The contents of the Accumulation/Distribution Line are explained in detail under the discussion of the Chaikin Oscillator (Chaikin A/D Oscillator). Briefly, the indicator is:
{ [(close-low) – (high-close) / (high-close) ] x volume} + I
Where "I" is yesterday's Accumulation/Distribution value.
is a cumulative total of the Swing Index (see Swing Index).
The Swing Index seeks to isolate the "real" price of a security by comparing the relationships between the current prices (i.e., open, high, low, and close) and the previous period's prices.
The Swing Index requires opening prices.
is a line study consisting of three parallel lines. The lines are drawn from three points that you select.
The three trendlines are drawn as follows: The first trendline begins at the left-most point selected and is drawn so it passes directly between the right-most points. This line is the handle of the pitchfork. The second and third trendlines are then drawn beginning at the right-most points and are drawn parallel to the first line. These lines are the tines of the pitchfork.
The True Range indicator is defined by Wilder to be the greatest of the following for each period:
· The distance from today's high to today's low.
· The distance from yesterday's close to today's high.
· The distance from yesterday's close to today's low.
· The Average True Range is simply the average of the true ranges over the past x periods (where x
is specified by the user).
are a type of envelope (see Envelope) developed by John Bollinger. However, where envelopes are plotted at a fixed percentage above and below a moving average, Bollinger Bands are plotted at standard deviation levels above and below a moving average.
You may find the expert named "Equis - Bollinger Bands" helpful in interpreting Bollinger Bands. See Attaching an Expert to a Chart for more information an experts.For information on products and services offered by John Bollinger contact Bollinger Capital Management at 1-310-798-8855.
The Japanese developed a method of technical analysis in the 1600s to analyze the price of rice contracts. This technique is called Candlestick charting.
Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar-chart. Articles written by Steven Nison that explain Candlestick charting appeared in the December, 1989 and April, 1990 issues of Futures Magazine. The definitive book on the subject is Japanese Candlestick Charting Techniques also by Steve Nison
You may find the expert named "Equis - Candlesticks" helpful in interpreting Candlestick patterns. See Attaching an Expert to a Chart for more information an experts.Some investors are attracted to Candlestick charts by their mystique--maybe they are the "long forgotten Asian secret" to investment analysis. Other investors may be turned-off by their mystique. Regardless of your feelings about the mystique of Candlestick charting, we strongly encourage you to explore their use. Candlestick charts dramatically illustrate supply/demand concepts defined by classical technical analysis theories.
IMPORTANT: Because Candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices. If you attempt to display a Candlestick chart on a security that does not have opening prices, MetaStock Pro will use the previous period's closing prices in place of opening prices. Note that this technique can create
Candlestick lines and patterns that are not valid (e.g., the previous period's close may have been outside the current period's high-low range).
Candlevolume charts are a unique hybrid of the Equivolume and Candlestick charting methods. A candlevolume chart possesses the shadows and empty/filled body characteristics of Candlestick charts, plus the volume-based body width of Equivolume charts. This combination gives you the unique ability to study Candlestick patterns in combination with their volume.
Like the popular Chaikin A/D Oscillator developed by Marc Chaikin, the Chaikin Money Flow indicator is based on the Accumulation/Distribution line. It is created by summing the values of the Accumulation/Distribution Line for 21 periods and then dividing by a 21 period sum of the volume.
sum(((( C-L )-( H-C )) / ( H-L ))*V,21 ) / sum(V,21)
The color/style page allows you to change the color, line style, and weight of the selected price plot. You can also make these changes by using the color and line style toolbars (see Color and Line Style Toolbars).
Price Styles. Click on the Price Style drop-list to display the nine price styles: Bars, Candlesticks, Candlevolume, Equivolume, Line, Kagi, Point & Figure, Renko, and Three Line Break.
Up. Use this drop-list to select the color when the closing price moves upward (as compared to the previous period's price). Note that this color only affects the currently selected Price Style. If an expert containing a Highlight is attached to the chart (and its condition is true), the Highlight's color will override this setting.
Down. Use this drop-list to select the color when the closing price moves downward (as compared to the previous period's price). Note that this color only affects the currently selected Price Style. If an expert containing a Highlight is attached to the chart (and its condition is true), the Highlight's color will override this setting.
Weight. Use this drop-list to select the weight (i.e., thickness) of the price plot.
