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Overlays

Indicators plotted on the price chart

Bollinger Bands®

Bollinger Bands are adaptive trading bands that answer the question “Are prices high or low?” on a relative basis. The adaptive mechanism is volatility. The middle band is a simple moving average with a default period of 20. The upper and lower bands are spread above and below the middle band by a multiple of standard deviation, with the default multiplier being two.

MiddleBB = Average(close, 20)
UpperBB = MiddleBB + 2.0 × StandardDeviation(close, 20)
LowerBB = MiddleBB − 2.0 × StandardDeviation(close, 20)

If you change the calculation period and wish to have the bands contain a consistent amount of data consider using the following multipliers: 10 periods, 1.9; 50 periods, 2.1.

There are many uses for Bollinger Bands, amongst the most popular are pattern recognition and discrete buy and sell setups in combination with other indicators. See the book “Bollinger on Bollinger Bands” for a full explanation. (click here.)

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Bollinger Envelopes™

Bollinger Envelopes are a variation on Bollinger Bands that focus on the extremes of price action. While Bollinger Bands are centered on a moving average, usually of closing prices, Bollinger Envelopes are anchored by the highs and the lows. The upper Bollinger Envelope is constructed from a moving average of the highs and the standard deviation of the highs; the lower Bollinger Envelope is constructed from a moving average of the lows and the standard deviation of the lows. The formulas are:

UpperBE = Average(high, 20) + 1.5 × StandardDeviation(high, 20)
LowerBE = Average(low, 20) − 1.5 × StandardDeviation(low, 20)

Since there is no middle band in the calculation, we imply one by taking the mean of the upper and lower envelopes.

MiddleBE = (UpperBE + LowerBE) ÷ 2

Bollinger Envelopes are particularly useful where the trading session is not well defined, in periods of extreme market action and are used in the Ice Breaker trading system.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Simple Moving Average

The simple moving average is perhaps the most elemental technical analysis tool. It is the sum of the data for a given number of data points divided by the number of the data points. In statistics it is known as the arithmetic mean. The word “moving” means that as each new data point becomes available the calculation window advances creating a new average.

Simple Moving Average = sum(close, n) ÷ n

Often used to generate buy and sell signals when it is crossed, it is perhaps better used as a measure of trend direction when the period (n) is set to describe the intermediate-term trend. For the stock market using daily data, we find 20 periods to be a good starting default value for n.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Exponential Moving Average

The simple moving average can be problematic due to its sensitivity to old data points leaving the calculation window. This is especially true for short-term averages. For example, when using a 10-period average if there was a large change in the data ten periods ago, the value of the average will change the next period even if price remains unchanged. A popular smoothing technique that avoids this problem is the exponential average. The calculation uses a portion of today's data and a portion of yesterday's average to arrive at today's average. This has the effect of increasing sensitivity to the most recent data and reducing sensitivity to older data.

The weight to use is found via the formula exp = 2 ÷ (n + 1), where n is the number of periods in a comparable simple moving average. For 10 periods 2 ÷ (10 + 1) = 0.18.

Exponential Moving Average = exp × close + (1 − exp) × prior average

© 2011 Bollinger Capital Management, Inc. All rights reserved.

John Bollinger's Price Magnet™

Early market technicians often constructed artificial or synthetic prices as trading tools. There were three main approaches: synthetics designed to reflect where the security “should have been” trading, where it would trade in the future, or as indications of support and resistance.

One example of synthetic prices that is still in use are the “floor trader's numbers”:

     Mid Point = (High + Low + Close) ÷ 3 (the typical price)
     Upper Pivot = 2 × Mid Point − Low
     Lower Pivot = 2 × Mid Point − High

See Marc Fisher on ACD and Pivots in his book “Logical Trader” for more on current usage. There are lots of other examples in the history of technical analysis.

“In doing some work on zero-lag moving averages I was reminded of the calculations for synthetic prices. I saw similar ideas reflected in Jim Alphier's work, so I thought I'd give the idea a spin. I didn't want a simple bracket, Bollinger Bands already served well in that role. What I wanted was a sense of the most probable direction of prices. After a lot of staring at the ceiling, Price Magnets were born. The idea is simple and robust; the calculated prices act as 'magnets', 'pulling' prices higher or lower. You can think of them as a natural bias or tendency based on recent market action. The point plotted above or below today's bar is a forecast for tomorrow's direction. The threshold eliminates the Price Magnets plotted close to the current period's close. Set this to 0.0 to see all of the Price Magnets or to a larger value to see fewer Price Magnets; 2 or 4 are good choices for many stocks. Enjoy.” JB

© 2011 Bollinger Capital Management, Inc. All rights reserved.

