-day exponential moving 1. Go short [S] when SROC turns down while above zero Wait for the EMA to turn downwards. Exit the trade [X] when price closes above the EMA 2. Go short [S] when SROC again turns down while above zero, completing a bearish divergence. Wait for the EMA to turn downwards Exit the short trade [X] when price closes above the EMA. 3. SROC turns up while below zero No action is taken as the EMA continues to slope downwards. Source: http://www.doksinet 4. Go long [L] when SROC turns up while below zero, completing a bullish divergence. Wait for the EMA to turn upwards 5. SROC turns down while above zero but the EMA continues to rise Exit the long trade and go short at [S] when price eventually closes below the EMA. Setup See Indicator Panel for

directions on how to set up an indicator. The default settings for Smoothed Rate of Change are : • 13-day exponential moving average; and • 21-day rate of change. To alter the default settings - Edit Indicator Settings. Moving Average - Overbought / Oversold Price Envelopes Price envelopes (or percentage bands) are plotted at a set percentage above and below a moving average. They are used to indicate overbought and oversold levels and can be traded on their own or in conjunction with a momentum indicator. The length of the moving average should be varied according to the cycle that you are trading. See Moving Averages for details The Percentage should be set so that about 90% of price activity is contained within the bands. Adjust the band width if volatility increases over time Trading Signals First, identify whether price is trending or ranging: • When price swings back and forth across the moving average it is ranging. • When price stays above the moving average

it is in an up-trend. • When price stays below the moving average it is trending down. Ranging Market The theory is that a movement that starts at one price band is likely to carry to the other, though this is not entirely reliable. Stop losses should be placed below the most recent low when you go long or above the latest high if you go short. Source: http://www.doksinet • Go long when prices turn up near the lower band. Close your position if price turns down near the upper band or if it crosses back below the moving average (from above). • Go short when price turns down near the upper band. Close your position if price turns up near the lower band or crosses back above the moving average (from below). Use reversal signals to detect turning points close to the upper and lower bands. Closing price is often used as a filter with the moving average. Trailing buy- and sellstops can be used to time entry and exit points Example 1 IBM is charted with average. Percentage

bands at 7% around a 30 day exponential moving 1. Go long [L] - there is a hook reversal when price is near the lower band 2. Exit [X] the long position when price closes back below the moving average 3. Go long again [L2] when price turns up near the lower band 4. Go short [S] when price turns down near the upper band Source: http://www.doksinet 5. Continue with this pattern until price begins to trend (indicated by the breakout from the trading range) then switch to the signals below. Bollinger Bands Bollinger Bands were invented by John Bollinger. Used to confirm trading signals, normally from a Momentum Indicator, the bands indicate overbought and oversold levels relative to a moving average. Bollinger Bands are calculated at a specified number of standard deviations above and below the moving average, causing them to widen when prices are volatile and contract when prices are stable. Bollinger originally used a 20 day simple moving average and set the bands at 2 standard

deviations, suited to intermediate cycles. Trading Signals Example 1 Microsoft is charted with 20 day Bollinger bands at 2 standard deviations. Contracting bands warn that the market is about to trend: the bands first converge into a narrow neck, followed by a sharp price movement. The first breakout is often a false Source: http://www.doksinet move, preceding a strong trend in the opposite direction. A contracting range [C] is evident in June 1998: the bands converge to a width of $2, followed by a breakout in July to a new high. A move that starts at one band normally carries through to the other, in a ranging market. A move outside the band indicates that the trend is strong and likely to continue unless price quickly reverses. Note the quick reversal [QR] in early August A trend that hugs one band signals that the trend is strong and likely to continue. Wait for divergence on a Momentum Indicator to signal the end of a trend. Bollinger Bands Bollinger Bands were invented by

John Bollinger. Used to confirm trading signals, normally from a Momentum Indicator, the bands indicate overbought and oversold levels relative to a moving average. Bollinger Bands are calculated at a specified number of standard deviations above and below the moving average, causing them to widen when prices are volatile and contract when prices are stable. Bollinger originally used a 20 day simple moving average and set the bands at 2 standard deviations, suited to intermediate cycles. Trading Signals Example 1 Microsoft is charted with 20 day Bollinger bands at 2 standard deviations. Source: http://www.doksinet Contracting bands warn that the market is about to trend: the bands first converge into a narrow neck, followed by a sharp price movement. The first breakout is often a false move, preceding a strong trend in the opposite direction. A contracting range [C] is evident in June 1998: the bands converge to a width of $2, followed by a breakout in July to a new high. A move

that starts at one band normally carries through to the other, in a ranging market. A move outside the band indicates that the trend is strong and likely to continue unless price quickly reverses. Note the quick reversal [QR] in early August A trend that hugs one band signals that the trend is strong and likely to continue. Wait for divergence on a Momentum Indicator to signal the end of a trend. Example 2 Microsoft Corporation: day Rate of Change. 20 day Bollinger bands at 2 standard deviations and 10 Source: http://www.doksinet 1. Go short [S] - bearish divergence on ROC 2. Contracting Bollinger Bands [C] warn of increased volatility This begins with a false rally (note the ROC triple divergence) followed by a sharp fall. 3. Go long [L] - price hugs the lower band, followed by a bullish divergence on ROC. 4. Go short [S] - price hugs the upper band, followed by a bearish divergence on ROC. Setup The default settings for Bollinger bands are 2.0 standard deviations around a 20