Apply To All Price Styles. Check this box if you want the Up and Down colors selected for the current price style to apply to all Price Styles (rather than just the currently selected Price Style).
The Commodity Channel Index (CCI) is calculated by first determining the difference between the mean price of a commodity and the average of the means over the time period chosen. This difference is then compared to the average difference over the time period (this factors in the commodity's own inherent volatility). The result is then multiplied by a constant that is designed to adjust the CCI so that it fits into a "normal" trading range of +/-100. A complete explanation of the CCI is beyond the scope of the manual. Further details on the contents and interpretation of the CCI can be found in the October 1980 issue of Commodities magazine (now known as Futures). The article was written by Donald Lambert.
The CCI indicator used in older versions of MetaStock is called "CCI (EQUIS)." "CCI (Standard)" is the recently modified version that is consistent with the author's current calculation method. The interpretation of both methods is identical.
See Plotting an Indicator for more information on plotting indicators. See Commodity Channel Index (CCI) for more information on the CCI parameters.
The CSI is calculated using the ADXR component of the Directional Movement indicator. Refer to New Concepts in Technical Trading Systems (see Suggested Reading) for more information on the calculation and interpretation of the indicator.
Displaying the Trend in the Expert Corner
The expert corner is a small area located in the bottom corner of the chart where the x-and y-axes meet. This area is reserved for the display of a symbol. The symbol indicates the current trend (i.e., for the last bar loaded in the chart) of the security. The rules that define expert corner symbol are created in the Trend page of the Expert Editor dialog (see Defining Bullish and Bearish Trends).
A user defined symbol will appear if the current state is bullish, bearish, or neutral. If the state is confused (see Defining Bullish and Bearish Trends), the symbol for neutral will appear. If the state is undefined, no symbol will appear.
The color and style of the symbol is controlled from the Expert Corner dialog. This dialog is displayed by choosing the Corner button on the Trend page of the Expert Editor dialog.
Display Symbol in Expert Corner. Check this box if you want symbols displayed in the Expert Corner area of the chart.
Symbol. Choose the symbol to use for the bullish, bearish, and neutral state of the security.
Color. Choose the color to use for the symbol. Be sure to choose a color that is different from the background color of the expert. Otherwise, the symbol will not be visible.
The purpose of correlation analysis is to measure the relationship between two variables. This relationship is called the "correlation coefficient."
The correlation coefficient ranges between ±1.0. A coefficient of +1.0 is a perfect positive correlation and -1.0 is a perfect negative correlation. Two variables with no relationship will have a coefficient of zero.
Cycles allow us to accurately predict events in nature: bird migrations, the tides, planetary movements, etc. You can also use cycle analysis to predict changes in financial markets, although not always with the accuracy found in nature.
We know that prices are a consensus of human expectations. These expectations are always changing, shifting the supply/demand lines (see Support and Resistance Levels), and causing prices to oscillate between overbought and oversold levels. Fluctuations in prices are a natural process of changing expectations and lead to cyclical patterns.
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Delta shows the amount that the option's price will change if the underlying security's price changes by $1.00.
For example, if XYZ is selling for $105.00/share, a call option on XYZ is selling for $2.00 and the Delta is 75%, then the option's price should increase $0.75 (to $2.75) if the price of XYZ increases to $106.00/share. In other words, the option should go up $0.75 for each $1.00 that XYZ goes up.
developed by James Sibbet, combines price and volume in such a way that it is often a leading indicator of price change. The Demand Index calculations are too complex, however, for this text. The calculations require 21-column accounting paper to calculate manually.
MetaStock Pro uses a slight variation on the Sibbet's original Index so that the Index is displayed on a "normal" y-axis scale. The author's Index is plotted on a scale labeled +0 at the top, 1 in the middle, and -0 at the bottom. MetaStock Pro uses a scale from +100 to -100. Other than the difference in y-axis labeling, the indicator is calculated exactly as designed by its author.
The Detrended Price Oscillator (DPO) is an indicator that attempts to eliminate the trend in prices. Detrended prices allow you to more easily identify cycles and overbought/oversold levels.
The calculation is quite simple; you simply center an x-period moving average by shifting it back x/2 + 1 periods. This centered moving average is then subtracted from the close. The result is an oscillator that crosses above and below zero.
Since the DPO is shifted back "x/2 + 1" periods, the last "x/2 + 1" periods will have no values.