HIPs and LOPs

HIPs and LOPs are HIgh Points and LOw Points. HIPs and LOPs are often called pivots, but as we use that term already we'll stick with HIPs and LOPs.

HIP A HIP is a bar with a high that is higher than the bar before it or the bar after it. On the charts, a HIP is represented by a “H” above the day it occurred.


LOP A LOP is a bar with a low that is lower than the bar before it or the bar after it. On the charts, a LOP is represented by a “L” below the day it occurred.


HIPs and LOPs are one of the oldest and most basic technical tools. Careful study of these crucial markers will reward you with a better understanding of the basic structure of price and market dynamics.

Origin:
The origin of the concept is most likely Henry Wheeler Chase's ringed highs and lows from the 1930s. In that era traders recorded prices on columnar pads for analysis and circled a high that was higher than the high above it or below it, or a low that was lower than the low above it or below it.

What it does:
In an upswing HIPs and LOPs will occur in an orderly progression higher and vice versa. In a consolidation they will form no discernible pattern.

HIPs (H) - higher high than previous and next day's highs. LOPs (L) - lower low than previous and next day's lows.


HIPs and LOPs are useful for identifying short-term resistance and support and can be used as markers in a swing trading approach. They can also be used to identify stop levels and as trend identifiers in the wake of a Squeeze. They are also useful in pattern recognition. For example, most W bottom patterns will consist of a LOP, a HIP and then a LOP.

The number in the drop-down list is known as the “order” of the HIPs and LOPs; it determines the number of days on each side of the HIP or LOP that are counted. For example, if you choose 2, only HIPs with two or more lower highs before and after will be marked. Please note that HIPs and LOPs are forward looking and need a number of periods equal to their order before they can be plotted.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Zig Zag

The Zig Zag is a filtered price plot that eliminates short-term “noise”. A Zig Zag plot connects swings of magnitudes greater than the user-selected percent threshold. If 10% is selected then the Zig Zag connects the highest highs and lowest lows that are separated by more than 10%. Zig Zag plots represent idealized price paths and are useful for clarifying price patterns and for trend identification. For example, if there is a high at 100, a 10% Zig Zag will ignore any price action until price falls to 90. If a a new high is made it will re-anchor to that high and wait for a 10% drop from the new anchor. After a 10% drop it will ignore anything short of a 10% rally or a new low. Our version is based on Arthur Merrill's work published in “Filtered Waves”.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Chandelier Stop

Chandelier Stops were popularized by Chuck LeBeau. They are dynamic, progressive stops that are calculated starting with the period after you enter a trade. The formulas are simple and robust. For sell stops when you are long the stop is the highest high since you entered the trade less n times the m-day Average True Range (ATR). For buy stops when you are short the stop is the lowest low since you entered the trade plus n times the m-day ATR. The usual defaults are n = 3 and m = 10, so a “normal” Chandelier sell stop is the highest high since entry less three times the 10-period ATR.

True Range (TR) is a measure of range that incorporates any gaps that may occur in the price structure between periods. For the true high, the value is the current period's high or prior period's close, whichever is higher. For the true low, the value is the current period's low or prior period's close, whichever is lower. TR is the true high minus the true low. ATR is an n-period average of TR, where n is usually 10.

Chandelier Stops may change each period an open position is held as ATR will change even if a new high (when long) or low (when short) since entry isn't recorded. One question that often comes up is whether to allow the stop to back off? For example, if this period's stop for a short position is 33.35 and next period's is 33.5 due to an expansion in ATR, should we stick with the more conservative stop of 33.35 or allow it to back off a bit to 33.5? Chuck LeBeau's answer is that backing off is a feature of Chandelier Stops that should be allowed and that is good enough for us.

To plot a Chandelier Stop, use the pull down menu to select long or short, specify the entry date, and the m and n parameters, the defaults are 10 and 3. You can enter a decimal for the n parameter. You have the option to display one stop or continuous reversal positions which open a new trade at the end of each trend. Do this by checking the 'always in' check box. If unchecked, only one trade is shown.