day exponential moving average. Edit Indicator Settings to change the standard settings Directional Movement The Directional Movement System is a fairly complex indicator developed by Welles Wilder and explained in his book, New Concepts in Technical Trading Systems. Most indicators have one major weakness - they are not suited for use in both trending and ranging markets. The key feature of the Directional Movement System is that it first identifies whether the market is trending before providing signals for trading the trend. Source: http://www.doksinet Directional Movement System measures the ability of bulls and bears to move price outside the previous days trading range. The system consists of three lines: • The Positive Direction Indicator (+DI) summarizes upward trend movement; • The Negative Direction Indicator (-DI) summarizes downward trend movement; and • The Average Directional Movement Index (ADX) indicates whether the market is trending or ranging. See

Construction for further details. Welles Wilder does not use the standard moving average formula. This should be taken into account when selecting indicator time periods. See Welles Wilders Indicators Trading Signals A number of different trading systems have developed around Directional Movement. The following rules are based on the system presented by Dr Alexander Elder in Trading for a Living: Go long when +DI is above -DI and either: • ADX rises while +DI and ADX are above -DI; or • ADX turns up from below +DI and -DI. Exit when +DI crosses below -DI. See ADX below for further details. Go short when -DI is above +DI and either: • ADX rises while -DI and ADX are above +DI; or • ADX turns up from below +DI and -DI. Exit when -DI crosses below +DI. Use stop-losses at all times. ADX: Declining ADX shows that the market is losing direction. When ADX falls below both +DI and -DI it signals a lifeless market. Do not trade with DMS until ADX has clearly turned off the

bottom. Dr Elder suggests waiting until ADX rises 4 steps off its low (eg ADX rises to 19 from a low of 15). The longer that ADX has remained below both +DI and -DI the stronger the subsequent trend is likely to be. Source: http://www.doksinet When ADX rises above both +DI and -DI it signals that the market is becoming overheated. Take profits when ADX turns downwards from above +DI and -DI Example The Commonwealth Bank of Australia Limited is plotted with 14-day ADX. +DI, -DI and 1. -DI crosses to above +DI so trade only short 2. Go short when ADX rises above +DI 3. Take profits when ADX turns down while above +DI and -DI Exit short trade and trade only long as +DI has crossed to above -DI. 4. Go long as ADX starts rising while above -DI 5. Take profits when ADX turns down while above +DI and -DI 6. Exit long trade and trade only short as -DI has crossed to above +DI ADX continues to fall so there are no trades. 7. Trade only long as +DI has crossed to above -DI ADX turns up

while below +DI and -DI, but does not rise by the recommended 4 steps, so no trade is entered. 8. One view is that you should go long whenever ADX rises above -DI, but ADX has remained very low and flat and it would be advisable not to trade until ADX has risen by at least 4 steps above its recent low. Source: http://www.doksinet 9. Trade only long as +DI has crossed to above -DI 10. Go long when ADX rises above -DI 11. Exit long trade when +DI falls below -DI Setup The default Directional Movement System uses 14 day smoothing. This is not equivalent to a 14 day EMA. Click here for details Parabolic SAR Parabolic SAR was developed by J. Welles Wilder Jr and is described in his book New Concepts in Technical Trading Systems. SAR stands for stop and reverse Parabolic SAR should only be employed in trending markets - when it provides useful entry and exit points. It is plotted in a rather unorthodox fashion: a stop loss is calculated for each day using the previous days data. The

advantage is that the stop level can be calculated in advance of the market opening. • A stop level below the current price indicates that your position is long. The stop will move up every day until activated (when price falls to the stop level). • A stop level above the current price indicates that your position is short. The stop moves down every day until triggered (when price rises to the stop level). See Construction for further details. Trading Signals Your first step is to confirm that the market is trending: • Use a trend indicator, or • Stop trading with the Parabolic SAR if you are whipsawed twice in a row and recommence after you observe a breakout from the chart pattern. A trade is signaled when the price bars and stop levels intersect: • Go long when price meets the Parabolic SAR stop level, while short. Source: http://www.doksinet • Go short when price meets the Parabolic SAR stop level, while long. Example Microsoft Corporation plotted with

average. Parabolic SAR and 63-day exponential moving 1. Ignore signals while price is ranging (identified by the fluctuations around the MA). Go long at [L] after price respects the MA Price then breaks out of the range, confirming our signal. 2. Exit [X] when price activates the Parabolic SAR stop Do not go short as the MA slopes upwards. 3. Go long [L] when price crosses back above the stop MA is still rising 4. Exit [X] when price falls to the stop level Do not go short as the MA slopes upwards. 5. Go long [L] when price crosses back above the stop MA is still rising 6. Exit [X] when price falls to the stop level Do not go short as the MA still slopes upwards. Source: http://www.doksinet In the original system, short signals are taken at each exit point [X], resulting in unprofitable trades against the trend. Setup See Indicator Panel for directions on how to set up Parabolic SAR on the price chart. The default settings are an acceleration factor of 2% and a maximum step of