MetaStock Pro prompts you to enter the number of periods. The value entered should be the approximate length of the cycle you wish to identify. Cycles longer than the number of periods you enter will not be shown. The default value is 20.
There are five indicators comprising the Directional Movement system: +DI, -DI, ADX, ADXR, and DX.
The parameters for the Directional Movement indicators are shown below. These parameters are specified at the time the indicator is plotted. You can edit the parameters of an existing plot by right-clicking on the indicator and choosing Properties from the shortcut menu.
Time Periods. Enter the number of time periods to use when calculating Directional Movement. The term "time periods" refers to days if the chart contains daily data, weeks for weekly data, hours for hourly data, etc.
The parameters for the Dynamic Momentum Index are shown below. These parameters are specified at the time the indicator is plotted. You can edit the parameters of an existing plot by right-clicking on the indicator and choosing Properties from the shortcut menu.
Price Field. Choose the price field (i.e., open, high, low, or close) to use when calculating the Dynamic Momentum Index.
The Dynamic Momentum Index (DMI) was developed by Tushar Chande and Stanley Kroll. The indicator is covered in detail in their book The New Technical Trader.
The DMI is identical to Welles Wilder's RSI (see Relative Strength Index) except the number of periods is variable rather than fixed. The variability of the time periods used in the DMI is controlled by the recent volatility of prices. The more volatile the prices, the more sensitive the DMI is to price changes. In other words, the DMI will use more time periods during quiet markets, and less during active markets. The maximum time periods the DMI can reach is 30 and the minimum is 3. This calculation method is similar to the Variable Moving Average, also developed by Tushar Chande (see Moving Averages).
The advantage of using a variable length time period when calculating the RSI is that it overcomes the negative effects of smoothing, which often obscure short-term moves.
The volatility index used in controlling the time periods in the DMI is based on a calculation using a five period standard deviation and a ten period average of the standard deviation.
was developed by Richard W. Arms, Jr., best known for the popular Arms Index and the Equivolume charting method. The Ease of Movement indicator is a product of the Equivolume charting method. The Ease of Movement indicator provides one value (for each time period) representing the price and volume for that period. It calculates the ease at which prices are moving. The larger the price move and the lighter the volume, the easier the movement.
The raw Ease of Movement values is usually smoothed by a moving average.
An envelope is comprised of two moving averages (see Moving Averages). One moving average is shifted upward and the second moving average is shifted downward. The envelope is plotted around a price plot or indicator.
Developed by Richard W. Arms, Jr., and explained in his book Volume Cycles in the Stock Market (see Suggested Reading), Equivolume presents a highly informative picture of market activity for stocks, futures, and indices.
Equivolume departs from other charting methods with its emphasis on volume as an equal partner with price. Instead of being displayed as an "afterthought" on the lower margin of a chart, volume is combined with price in a two-dimensional box. The top line of the box is the high for the period and the bottom line is the low for the period. The width of the box is the unique feature of Equivolume charting; it represents the volume of trading for the period.The width of the box is controlled by a normalized volume value. The volume for an individual box is normalized by dividing the actual volume for the period by the total of all volume displayed on the chart. Therefore, the width of each Equivolume box is based on a percentage of total volume, with the total of all percentages equaling 100.
The resulting charts represent an important departure from all other analytical methods, in that time becomes less important than volume in analyzing price moves. It suggests that each movement is a function of the number of shares or contracts changing hands rather than the amount of time elapsed.Perhaps the Equivolume charting method is best summed up by the developer himself as follows: "If the market wore a wristwatch, it would be divided into shares, not hours."
Leonardo Fibonacci was an important mathematician who was born in Italy around the year 1170. It is rumored that Fibonacci discovered the relationship of what are now referred to as Fibonacci numbers while studying the Great Pyramid of Giza in Egypt.
Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc.
The parameters for Fibonacci Time Zones are shown below. You can edit the parameters of Fibonacci Time Zones that are already plotted by right-clicking on them and choosing Fibonacci Time Zones Properties from the shortcut menu.
Date. This is the date/time on which the dotted "reference" line is drawn. The remaining time zone lines are drawn to the right of the reference line at the predefined Fibonacci intervals.
Show Lines in All Windows. Check this box if you want the time zones to extend vertically across all inner windows within the chart.
For general information on line studies, see Drawing a Line Study. For interpretation information on Fibonacci Time Zones, see Time Zones.
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc.