After you plot the chart, the Chandelier Stops will be plotted starting from the entry position to the exit position if the conditions are met, otherwise the trade will remain open. For the always-in option, the stop will reverse when it is closed and a new trade is initialized. The signals for each trade are also drawn.

For a long trade: A green arrow is drawn at the entry and a red arrow is drawn at the exit if the position is closed.
For a short trade: A red arrow is drawn at the entry and a green arrow is drawn at the exit if the position is closed.

© 2012 Bollinger Capital Management, Inc. All rights reserved.

BBStops™

BBStops are a variation on Parabolic Stops where the initial stop point is offset below the low of the entry period for long trades, or above the the high of the entry period for short trades by the calculation mechanism used in Bollinger Envelopes. This combination of the Parabolic Stop mechanism and the Bollinger Envelope interval proves to be a powerful one that requires that the trade perform in addition to tracking the trade's progress. See Help for Parabolic Stops for more details. BBStops are only plotted for a single position. The default for the BE parameter is 1.5, which we find to work well, but you can try smaller values for more conservative stops or larger values to give the trade more room to “breath”.

© 2012 Bollinger Capital Management, Inc. All rights reserved.

Parabolic Stops

These stops are derived from a price and time trading system, SAR (stop and reverse), introduced by Welles Wilder in his 1978 book &ldquo'New Concepts in Technical Trading Systems”. The Parabolic Stop trails the price as the trend extends over time. In an uptrend the stop rises from below the price line and in a downtrend the stop falls from above the price line. When the price trend breaks below or above the indicator line the stop is triggered.

The algorithm used for calculating the SAR:
In an uptrend:(Long Trade)
Current SAR = Prior SAR + Prior AF(Prior EP − Prior SAR)
Where EP (Extreme Point) is the highest high in the current trend
AF (Acceleration Factor) which starts at the user-specified step value (default is 0.02) and increases by the step value each time a new high is made in the current trend. The AF stops increasing at the user-specified limit (default is 0.2).

In a downtrend:(Short Trade)
Current SAR = Prior SAR − Prior AF(Prior SAR − Prior EP)
Where EP (Extreme Point) is the lowest low in the current trend
AF (Acceleration Factor) which starts at the user-specified step value (default is 0.02) and increases by the step value each time a new low is made in the current trend. The AF stops increasing at the user-specified limit (default is 0.2)

To plot the Parabolic stops, use the pull-down menu to specify a long or short position, specify the entry date, the AF step (default 0.02) and the maximum AF (default 0.2) parameters.

After you plot the chart, the Parabolic Stops will be plotted starting from the entry position to the end of the chart. The stop will reverse when each position is closed and a new trade is initialized.

For a long trade: A green arrow is drawn at the entry and a red arrow is drawn at the exit if the position is closed.
For a short trade: A red arrow is drawn at the entry and a green arrow is drawn at the exit if the position is closed.

© 2012 Bollinger Capital Management, Inc. All rights reserved.


Bollinger Band® Indicators

%b, Percent b (PB)™

%b (Percent b) was one of the first two indicators derived from Bollinger Bands. It employs a variation on the formula for Stochastics. %b depicts the location of the most recent close within the Bollinger Bands. At 1.0, the close is at the upper band, at 0.0 the close is at the lower band and at 0.5 the close is at the middle band. A %b reading of 1.1 means that you are above the upper band by 10% of the width of the bands. -0.2 means that you are below the lower band by 20% of the width of the bands.

To make analysis easier, we give you the opportunity to plot two smoothings of %b: %b1 and %b2. %b1 is a three period smoothing of %b and %b2 is a three period smoothing of %b1. These are similar to the smoothings used for Stochastics except that we use exponential averages.

%b is a useful tool for identifying divergences, diagnosing tops and bottoms, and pattern recognition. %b is also used extensively in trading system construction. It is perfect for detecting when a new high or low is a new absolute extreme, but not a new extreme relative to the Bollinger Bands.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

BBImpulse (BBI)™

BBImpulse is derived from %b. Its value is the periodic change of %b, so if %b was 0.45 this period and 0.20 last period the present value of BBImpulse is 0.25. We present two reference levels on the chart, an alert level and an impulse level. Generally the market moves in the direction of the latest alerts and/or impulses except towards the end of a move where one can take advantage of exhaustion/reversal signals from this indicator. Ian Woodward employs BBImpulse for his Kahuna signals using key levels of 0.24 and 0.40. (See the description for the indicator Stochastic Impulse.)