20%. Evaluation Parabolic SAR introduces some excellent concepts to technical analysis but leaves two major weaknesses: 1. Trend speeds vary over time and between stocks It is difficult to arrive at one acceleration factor that suits all trends -- it will be too slow for some and too fast for others. 2. The SAR system assumes that the trend changes every time a stop has been hit Any trader will tell you that your stops may be hit several times while the trend continues. Price merely retraces through your stop and then resumes the uptrend, leaving you lagging behind Closing price compared to Moving Average Commodity Channel Index The Commodity Channel Index measures the position of price in relation to its moving average. This can be used to highlight when the market is overbought/oversold or to signal when a trend is weakening. The indicator is similar in concept to Bollinger Bands but is presented as an indicator line rather than as overbought/oversold levels. Trading Signals

Commodity Channel Index is best used in conjunction with trailing buy- and sell-stops. Ranging Market • Go long if the CCI turns up from below -100. • Go short if the CCI turns down from above 100. Source: http://www.doksinet Trending Market Divergences are stronger signals that occur less frequently. They are mostly used to trade intermediate cycles. • Go long on a bullish divergence. • Go short on a bearish divergence. Example IBM Corporation with 14 day Commodity Channel Index. The days shown are the signal days. Trades are entered using trailing buy- and sell-stops on the day following S1: Go short - Commodity Channel Index turns down above the overbought line. This trade is stopped out at the rally before S2. S2: Go short - bearish divergence. This trade is stopped out during the rally before S3 S3: Go short - bearish triple divergence. L1: Go long - Commodity Channel Index turns up from below the oversold line. The next day closes below the low of the signal

day, causing the trade to be stopped out. A trailing buy-stop would stop us back in two days later. S4: Go short - Commodity Channel Index turns down above the overbought line. L2: Go long - Commodity Channel Index turns up from below the oversold line. S5: Go short - Commodity Channel Index turns down above the overbought line and bearish divergence occurs. L3: Go long - Commodity Channel Index turns up from below the oversold line and bullish divergence occurs. ?: The market is now trending (evidenced by the break above the previous high). Source: http://www.doksinet Do not go short when Commodity Channel Index turns down above the overbought line wait for a bearish divergence. S6: Go short - bearish divergence. S7: Even stronger signal - bearish triple divergence. Setup The default Commodity Channel Index is set at 20 days with Overbought/Oversold levels at 100/-100. To alter the default settings Momentum Indicators The most commonly used momentum oscillators are: •

Momentum, • Rate of Change, • Relative Strength and • Stochastic . Momentum Indicators The most commonly used momentum oscillators are: • Momentum, • Rate of Change, • Relative Strength and • Stochastic . Momentum has three weaknesses: 1. It does not fluctuate between set limits, meaning that Overbought and Oversold levels have to be re-set for each stock; 2. Movements tend to erratic; and Source: http://www.doksinet 3. Unusually high or low prices at the start of the indicator window (eg 14 days ago on a 14 day indicator) cause distortion. This is shown in more detail in Momentum Construction. Rate of Change fluctuates as a percentage around the zero line, but the indicator still suffers from the last two weaknesses. RSI addresses all three weaknesses: it is smoother, not as susceptible to distortion and fluctuates between 0 and 100. Stochastic indicator compares closing price to the price range (High minus Low) for the window period. This is an

improvement on the above three indicators which measure relative changes in closing price. Stochastic movements can be erratic and many analysts use the internally-smoothed Slow Stochastic indicator, which they find more reliable. Types of Momentum Indicators Closing Price relative to previous Closing Price Momentum Rate of Change (Price) Smoothed Rate of Change Relative Strength Index TRIX Indicator Closing Price relative to Range Stochastic Slow Stochastic Williams %R Momentum Momentum measures the rate of change in closing prices and is used to detect trend weakness and likely reversal points. It is often underrated because of its simplicity High Momentum readings (positive or negative) occur when a trend is at its strongest. Lower readings are found at the start and end of trends. Overbought and oversold levels are set separately for each security, based on the performance of the indicator over past cycles. Source: http://www.doksinet Trading Signals Different Momentum

signals are used for ranging markets and trending markets. Ranging Markets First, you will need to set overbought and oversold levels based on your observation of past ranging markets. The levels should cut across at least two-thirds of the peaks and troughs. Go long when: • Momentum crosses to below the oversold level and then rises back above it; or • On bullish divergences - where the first trough is below the oversold level. Go short when: • Momentum crosses to above the overbought level and then falls back below it. • On a bearish divergence - with the first peak above the overbought level. Trending Markets First, identify the trend direction using Momentum or a trend indicator. Momentum tends to stay above zero during an up-trend and below zero during a down-trend. Only take signals in the direction of the trend. • Up-trend: go long if Momentum turns upwards when below zero. • Down-trend: go short if Momentum turns downward when above zero. Exit using a