These numbers possess an intriguing number of interrelationships, such as the fact that any given number is approximately 1.618 times the preceding number and any given number is approximately 0.618 times the following number. The booklet Understanding Fibonacci Numbers by Edward Dobson (see Suggested Reading) contains a good discussion of these interrelationships.
The Forecast Oscillator is an extension of the linear regression based indicators made popular by Tushar Chande. The Forecast Oscillator plots the percentage difference between the forecast price (generated by an x-period linear regression line) and the actual price. The oscillator is above zero when the forecast price is greater than the actual price. Conversely, it's less than zero if its below. In the rare case when the forecast price and the actual price are the same, the oscillator would plot zero.
For more on linear regression analysis see Linear Regression Trendline, Linear Regression Indicator, and Time Series Forecast.
Option Gamma shows the anticipated change in Delta, given a one point increase in the underlying security. Thus, it shows how responsive Delta is to a change in the underlying security's price. For example, a Gamma of four indicates that the Delta will increase four points (e.g., from 50% to 54%) for each one point increase in the underlying security's price.
W. D. Gann (1878-1955) designed several unique techniques for studying price charts. Central to Gann's techniques was the use of geometric angles in conjunction with time and price. Gann believed that specific geometric patterns and angles had unique characteristics that could be used to predict price action. All of Gann's techniques require that equal time and price intervals be used on the charts, so that a rise/run of 1 x 1 will always equal a 45 degree angle.Gann believed that the ideal balance between time and price exists when prices rise or fall at a 45 degree angle relative to the time axis. This is also called a 1 x 1 angle (i.e., prices rise one price unit for each time unit).
A bar chart is the most popular way to display security prices. A bar chart is made up of vertical bars, with each bar representing the price movement for a time period (i.e., hour, day, week, month, etc.). Hash marks on the left and right sides of the bar represent the opening and closing prices respectively. The top of the bar represents the high price and the bottom of the bottom represents the low price.
The Intraday Momentum Index (IMI) was developed by Tushar Chande. It is a cross-breed between the RSI (see Relative Strength Index) and candlestick analysis (see Candlesticks, Japanese
). For more information on the IMI, refer to the book The New Technical Trader by Tushar Chande and Stanley Kroll.
The calculation of the IMI is very similar to the RSI, except it uses the relationship between the intraday opening and closing prices to determine whether the day is "up" or "down." If the close is above the open, it is an up day. If the close is below the open it is a down day. Therein lies its tie to candlestick charting. For those familiar with candlestick charting, the IMI separates the black and white candlesticks and performs a RSI calculation on the candlestick bodies.
The Moving Average Convergence/Divergence indicator (MACD) is calculated by subtracting the value of a 0.075 (26-period) exponential moving average from a 0.15 (12-period) exponential moving average. A 9-period dotted exponential moving average (the "signal line") is automatically displayed on top of the MACD indicator line.
You may find the expert named "Equis - MACD" helpful in interpreting the MACD indicator.
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In his book, Trading Chaos, Dr. Bill Williams, introduces a unique method of combining price action with volume. The main component of this method is a simple indicator he developed called the Market Facilitation Index (MFI).
The MFI simply divides the day's range (high to low) by the total volume. The result shows the efficiency of price movement by quantifying the price movement per unit of volume.
The Mass Index, popularized by Tushar Chande and Donald Dorsey (see the June 1992 issue of Technical Analysis of Stocks & Commodities magazine), is calculated by summing an exponentially smoothed moving average of the daily ranges (High-Low) over 25 periods.
The Mass Index is designed to identify reversals in trend by measuring the narrowing and widening of the average range between the high and low prices. As the range widens, the Mass Index increases. As the range narrows, the Mass Index decreases
The Median Price indicator is calculated by adding the high price and the low price together, and then dividing by two. The result is the average, or median, price.
Median Price = (high+low)/2
The MESA Sinewave indicator was developed by recognized cycle specialist John Ehlers. The MESA Sinewave indicator looks like a sinewave when the market is in a cycle mode and tends to wander when the market is in a trend mode. The MESA Sinewave indicator anticipates cycle mode turning points rather than waiting for confirmation as is done with most oscillators. The MESA Sinewave indicator has the additional advantage that trend mode whipsaw signals are minimized.
The Sine Wave indicator was introduced in the November 1996 issue of Technical Analysis of Stocks & Commodities magazine.