© 2011 Bollinger Capital Management, Inc. All rights reserved.

BandWidth (BW)™

BandWidth was one of the first two indicators derived from Bollinger Bands. BandWidth depicts how wide the Bollinger Bands are as a function of the middle band. The formula is (upperBB − lowerBB) ÷ middleBB.

The most popular use of BandWidth is to identify The Squeeze, which is a 125-period low for the indicator, and is very helpful in diagnosing the beginning of trends. The opposite of The Squeeze, The Bulge, is useful in diagnosing the end of trends.

In addition to the BandWidth line, we draw two reference lines to give a sense of where the current BandWidth stands in relation to history. The upper line represents the highest BandWidth in the past 125 periods (The Bulge when touched). The lower line represents the lowest BandWidth in the past 125 periods (The Squeeze when touched).

Finally there is an option to plot a three period smoothing of BandWidth to help identify and clarify turning points.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

BandWidth Delta (BWD)™

BandWidth Delta depicts the momentum of BandWidth and is useful in diagnosing the peaks and troughs in BandWidth as markers of potential trend changes. This indicator is especially useful when trying to analyze the potential for consolidations or reversals after large moves. You can think of BandWidth Delta as a magnifying glass for BandWidth.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

%BandWidth, Percent BandWidth (PBW)™

%BandWidth (Percent BandWidth) uses the formula for Stochastics to normalize BandWidth as a function of its n-day look-back period. 125-periods is the default, but you may choose your own look-back period. 1.0 equals the highest BandWidth in the past n periods, while 0.0 equals the lowest BandWidth in the past n periods. If you use 125 as the look-back period, then 0.0 = The Squeeze and 1.0 = The Bulge. The interpretations are similar to BandWidth, but some find the normalized, or closed presentation more intuitive. %BandWidth, along with %b, are two primary building blocks for Bollinger Band trading systems.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

BBTrend (BBT)™

BBTrend takes advantage of the ways in which Bollinger Bands of different lengths interact to determine whether the market is trending or not. Amongst commonly used technical indicators, Average Directional Movement Index (ADX) and Choppiness Index (CI) serve similar purposes.

You can select the two time periods, short and long. 20 and 50 are the defaults, but 10 and 30 or 40 may be more attractive for shorter-term traders.

Unlike the traditional trend indicators, BBTrend combines directional information with the trend information. Readings below zero are indicative of negative trends and readings above zero indicate positive trends. The farther the reading away from zero the stronger the trend.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

BBMomentum (BBM)™

BBMomentum measures price moves as a function of the width of the Bollinger Bands. BBMomentum's value is the n-period change in price divided by the upper band minus the lower band. A good starting value for n is half the length of the Bollinger Band calculation. So, if you are using 20-period Bollinger Bands, try 10 periods for BBMomentum.

BBMomentum normalizes momentum using the width of the Bollinger Bands. In volatile times it takes a large change in price to create the same BBMomentum reading than a much smaller change would create in calm times. BBMomentum can be thought of as a form of volatility-normalized momentum and can be used the way any other momentum indicator is used.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

BBIndex (BBX)™

BBIndex is a classic overbought/oversold indicator similar in application to the Commodity Channel Index (CCI). Indeed, it can be seen as a 'modern' version of CCI. Match the period to the trend that you are trading, 20 is the default, and use plus/minus 2.0 as the basic overbought/oversold reference levels with plus/minus 3.0 as extreme levels. BBIndex is also a superb divergence tool, and as such is helpful in identifying the beginnings and ends of trends.

© 2012 Bollinger Capital Management, Inc. All rights reserved.

BBAccumulation (BBA)™

BBAccumulation combines three volume indicators, Accumulation-Distribution (AD), Intraday Intensity (II) and On-Balance Volume (OBV) in a Bollinger Band framework. First the indicators are normalized with %b, then they are combined. OBV examines the periodic change, II examines the closing location in the periodic range and AD examines the relationship between the open and close to the periodic range. When normalized so they are comparable, taken together they give an excellent picture of the supply demand characteristics of a security.

© 2012 Bollinger Capital Management, Inc. All rights reserved.