trend indicator. Trend lines are also drawn on the Momentum indicator. A break in the trend line often occurs in advance of a similar break on the price chart. Take profits on divergences and trend line breaks. Example Dow Jones Industrial Average with 10-day Momentum indicator and Bollinger bands at 2.5 standard deviations around a 21-day exponential moving average Source: http://www.doksinet 1. Go long [L] when the MA turns upwards after a bullish Momentum divergence 2. Take profits [P] on a bearish divergence 3. Exit [X] when price closes below the MA 4. Price has started ranging, shown by the fluctuation of price around the MA and Momentum around the zero line. Set overbought and oversold levels based on observation of previous ranging markets. Go short [S] when Momentum turns back below the overbought line. 5. Go long [L] when Momentum crosses back above the oversold line 6. Go short [S] again when Momentum crosses back below the overbought line 7. Go long [L] 8. Go short [S]

9. Go long [L] when Momentum crosses back above the oversold line The long position is stopped out by a lower Low at [W]. 10. Go long again at [W] - the signal is supported by a bullish divergence 11. Go short [S] 12. Go long [L] Price then breaks out of the ranging market and stays above the MA Switch to trending signals. 13. Take profits [P] on a bearish divergence 14. Take further profits [P] on a bearish triple divergence Exit [X] the trade when price closes below the MA. Source: http://www.doksinet Setup The default indicator window is 12 days. To alter the default settings Rate of Change (Price) ROC is a refinement of Momentum - readings fluctuate as percentages around the zero line The indicator is designed for use in ranging markets - to detect trend weakness and likely reversal points. However, when combined with a trend indicator, it can be used in trending markets. Trading Signals ROC trading signals are identical to Momentum signals. Ranging Markets First, you will

need to set overbought and oversold levels based on your observation of past ranging markets. The levels should cut across at least two-thirds of the peaks and troughs. • Go long when ROC crosses to below the oversold level and then rises back above it. • Go long on bullish divergences - where the first trough is below the oversold level. • Go short when ROC crosses to above the overbought level and then falls back below it. • Go short on a bearish divergence - with the first peak above the overbought level. Example 1 FedEx is plotted with average. 10 day ROC indicator and 21 day exponential moving Source: http://www.doksinet 1. Go short [S] when ROC turns down above the overbought level Place a stoploss above the recent High 2. Go long [L] when ROC turns up from below the oversold level Place a stop below the latest Low. 3. Go short [S] 4. Go long [L] This proves a false signal as price falls below the recent Low stopping out the position 5. Go long [L] when ROC

again turns up from below the oversold level 6. Go short [S] Use stop-losses on all trades. Trending Markets First, identify the trend direction using a trend indicator. ROC tends to stay above zero during an up-trend and below zero during a down-trend. Only take signals in the direction of the trend. • In an up-trend, go long if ROC turns upwards when below zero. • In a down-trend, go short if ROC turns downward when above zero. Source: http://www.doksinet Use trailing buy and sell stops to time your entry and exit. Take profits on divergences and trend line breaks. Exit using a trend indicator Trend lines are sometimes drawn on ROC. A break in the trend line often occurs in advance of a similar break on the price chart. Example 2 General Motors with 10 day ROC and 21 day exponential moving average. 1. ROC turns up from below zero, providing an excellent first entry point in the trend. Go long [L] 2. Take profits [P] on a bearish divergence 3. A triple divergence occurs

- take more profits [P] Exit [X] when price closes below the MA. 4. Go long [L] when ROC turns up below zero Enter when price crosses above the MA and above the High of the signal day. 5. Take profits [P] on a bearish divergence Exit [X] when price closes below the MA. Setup See Indicator Panel for directions on how to set up the ROC indicator. The default indicator window is set at 12 days. Source: http://www.doksinet Relative Strength Index Relative Strength Index (RSI) is a popular momentum oscillator developed by J. Welles Wilder Jr. and detailed in his book New Concepts in Technical Trading Systems The Relative Strength Index compares upward movements in closing price to downward movements over a selected period. Wilder originally used a 14 day period, but 7 and 9 days are commonly used to trade the short cycle and 21 or 25 days for the intermediate cycle. Please note that Wilder does not use the standard moving average formula and the time period may need adjustment.