The momentum of a security is the ratio of today's price compared to the price x-time periods ago. The formula equivalent of the calculation is shown below:
Momentum = [close / ref(Close,-10) ] x 100
Where:
ref(Close,-10) = The closing price 10 periods ago
The Money Flow Index (MFI) attempts to measure the strength of money flowing in and out of a security. It is closely related to the Relative Strength Index (RSI); however, the Money Flow Index accounts for volume action. The RSI incorporates price action only.
Money flow (not the Money Flow Index) is calculated by determining the average price for the day and then comparing this figure to the previous day's average price. If today's average price is greater, it is considered positive money flow. If today's average price is less, it is considered negative money flow. Money flow for a specific day is calculated by multiplying the average price by the volume.
Money Flow = volume x average price
Positive Money Flow is the sum of the positive money flow over the specified number of periods. Negative Money Flow is the sum of the negative money flow over the specified number of periods.
Money ratio = positive Money Flow / negative Money Flow
Finally, the Money Flow Index is calculated using the following formula:
Money Flow Index (MFI) = 100 – [100/(1+Money ratio )]
A moving average is a method of calculating the average value of a security's price, or indicator, over a period of time. The term "moving" implies, and rightly so, that the average changes or moves. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes over time, its average price moves up or down.
MetaStock Pro calculates and displays six different types of moving averages: simple (also referred to as arithmetic), exponential, time series, triangular, variable, and weighted. In addition, MetaStock Pro will calculate moving averages of the security's open, high, low, close, median price, typical price, volume, open interest, or indicator.
The only significant difference between the various types of moving averages is the weight assigned to the most recent data. Once this "weighting" scheme has been determined, it is held static over the range of calculations. The exceptions are the variable moving average and volume adjusted moving average. The variable moving average automatically adjusts its weighting based on market conditions. A variable moving average becomes more sensitive to recent data as volatility increases and less sensitive to recent data as volatility decreases. Similarly, the volume adjusted moving average automatically adjusts as the security's volume increases and decreases.
relates a decrease in volume to the change in the security's price. When volume decreases from the previous day, the NVI is adjusted by the percentage change in the security's price.
If (V < (ref(V,-1)) then
NVI = I + (((C - ref(C,-1) / ref(C,-1)))
If (V >= ref(V,-1)) then
NVI = I
Where:
C = Today's closing price
ref(C,-1) = Yesterday's closing price
I = Yesterday's Negative Volume Index
NVI = Today's Negative Volume Index
V = Today's volume
ref(V,-1) = Yesterday's volume
The NVI is constructed so it only displays changes on days when volume decreases from the previous day. Because falling prices are usually associated with falling volume, the NVI will usually trend downward.
See Plotting an Indicator for more information on plotting indicators. See Negative Volume Index for more information on the NVI parameters.
The Option Expiration indicator shows the month to month expiration cycle of stock and index options. It is designed primarily to help in the development of more robust trading systems using the indicator's function (see Option Expiration for more information on the Option Expiration function). The visual interpretation of the plot itself is of little value as it simply shows the number of days until the next monthly option expiration date.Stock and Index options expire on the Saturday following the third Friday of each month. Options may be written for one of three cycles. New options can be written every three months, with cycles beginning in January, February, and March.
The option expiration day in the months of March, June, September, and December are referred to as "triple witching." On these days, stock options, index options, and index futures all expire simultaneously. For this reason, triple witching days are often very volatile.
Since options officially expire on Saturdays (a non-trading day), the Next Option Expiration indicator's value on the Friday before expiration will be 1.00—meaning one day until expiration. This is also consistent with the way the Option Life function calculates (see Option Life).
Some of the most active days in the history of the markets have occurred at option expiration. Because of the increasing use of options by both small and large investors as a means of hedging and speculating, it may be wise to consider the potential increase in volatility that can occur in the underlying security on option expiration days.
The Positive Volume Index (PVI) relates an increase in volume to the change in the security's price. When volume increases from the previous day, the PVI is adjusted by the percentage change in the security's price.
If (V > ref(V,-1)) then
PVI = I + (((C - ref(C,-1)) / ref(C,-1)))
If (V <= ref(V,-1)) then
PVI = I
Where:
C = Today's closing price
ref(C,-1) = Yesterday's closing price
I = Yesterday's Positive Volume Index
PVI = Today's Positive Volume Index
V = Today's volume
ref(V,-1) = Yesterday's volume
The PVI is constructed so it only displays changes on days when volume increases from the previous day. Because rising prices are usually associated with rising volume, the PVI will generally trend upward.