BBPersist (BBP)™

BBPersist is simple, elegant counting application that counts highs above the upper Bollinger Band and lows below the lower Bollinger Band and nets them to create an indicator. BBPersist displays the balance between strength and weakness over time and is very helpful in diagnosing that difficult analytical problem, the walk up or down the bands. You can plot a second BBPersist by specifying another period in the second box.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Volume Indicators - Standard

In general volume indicators are meant to clarify the supply demand relationships in the market. Two modes of analysis are common, trend and divergence. For the standard versions, trend analysis is usually the first step with warnings being generated as divergences between price and indicator action develop.

Volume (V)

This is a simple bar plot of the transaction volume recorded for each period plotted on the chart above. A moving average is included to help identify high and low volume periods. You may specify the number of periods in the average; 50 is the default.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Normalized Volume (Vol%)

Normalized volume is volume divided by an average. This plot has two main uses; it allows you to judge whether volume is high or low on a relative basis and it allows the comparison of volume levels from issue to issue. You may specify the number of periods in the average; 50 is the default. The horizontal line at 100 is where volume for that period equals its n-period average. It may be helpful to think of volume as high when it is above 125 and low when it is below 80.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

On-Balance Volume (OBV)

On-Balance Volume (OBV) is one of the oldest and best known of all the volume indicators. OBV was popularized by Joe Granville and is a good trend indicator. OBV adds volume to a running sum when price advances and subtracts volume from the running sum when price declines. It is meant to model the basic forces of supply and demand that drive the market. Two exponential smoothings are available.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Price-Volume Trend (PVT)

Price-Volume Trend (PVT) is David Markstein's variation on On-Balance Volume (OBV) in which the percentage changes from period to period are used to parse volume. Two exponential smoothings are available.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Accumulation-Distribution (AD)

Accumulation-Distribution (AD) was created by Larry Williams to track buying pressure (accumulation) and selling pressure (distribution). AD compares the range between the open and close to the range of the day. It is a concept very closely related to Japanese candlestick charts. Two exponential smoothings are available.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Intraday Intensity (II)

Intraday Intensity (II) was developed by the economist David Bostian. This indicator uses the position of the close in relation to the high and low to parse volume. It is meant to track the activities of institutional traders; large blocks move the market in the direction of their order flow -- increasingly so toward the close. Two exponential smoothings are available. (In some programs this indicator is known as Money Flow.)

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Sponsored Volume (SV)

Sponsored Volume (SV) is a version of Intraday Intensity (II) from Jim Alphier that uses true highs and lows instead of periodic highs and lows in its calculation. If you trade something that has frequent and/or large gaps, you may want to use this version of II. Two exponential smoothings are available.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Interday Accumulation (IA)

Interday Accumulation (IA) is a version of Accumulation-Distribution (AD) that uses true highs and lows instead of periodic highs and lows in its calculation. If you trade something that has frequent and/or large gaps, you may want to use this version of AD. Two exponential smoothings are available.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Wynia Volume Profile (WVP)

This indicator was developed by Fred Wynia and uses a zig zag function to filter price and then compares the volume in up swings versus down swings. The indicator value is the ratio of the volume in the up swings to the volume in the down swings or vice versa. This indicator is useful for detecting rallies or declines that haven't sufficient backing to continue.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Volume Indicators - Oscillators

Converting volume indicators into oscillator form increases the focus on the short-term situation rather than the trend analysis that is more common with the standard versions. Divergences are more important here, as well as alerts generated when the upper Bollinger Band® is tagged and the indicator is below zero or vice versa. For many of these indicators the simple guideline of bullish above zero and bearish below zero can be quite useful.

Accumulation-Distribution % (AD%)

Accumulation-Distribution % (AD%) is the closed form of Accumulation-Distribution(AD). AD% is calculated by taking the n-period sum of AD and dividing by the n-period sum of volume; the result is a normalized AD that is now comparable from issue to issue. 20 is the default period. A second period can be plotted for comparison.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Intraday Intensity % (II%)

Intraday Intensity % (II%) is the closed form of Intraday Intensity (II). II% is calculated by taking the n-period sum of II and dividing by the n-period sum of volume; the result is a normalized II that is now comparable from issue to issue. 21 is the default period. A second period can be plotted for comparison. (In some programs this indicator is known as Money Flow or Money Flow %.)