Relative Strength Index is smoother than the Momentum or Rate of Change oscillators and is not as susceptible to distortion from unusually high or low prices at the start of the window (detailed in Momentum Construction). It is also formulated to fluctuate between 0 and 100, enabling fixed Overbought and Oversold levels. See Construction for further details. Trading Signals Different signals are used in trending and ranging markets. The most important signals are taken from overbought and oversold levels, divergences and failure swings. Use trailing buy- and sell-stops to time entry into trades. Ranging Markets Set the Overbought level at 70 and Oversold at 30. • Go long when RSI falls below the 30 level and rises back above it or on a bullish divergence where the first trough is below 30. • Go short when RSI rises above the 70 level and falls back below it or on a bearish divergence where the first peak is above 70. Failure swings strengthen other signals. Trending Markets

Only take signals in the direction of the trend. Source: http://www.doksinet • Go long, in an up-trend, when RSI falls below 40 and rises back above it. • Go short, in a down-trend, when RSI rises above 60 and falls back below it. Exit using a trend indicator. Take profits on divergences. Unless confirmed by a trend indicator, Relative Strength Index divergences are not strong enough signals to trade in a trending market. Example Wal-Mart Stores Inc. is plotted with a 21 day exponential moving average (MA) and 9 day Relative Strength Index. A 2-day closing filter is used with the MA 1. Price is trending downwards (staying below the moving average) Do not take long signals until the MA turns upward, otherwise we are trading against the trend. 2. A bullish divergence on Relative Strength Index is reinforced by completion of a failure swing at [2]. Go long [L] when the MA slopes upwards and RSI crosses to above 40. Source: http://www.doksinet 3. RSI completes a minor

failure swing at [3] Take profits [P] and exit the remaining position [X] when there are two closes below the MA. Do not go short as price is trending upwards (staying above the moving average). 4. Price has started to fluctuate around the moving average, signaling a ranging market. Go short [S] when RSI crosses from above to below 70 5. Go long [L] when RSI crosses from below to above 30 6. There has been a breakout from the trading range and price is trending upwards Do not close the long position. 7. Take profits [P] on the bearish divergence (Price has completed a higher peak while RSI has experienced a lower peak). 8. Take profits [P] A bearish triple divergence is confirmed by completion of a large failure swing at [8]. 9. Increase your long position [L] RSI has crossed from below to above 40 during an up-trend. Exit your position [X] when there are two closes below the MA. Do not go short as the MA still slopes upwards. 10. A small bearish divergence warns of a possible trend

reversal 11. A bearish triple divergence is reinforced by completion of a failure swing at [11] Wait until the MA has turned down and RSI has crossed to below 60 before entering a short trade [S]. Setup See Indicator Panel for directions on how to set up Relative Strength Index. The default RSI window is set at 14 days with Overbought/Oversold levels at 70% and 30%. Stochastic Oscillator The indicator consists of two lines: • %K compares the latest closing price to the recent trading range. • %D is a signal line calculated by smoothing %K. Source: http://www.doksinet The number of periods used in the indicator can be varied according to the purpose for which the Stochastic is used: %K Periods %D Periods Overbought level Oversold level Combine with trend indicator 5 to 10 days 3 days 80% 20% Very sensitive Stand-alone or trade longer cycles 14 or 21 days 3 days 70% 30% Only shows important turning points Purpose: Comments: The formula is explained at

Construction. Slow Stochastic incorporates further smoothing and is often used to provide a more reliable signal. Trading Signals If the Stochastic hovers near 100 it signals accumulation. Stochastic lurking near zero indicates distribution. The shape of a Stochastic bottom gives some indication of the ensuing rally. A narrow bottom that is not very deep indicates that bears are weak and that the following rally should be strong. A broad, deep bottom signals that bears are strong and that the rally should be weak. The same applies to Stochastic tops. Narrow tops indicate that the bulls are weak and that the correction is likely to be severe. High, wide tops indicate that bulls are strong and the correction is likely to be weak. Ranging Markets Signals are listed in order of their importance: 1. Go long on bullish divergence (on %D) where the first trough is below the Oversold level. 2. Go long when %K or %D falls below the Oversold level and rises back above it 3. Go long when %K

crosses to above %D Short signals: 1. Go short on bearish divergence (on %D) where the first peak is above the Overbought level. 2. Go short when %K or %D rises above the Overbought level then falls back below it. Source: http://www.doksinet 3. Go short when %K crosses to below %D Place stop-losses below the most recent minor Low when going long (or above the most recent minor High when going short). %K and %D lines pointed in the same direction are used to confirm the direction of the short-term trend. Trending Markets Only take signals in the direction of the trend and never go long when Stochastic is overbought, nor short when oversold. Use trailing buy- and sell-stops to enter trades and protect yourself with stop-losses. Long: If %K or %D falls below the Oversold line, place a trailing buy-stop. When you are stopped in, place a stop loss below the Low of the recent down-trend (the lowest Low since the signal day). Short: If Stochastic rises above the Overbought line, place a

trailing sell-stop. When you are stopped in, place a stop loss above the High of the recent up-trend (the highest High since the signal day). Exit: Use a trend indicator to exit. Example The Slow Stochastic Example illustrates the trading signals. This study focuses on the trailing stop entry technique used in a trending market. Intel Corporation is shown with a 21 day exponential moving average (MA) and 7 day Stochastic %K and %D. The MA is used as the trend indicator with closing price as a filter. Source: http://www.doksinet 1. %K falls below 20 Place a trailing buy-stop just above the days High of $33 1/2 2. Move the buy-stop down to $33, above the High of day 2 3. Move the stop down to above the High of day 3 4. Move the stop down to $32 1/2 - one tick above the High on day 4 5. The day opens with a new Low of $31 3/8 and then rises until we are stopped in at $32 1/2. Place a stop-loss below the Low (ie the lowest Low since day [1]) Thereafter, price falls back to the days