The Price Oscillator displays the difference between two moving averages of the security's price. The difference between the averages can be expressed in either points or percentages.
The Price Rate-Of-Change (R.O.C.) indicator (percent method) is calculated by dividing the price change over the last x-periods by the closing price of the security x-periods ago. The result is the percentage that the security's price has changed in the last x-periods.
If the security's price is higher today than x-periods ago, the R.O.C. will be a positive number. If the security's price is lower today than x-periods ago, the R.O.C. will be a negative number.
The Price Volume Trend (PVT) is similar in concept to On Balance Volume (see On Balance Volume) in that it is a cumulative total of volume that is adjusted depending on changes in closing prices. But whereas OBV adds all volume on days when prices close higher and subtracts all volume on days when prices close lower, the PVT adds only a portion of the daily volume. The amount of volume added to the PVT is a function of the amount by which prices rose or fell relative to the previous day's close.
PVT = (((C-ref(C,-1)) / ref(C,-1)) * V) + I
Where:
C = Today's closing price
ref(C,-1) = Yesterday's closing price
V = Today's volume
I = Yesterday's Price Volume Trend
The PVT is calculated by multiplying the day's volume by the percentage change of the underlying security and adding this value to a cumulative total. For example, if the security closed up 0.5% and volume was 10,000 shares, we would add 50 (i.e., 0.005 * 10,000 = 50) to the PVT. If the security had closed down 0.5%, we would have subtracted 50 from the PVT.
Developed by Mel Widner, Ph.D., the Projection Oscillator is a by-product of his Projection Bands (see Projection Bands). The Projection Oscillator is basically a slope-adjusted Stochastic. Where the Stochastic Oscillator (see Stochastic Oscillator) shows the relationship of the current price to its minimum and maximum prices over a recent time period, the Projection Oscillator shows the same thing, but the minimum and maximum prices are adjusted up/down by the slope of the price's regression line. This adjustment makes the Projection Oscillator more responsive to short-term price moves than an equi-period Stochastic.
Put another way, the Projection Oscillator shows where the current price is relative to the Projection bands. A value of 50 indicates that the current price is exactly in the middle of the bands. A value of 100 indicates that prices are touching the top band. A value of 0 indicates that prices are touching the bottom band.
The Qstick indicator was developed by Tushar Chande. Qstick provides a way to quantify candlesticks. The distance between the open and close prices lies at the heart of candlestick charting. For those unfamiliar with candlestick charting, the body of a candlestick is black if today's close is less than the open; it is white if today's close is greater than the open. A majority of white candlesticks over a specified range is considered bullish. Whereas a majority of black candlesticks over a specified range is considered bearish.
The Qstick indicator is simply a moving average of the difference between open and close prices.
The Linear Regression method provides several useful outputs for technical analysts, including the r-squared. R-squared shows the strength of trend. The more closely prices move in a linear relationship with the passing of time, the stronger the trend.
The Relative Strength Index (RSI) is a popular oscillator used by commodity traders. It was first introduced by J. Welles Wilder in an article in Commodities (now known as Futures) magazine in June, 1978. Step-by-step instructions on calculating and interpreting the RSI are also provided in Mr. Wilder's book, New Concepts in Technical Trading Systems (see Suggested Reading).
The name "Relative Strength Index" is slightly misleading as the RSI does not compare the relative strength of two securities, but rather the internal strength of a single security. A more appropriate name might be "Internal Strength Index."
The RSI is a fairly simple formula, but is difficult to explain without pages of examples. The basic formula is:
RSI = 100 - { 100/ [1+(u/d)] }
Where:
U = An average of upward price change.
D = An average of downward price change.
MetaStock Pro prompts you to enter the number of time periods in the averages.
The Relative Volatility Index (RVI) was developed by Donald Dorsey. It was originally introduced in the June 1993 issue of Technical Analysis of Stocks and Commodities magazine (TASC). A revision to the indicator was covered in the September 1995 issue.
The RVI is used to measure the direction of volatility. The calculation is identical to the Relative Strength Index (RSI) (see Relative Strength Index) except that the RVI measures the standard deviation of daily price changes rather than absolute price changes.
The Renko charting method is thought to have acquired its name from "renga" which is the Japanese word for bricks. Renko charts were introduced by Steve Nison (a well-known authority on the Candlestick charting method).