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Sponsored Volume % (SV%)

Sponsored Volume % (SV%) is the closed form of Sponsored Volume (SV). SV% is calculated by taking the n-period sum of SV and dividing by the n- period sum of volume; the result is a normalized SV that is now comparable from issue to issue. 21 is the default period. A second period can be plotted for comparison.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Interday Accumulation % (IA%)

Interday Accumulation % (IA%) is the closed form of Interday Accumulation (IA). IA% is calculated by taking the n- period sum of IA and dividing by the n-period sum of volume; the result is a normalized IA that is comparable from issue to issue. 20 is the default period. A second period can be plotted for comparison.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Money Flow Index (MFI)

Money Flow Index (MFI) compares volume on up periods to volume on down periods in a manner similar to Relative Strength Index. The typical price, (high + low + close) ÷ 3, is used to separate up periods from down. The periods are averaged and a ratio of up to down is taken. You may specify the number of periods used in the calculation. 14 is the default period. A second period can be plotted for comparison.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Volume-Weighted Moving Average Convergence Divergence (VWMACD)

VWMACD was created by Buff Domeier and uses the same calculation as MACD, but volume-weighted averages are used instead of exponential averages. The periods used are 12, 26, 9 (signal). Treat exactly as you would MACD.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Volume Oscillator (VO)

This indicator considers nothing but volume. It is the difference between a short moving average of volume and a longer one. It is used to confirm volume patterns in relation to price patterns. For instance, it can be used to assess whether there is sufficient volume to support a rally or a decline. You may specify the number of periods used in the averages; 10 and 20 are the defaults.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Volume Price Confirmation Indicator (VPCI)

VPCI is Buff Dormeier's effort to codify the old technical analysis concept of price-volume confirmation in a technical indicator. VPCI won the Dow Award in 2007. You can read the paper complete with examples of usage here. http://tinyurl.com/8clzjhq
There are four price/volume confirmation possibilities that this indicator encompasses:
Rising price and volume, strong demand, bullish.
Falling price and volume, weak supply, bullish.
Rising price and falling volume, weak demand, bearish.
Falling price and rising volume, strong supply, bearish.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Trend Identification - Moving Average

Departure Chart (DC)

The Departure Chart is one of the oldest technical studies. It measures the difference between two moving averages of price, one short and one long. Its primary use is as a trend identification tool, but it may be employed to identify overbought and oversold conditions as well. 10 and 20 are the default periods.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Moving Average Convergence Divergence (MACD)

Gerald Appel created MACD, a departure chart with an additional average added that acts as a signal line. The MACD line itself is the difference between a short-period and a long-period exponential average. The signal line is a n-period exponential average of the MACD line. The default periods for the short, long and exponential average are 12, 26, and 9, respectively. MACD Histogram is the difference between the MACD line and the signal and is used as an early alert system for changes in trend.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Relative Strength

Comparative Relative Strength

Relative strength compares two price series over time by taking a ratio of one to the other. An RS line is most often used to compare the performance of a stock to the market or its industry group. A rising RS line indicates out-performance, while a falling RS line indicates under-performance. For example, IBM / SPY shows the performance of IBM versus the S&P 500 Index ETF.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Trending versus Trading Range

Directional Movement Index (DMI)

Created by Wells Wilder, these indicators parse the price structure into the positive and negative components, DMI+ and DMI-, which many use for buy and sell signals. However, the most interesting feature is a derivative of the DMI indices called Average Directional Movement Index, ADX. ADX indicates whether the data is trending or not. Values above 18 indicate trending markets while values below 18 are associated with trading-range markets. The direction of the line is also important, rising equals increasing trend strength and falling, decreasing. You may select the look-back period. 14- and 18-day calculation periods are quite common.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Vertical Horizontal Filter (VHF)

Tushar Chande's trend analysis tool compares the distance traveled within a range to the range itself. In a perfectly trending market the distance traveled and the range will be the same. The formula is range / distance. As it takes ever more travel to cover the range, the value of VHF falls. A 14-day period is the default.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Choppiness Index (CI)

Choppiness Index, developed by E.W. Dreiss, uses chaos principles to measure “choppiness” or directionality of the market, whether prices are trending, or if we are in a consolidation period. The core idea is to compare the combined length of all the bars in a range (the ink) with the periodic range. Low values (below 38) indicate trending markets (up or down) and high values (above 62) indicate significant consolidations in price.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Aroon Indicator (AR)