Low, but fails to activate the stop-loss one tick below. 6. Exit when price closes below the MA Setup See Indicator Panel for directions on how to set up an indicator. The default settings are: • %K - 5 days • %D - 3 days • Both are calculated using simple moving averages • overbought level - 70% • oversold level - 30% Slow Stochastic Source: http://www.doksinet The Slow Stochastic applies further smoothing to the Stochastic oscillator, to reduce volatility and improve signal accuracy. Trading Signals Trading signals are the same as for the Stochastic oscillator. Ranging Markets Signals are listed in order of their importance: 1. Go long on bullish divergence (on %D) where the first trough is below the Oversold level. 2. Go long when %K or %D falls below the Oversold level and rises back above it 3. Go long when %K crosses to above %D Short signals: 1. Go short on bearish divergence (on %D) where the first peak is above the Overbought level. 2. Go short when

%K or %D rises above the Overbought level then falls back below it. 3. Go short when %K crosses to below %D Place stop-losses below the most recent minor Low (or above the most recent minor High) when going long (or short). Trending Markets Only take signals in the direction of the trend and never go long when Stochastic is overbought, nor short when oversold. The shape of a Stochastic bottom gives some indication of the ensuing rally. A narrow bottom that is not very deep indicates that bears are weak and that the following rally should be strong. A broad, deep bottom signals that bears are strong and that the rally should be weak. The same applies to Stochastic tops. Narrow tops indicate that the bulls are weak and that the correction is likely to be severe. High, wide tops indicate that bulls are strong and the correction is likely to be weak. Use trailing buy- and sell-stops to enter trades and protect yourself with stop-losses. Source: http://www.doksinet Long: If the

Stochastic (%K or %D) falls below the Oversold line, place a trailing buy stop. When you are stopped in, place a stop loss below the Low of the recent down-trend (the lowest Low since the signal day). Short: If Stochastic rises above the Overbought line, place a trailing short stop. When you are stopped in, place a stop loss above the High of the recent up-trend (the highest High since the signal day). Exit: Use a trend indicator to exit. Example Johnson & Johnson is plotted with a 21 day exponential moving average (MA) and 5 day Slow Stochastic with %K and %D. Overbought/oversold levels are set at 70/30. Closing price is used as a filter on the MA 1. The market is trending upwards (price above the MA) %K twice crosses to above 80. Wait until the MA turns down before going short [S] 2. %K crosses to below 20 Go long [L] when the MA turns upwards Exit [X] when price closes below the MA. Source: http://www.doksinet 3. %K crosses to below 20 Go long [L] when the MA turns

upwards 4. Price has been fluctuating around the MA which indicates that the market is ranging. Adjust the trading signals and overbought/oversold levels Go short [S] when %K crosses to below % D. The trade is stopped out by a rally above the last minor High. 5. A bearish divergence on %D signals to re-instate the short [S] position 6. %K crosses to above %D, signaling to go long [L] 7. %K signals to go short [S] when it crosses below %D 8. A bullish divergence on %D signals to go long [L] 9. %K rises above 70 and turns back below Go short [S] 10. There is a bullish, triple divergence on %D Go long [L] 11. %K crosses to below % D Go short [S] 12. Go long [L] when %K crosses to above %D The market is still ranging, with price fluctuating around the MA. Remember that the days shown are the signal days and that trades are only entered on the following day. Take a look at the exit [X] from [2] Adjusting Stop Levels may provide faster exits. Setup See Indicator Panel for directions on how

to set up an indicator. The default Slow Stochastic settings are: • %K - 5 days • %K slowing periods - 3 days • %D - 3 days • All are simple moving averages • overbought level - 70% • oversold level - 30% Williams %R The indicator is very similar to Stochastic %K - except that Williams %R is plotted using negative values ranging from 0 to -100. Details of the formula can be found under Construction. Source: http://www.doksinet The number of periods used to calculate Williams %R can be varied according to the time frame that you are trading. A rule of thumb is that the indicator window should be half the length of the cycle (14 days is popular for the intermediate cycle). Overbought and Oversold levels are normally set at -20 and -80. Trading Signals Ranging Markets Use trailing buy- and sell-stops, to enter and exit trades, and protect yourself with stoplosses. Long signals: 1. Go long on bullish divergence or failure swing; 2. Go long when Williams %R falls