Aroon was developed by Tushar Chande and is designed to identify direction and magnitude of a trend. Aroon consists of 3 lines: Aroon Up, line above 70 indicates an up trend; Aroon Down, line above 70 indicates a down trend and Aroon Oscillator, line near zero indicates a consolidation phase (no trend). The idea is to count the number of days since the high of the range (this is the up line) and the low of the range (this is the down line), another simple concept that can produce surprisingly deep market insight.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

The Range Indicator (TRI)

Published by Jack L. Weinberg in the June 1995 issue of Technical Analysis of Stocks & Commodities, The Range Indicator (TRI) compares high minus low (the range) with close versus close (the change). Look for trends to start from low levels of TRI when range and change are in gear and for trends to end from high levels of TRI when range and change are out of gear.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Momentum - Simple

Momentum (MTM)

Momentum is the point change of price over a specified time period and may be the most elemental indicator in the technician's tool chest. Futures traders are said to prefer MTM over Rate of Change, which depicts the percent change, as it models their profit and loss better. The second period is for an exponential moving average of MTM. 12 is the default period for MTM and 10 is the default period for the smoothing, though you may want to try three.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Rate of Change (ROC)

Rate of Change is the percent difference of price over a specified period. Stock traders are said to prefer ROC over Momentum as it is directly comparable from issue to issue and time to time. The second period is for an exponential average smoothing of ROC. 12 is the default period for ROC and 10 is the default period for the smoothing, though you may want to try three.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Momentum - Up versus Down

Chande Momentum Oscillator (CMO)

CMO is Tushar Chande's attempt to capture “pure momentum”. The idea is to separately sum up and down momentum over a given period and compare them with a normalized ratio. You may specify the look-back period; 14 is the default.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Relative Momentum Index (RMI)

This is Roger Altman's momentum variation on Welles Wilder's Relative Strength Index, RSI. Instead of accumulating ± price changes, RMI accumulates ±changes in momentum. Over 70 is considered overbought and under 30 is oversold. The first parameter is the days for calculating momentum, the default is 4. The second parameter is the time frame, the default is 14. (NOTE: RMI = RSI when time frame is the same and RMI momentum set to 1.)

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Relative Strength Index (RSI)

Welles Wilder's Relative Strength Index, RSI, is a classic technical-analysis tool that compares strength on up days to weakness on down days. The fixed values of 70 (overbought) and 30 (oversold) are most often used as signal levels. However, in a bullish environment 80 and 40 may be better suited and 60 and 20 are often used in bear markets. Many analysts use the swings of RSI through various levels to define bull and bear markets.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Normalized Relative Strength Index (NRSI)

See RSI. Plotting 50-day, 2.1 standard deviation Bollinger Bands® on RSI allows the analyst to dispense with fixed levels and focus on indicator action. The upper band serves the same role as RSI 70 (overbought) and the lower band serves the same role as RSI 30 (oversold). Here we go one step further and create a Normalized RSI by plotting %b of RSI using 50-day Bollinger Bands. The formula is:

Normalized RSI = (RSI − LowerBB(RSI)) ÷ (upperBB(RSI) *minus; lowerBB(RSI))

So now 1.0 serves as overbought and 0.0 serves as oversold.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Qstick (QSTK)

Qstick is a moving average of the bodies of Japanese candlesticks, the relationship between the open and the close. Qstick is negative when the closes have been less than the opens on average and positive when the closes have been greater than the opens an average. Thus it is a look at the internal trend of the price structure. 5-10 day periods are most common. Qstick is distantly related to Accumulation- Distribution.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Ultimate Oscillator (UO)

This is Larry Williams' weighted momentum oscillator. The Ultimate Oscillator is a combination of three different individual oscillators of varying time frames. This is usually the smoothest of our momentum tools. You may specify the time frames for the three underlying oscillators; 5, 10, and 20 are the defaults.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Range Tools

Stochastics (%k, %d)

This is George Lane's Stochastics, an indicator of the position of current price relative to the price range of the past n-periods.

Calculation:
%k = (last price − lowest(low, n) ÷ (highest(high, n) − lowest(low,n)) × 100
%d = n-period sma of %k

The first input sets the look-back period for lowest low and highest high, the second input sets the length of the average(s). The fast Stochastic presents %k and an average of %k. The slow Stochastic presentation drops the raw calculation and adds a second smoothing.