below the oversold level Short signals: 1. Go short on bearish divergence or failure swing; 2. Go short when Williams %R rises above the overbought level Example 1 Johnson and Johnson is displayed with 7 day Williams %R. Source: http://www.doksinet 1. Place a trailing buy-stop when Williams %R falls below the oversold line We are stopped in [L] when price rises above the previous days High. Protect your position with a stop-loss below the recent Low. 2. Place a trailing sell-stop when %R rises above the overbought line We are stopped in [S] when price falls below yesterdays Low. The position is stopped out [X] on the following day when price rises above the recent High. 3. %R rises above the overbought level Place a trailing sell-stop A bearish divergence supports the signal. 4. A triple divergence adds further support for the short position 5. Place a trailing buy-stop when %R falls below -80 When stopped in [L], place a stop-loss below the recent Low. 6. Place a trailing

sell-stop when %R rises above -20 When stopped in [S], place a stop-loss above the recent High. 7. Place a trailing buy-stop: the oversold signal is strengthened by a bullish divergence. 8. Place a trailing sell-stop 9. %R falls below the oversold level: place a trailing buy-stop A failure swing is completed when %R rises above the level of the intervening peak. 10. Another signal to go short Place a trailing sell-stop We are stopped in 5 days later when price falls below the previous days Low. Protect your position with a stop-loss above the recent High. Trending Markets It is advisable to use a longer Williams %R period or some other form of smoothing to reduce volatility and false signals. Signals should only be taken when there is clear evidence that the trend has reversed. One method of doing so is to wait until %R crosses the -50 level: • Go long when %R falls below the Oversold level then rises above 50. • Go short when %R rises above the Overbought level then falls

below -50. Alternatively, use a trend indicator for trend direction and exit signals. Source: http://www.doksinet Example 2 Johnson and Johnson with 30 day exponential moving average (MA) and 14 day Williams %R: The chart shows a fairly strong up-trend, suitable for trading with %R trend signals. 1. Go long [L]: Williams %R rises from the oversold level to above -50 2. Go short [S] when %R falls below -50 from the overbought level 3. Go long [L] when %R rises above -50 from the oversold level 4. Go short [S] 5. Go long [L] 6. Go short [S] 7. Go long [L] Note that we are whipsawed fairly frequently if MA is used as the trend indicator, even with closing price as a filter. Setup The default Williams %R window is 14 days, with overbought/oversold levels of -20% and -80% respectively. Volume Indicators Source: http://www.doksinet Volume indicators are used to confirm the strength of trends. Lack of confirmation may warn of a reversal. Some of the more sophisticated indicators

compare volume and price movements. Types of Volume Indicators Volume Only Rate of Change (Volume) Volume Oscillator Compares Closing Price and Volume On Balance Volume Price and Volume Trend Force Index Compares Closing Price, Range and Volume Accumulation Distribution Chaikin Oscillator Money Flow Index Chaikin Money Flow Compares Range and Volume Ease of Movement Rate of Change (Volume) Rate of Change Volume (ROCV) is an oscillator applied to volume rather than price and is calculated in the same manner as the Rate of Change (Price) indicator. ROCV highlights increases in volume, which normally occur at most significant market tops, bottoms and breakouts. Example Procter and Gamble Corporation plotted with 5 day Rate of Change (Volume). Source: http://www.doksinet Observe the major spikes in volume: 1. On entry into the trading range 2. When price makes a new peak during the range 3. On an upward breakout from the range Setup See Indicator Panel for directions on how to

set up an indicator. The default ROC window is 12 days. Volume Oscillator The Volume Oscillator (VO) identifies trends in volume using a two moving average system. Volume Oscillator Source: http://www.doksinet The Volume Oscillator (VO) identifies trends in volume using a two moving average system. The Volume Oscillator measures the difference between a faster and slower moving average (MA). • If the fast MA is above the slow MA the oscillator will be positive. • If the fast MA is below the slow MA then the oscillator will be negative. • The Volume Oscillator will be zero when the two MAs cross. Signals • Rising volume (positive VO) signals a strong trend. • Falling volume (negative VO) indicates trend weakness. Example Coca Cola Corporation with Volume Oscillator. Price forms a flag pattern after a strong up-trend. Volume declines on each trough and rises on each peak, suggesting an upward breakout. Source: http://www.doksinet 1. The breakout above the

resistance line is then confirmed by a sharp rise in volume. Setup See Indicator Panel for directions. The default Volume Oscillator settings are: • Fast MA - 5 days • Slow MA - 10 days • Exponential moving averages. On Balance Volume On Balance Volume attempts to measure the level of accumulation or distribution by comparing volume to price movements. Volume is added to the indicator if closing price moves up and subtracted if closing price moves down. No adjustment is made if closing price is unchanged. Further details are shown at OBV Construction. Trading Signals On Balance Volume should be used in conjunction with other indicators. Ranging market During a ranging market watch for a rising or falling On Balance Volume: • Rising OBV warns of an upward breakout. • Falling OBV warns of a downward breakout. Trending Market A rising On Balance Volume confirms an up-trend and a falling OBV confirms a downtrend. • Bullish divergence between OBV and price warns of