Usage:
Signal: %d line is generally used as the signal line.
Overbought/Oversold: Above 80 means the current price is near the top of its n-day high-low range and below 20 means it's near the bottom of the range. Values above 80 are considered overbought and values below 20 as oversold. Prices may persist at these levels, so pattern recognition is employed to identify trading opportunities.
Divergence: Bullish Reversal - price is trending down, Stochastic is bottoming and turning up. Bearish Reversal - price is trending up, Stochastic is peaking and turning down.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Stochastic Impulse (SI)

Stochastic Impulse is a BBands.com exclusive indicator. It is a variation on BBImpulse that depicts the changes in Stochastics rather than the changes in %b. Another way of saying this is that BBImpulse measures impulse strength in relation to the Bollinger Bands and Stochastic Impulse measures impulse strength in relation to range. (See BBImpulse.)

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Williams %R (%R)

This is a variation on Stochastics that some prefer. %R depicts where you are in the range of the past n-days without smoothing. Note that the scale is inverted from that for Stochastics. A 10- or 20-day period is a good starting place for stocks.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Average True Range (ATR)

The True Range of an issue for a given period is the high minus the low plus any gap in price that formed between sessions. It is the range as it might have been had trading continued for 24 hours. Average True Range is an n-period average of True Range. This is a basic volatility tool that is often used in trading systems, position sizing and the setting of stops such as Chandelier stops.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Overbought/Oversold

Deviation from Average (DFA)

Deviation from Average is the most basic overbought/oversold tool. It expresses how far prices have deviated from the mean as measured by an n-period average. The actual value is the percent deviation from the average. A 50-period average is the default, though 10- and 20-period averages are commonly used as well.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Commodity Channel Index (CCI)

CCI is an overbought/oversold tool that uses volatility as its gauge and an old scaling convention derived from its commodity-futures-market heritage. 20 periods is the default. See BBIndex for a modern version of this indicator.

© 2011 Bollinger Capital Management, Inc. All rights reserved.


Alphier Indicators

The late Jim Alphier passed away unexpectedly in 1990. He was a portfolio manager, market historian and a master technician that took most of his knowledge with him to the grave. Fortunately all was not lost and I was able to learn three of Jim's indicators from Fred Wynia: Expectations, Psychology and Conviction. We feel that these three are amongst his most important contributions and we are confident that these versions are reasonably true to his conceptions. (See Sponsored Volume in the volume indicators section for a rare Alphier contribution to volume analysis.)

Alphier Psychology (AP)

This is a short-term component of the Expectations curve that is more sensitive than Expectations. It is shorter-term in outlook and can be used on its own or to help anticipate changes in the Expectations curve.

© 2011 Bollinger Capital Management, Inc. All rights reserved.

Alphier Expectations (AE)

The Expectations curve is a supply-demand calculation along the lines of Accumulation-Distribution or Intraday Intensity. It is executed with Jim's unique flair and there isn't really anything else in technical analysis quite like it. Use it as you would any other supply-demand tool - volume is not a factor - or follow the rules we have implemented on the chart.

Expectation Chart rules:

  1. 40 and 160 delimit the oversold and overbought zones.
  2. Alerts & Signals
    • Red Minus signs () are Sell Alerts
      Green plus signs (+) are Buy Alerts
      Alerts are precursors to Signals. They can act as signals for aggressive investors.
    • S” are Regular Sell Signals
      B” are Regular Buy Signals
    • M” are Major Shift Sell Signals
      W” are Major Shift Buy Signals
    • Red asterisks (*) are Reversal Sell Signals
      Green number signs (#) are Reversal Buy Signals
      Following a Major Shift Signal, the first opposite Regular Signal is ignored.
    • Red “R” are 200 Sell Rules (2nd consecutive Expectation above 200)
      Green “R” are 0 Buy Rules (2nd consecutive Expectation less than 0)
© 2011 Bollinger Capital Management, Inc. All rights reserved.

Alphier Conviction (AC)

This is a classic divergence indicator, implemented as only Jim might have; it works by providing a comparison of the counts of plus and minus days versus the actual gains recorded. Classic divergence analysis is at its best here.

© 2011 Bollinger Capital Management, Inc. All rights reserved.