market bottoms. • Bearish divergence between OBV and price warns of market tops. Example Source: http://www.doksinet Intel Corporation plotted with On Balance Volume. 1. Price trades in a range during March before a bearish divergence occurs The signal is fairly weak - price makes an equal high while On Balance Volume makes a lower high. 2. The signal at [1] appears to have been incorrect - price rises to a higher peak but a far stronger triple divergence (price makes a higher high while OBV makes a lower high) signals weakness. 3. A further bearish divergence occurs - price makes an equal high and OBV makes a lower high. Shortly thereafter price falls sharply Price and Volume Trend Price and Volume Trend (PVT) is a variation of On Balance Volume, used to determine the strength of trends and warn of reversals. Trading Signals Trading signals are the same as for OBV and Accumulation Distribution. Price and Volume Trend should not be used on its own but in conjunction with

other indicators. Source: http://www.doksinet Ranging Market During a ranging market watch for a rising or falling Price and Volume Trend. • Rising PVT signals an upward breakout. • Falling PVT signals a downward breakout. Trending Market A rising Price and Volume Trend confirms an up-trend and a falling PVT confirms a down-trend. • Bullish divergence between PVT and price warns of market bottoms. • Bearish divergence between PVT and price warns of market tops. Example Australia and New Zealand Banking Group Limited (ANZ) is shown with Trend. Price Volume 1. After a strong up-trend there is a bearish divergence with price making a new high and Price and Volume Trend making a lower high. 2. This is followed by a triple divergence: price makes a higher peak while PVT is lower. Source: http://www.doksinet 3. Price makes another new high at the end of February while PVT again fails to make a new high. Money Flow The Money Flow Index is a volume-weighted version of

the Relative Strength Index, used to warn of trend weakness and likely reversal points. The indicator compares the value traded on up-days to value traded on down-days. Trading Signals Ranging Market Ranging markets can be identified by Money Flow Index fluctuating close to the 50 level. Trending Market Market tops are likely when a medium term Money Flow Index is above 80. Market bottoms are likely when a medium term Money Flow Index is below 20. • Go long on bullish divergence. • Go short on bearish divergence. Only trade with the trend and exit using a trend indicator. Example Microsoft Corporation plotted with Bollinger bands at 2.0 standard deviations around a 20 day exponential moving average and 20 day Money Flow Index. Source: http://www.doksinet Exit using the moving average - this example uses MA direction as a filter. Compare this to the results if a single close or 2 closes are used as a filter. 1. Go long [L] on a bullish divergence Exit when the moving

average turns down at [X]. Setup The default Money Flow Index window is 14 days. Overbought/oversold are set at 80% and 20% levels. Finding the Right Trading Course A Systematic Approach 1. Start with a realistic goal in mind: • Do you want to learn the basics? • Learn a new technique? Source: http://www.doksinet • Or make a million dollars? 2. Do you have sufficient time to practice what you learn from the course? Work on a minimum of 2 hours a day if you want to become a good trader. 3. Learn the basics first Know them thoroughly And PRACTICE!!! You need a strong foundation. Read charts for 1 to 2 hours a day • Analyze candlesticks (or OHLC bars) and volume • Identify support and resistance levels • Identify chart patterns • Identify trends and trading ranges • Identify the various time frames • Study market and sector indices • Learn the influence that these have on individual stocks • And the interaction between various equity markets,

bond markets, currencies and commodities 4. Seek out a trading course that will help you to achieve this A two-day workshop is not going to teach you all that you need to know - no matter what the salesman says. Seek out courses run by various educational institutions - the kind attended by trainee stockbrokers and analysts. The kind that take 3 to 6 months You will not learn all the tricks of the trade but you will gain a good basic grounding. 5. Benefit from the experience of others Search trading forums for discussion on various training courses. Ask a few questions Who has been on the course? When did they do the course? This is important: recent participants are normally fired with enthusiasm but how will they feel a year later? How have they benefited? What skills did they learn? Is there any ongoing support? Are there any realistic trading sessions? Would they recommend it? 6. Dont make the mistake of believing that you are now ready to enter the market Do so and you may be

stretchered off after a few weeks, never to return. Draw up a trading plan. Back test it with historical data and then stick to it - dont keep fine tuning it. Paper trade for a month or two - until you feel that you are ready to enter the market. 7. Take the smallest amount of capital that you can effectively trade with and cautiously enter the market. Concentrate on achieving the best possible return over a 12 month period. Make the commitment Dont get excited after a few wins and increase your capital. That is a sure sign that you are not in control - the Source: http://www.doksinet market is controlling you. Monitor your performance every week Review each trade and assess whether you have stuck to your plan. Make notes for later as to how you could improve your plan - but dont make any changes now. 8. Dont day-trade Leave that for the professionals 9. After 3 months, pause for a week Dont place any trades Review your performance. Identify any gaps in your knowledge that need

additional work (or study). If you know there is a problem but are unsure how to solve it, consult a mentor. Find an experienced (and successful) trader who is prepared to part with a few hours of his time. Set your trading plan for the next 3 months and continue Review at regular 3 month intervals. 10. After 12 months, review your performance and decide whether you are ready to commit more capital to the market. Do this again after 24 months, 36 months and so on