Renko charts are similar to Three Line Break charts except that in a Renko chart, a line (or brick as they are sometimes called) is drawn in the direction of the prior move only if a fixed amount (i.e., the box size) has been exceeded. The bricks are always equal in size. For example, in a five unit Renko chart, a 20 point rally is displayed as four equally sized, five unit high Renko bricks.
To draw Renko bricks, today's close is compared with the high and low of the previous brick (white or black). When the closing price rises above the top of the previous brick by the box size or more, one or more equal height, white bricks are drawn in the next column. If the closing price falls below the bottom of the previous brick by the box size or more, one or more equal height, black bricks are drawn in the next column.
If the market moves up more than the amount required to draw one brick, but less than the amount required to draw two bricks, only one brick is drawn. For example, in a two unit Renko chart, if the base price is 100 and the market moves to 103, then one white brick is drawn from the base price of 100 to 102. The rest of the move--from 102 to 103--is not shown on the Renko chart. The same rule applies anytime the price does not fall on a box size divisor.
Indicators calculated on renko charts use all the data in each column and then display the average value of the indicator for that column.
Standard Deviation is a statistical measurement of volatility. It is derived by calculating an x
-time period simple moving average of the data item (i.e., the closing price or an indicator); summing the squares of the difference between the data item and its moving average over each of the preceding x-time periods; dividing this sum by x; and then calculating the square root of this result.
Standard Error measures how closely prices congregate around a linear regression line. The closer prices are to the linear regression line, the higher the r-squared value and the stronger the trend.
For example, if each day's closing price was equal to that day's regression line value, then the standard error would be zero. The more variance or "noise" around the regression value, the larger the standard error and the less reliable the trend.
Sto.chas.tic (st kas'tik) adj. 2. Math. designating a process having an infinite progression of jointly distributed random variables.-- Webster's
The Stochastic Oscillator compares where a security's price closed relative to its trading range over the last x-time periods.
For example, to calculate a 10-day %K: First, find the security's highest high and lowest low over the last 10 days. For this example, let's assume that during the last 10 days the highest high was 46 and the lowest low was 38--a range of 8 points. If today's closing price was 41, %K would be calculated as:
The 0.375 in this example shows that today's close was at the level of 37.5% relative to the security's trading range over the last 10 days. If today's close was 42, the Stochastic Oscillator would be 0.50. The 0.50 would show that the security closed today at 50%, or the mid-point, of its 10-day trading range.
The above example used a %K Slowing Period of 1 day (no slowing). If you use a Slowing Period of greater than 1 period, you would total the value of the numerators for the number of Slowing Periods, then total the value of the denominators for the number of Slowing Periods, and then perform the division. For example, to calculate a 10-day %K with 3-period slowing, you would sum the value of the numerators (i.e., today's close minus the lowest low in the last 10 periods) for each of the last three periods, then sum the value of the denominators (i.e., the highest high in the last 10 periods minus the lowest low in the last 10 periods) for each of the last three periods, and finally divide the sum of the numerators by the sum of the denominators.
A moving average of %K is then calculated using the number of time periods you specified in the %D Periods. This moving average is called %D.
Finally, MetaStock Pro multiplies all stochastic values by 100 to change decimal values into percentages for better scaling (e.g., 0.375 is displayed as 37.5%).
The Stochastic Oscillator always ranges between 0% and 100%. A reading of 0% shows that the security's close was the lowest price that the security has traded during the preceding x-time periods. A reading of 100% shows that the security's close was the highest price that the security has traded during the preceding x-time periods.
The Swing Index seeks to isolate the "real" price of a security by comparing the relationships between the current prices (i.e., open, high, low, and close) and the previous period's prices.
The Swing Index requires opening prices.
Although it is beyond the scope of the manual to completely define the Swing Index, the basic formula is shown below. Step-by-step instructions on calculating the Swing Index are provided in Wilder's
Theta shows the change in the option's price (in points) due to the effect of time alone. The longer the time until expiration, the less effect that time has on the price of the option. However, as the option nears expiration, the effect can be great, particularly on out-of-the-money options. Theta is also referred to as "time decay."
originate from Japan and were introduced to the western world by Steve Nison (a well-known authority on the Candlestick charting method). The Three Line Break charting method gets its name from the default number of line blocks typically used.
Using the closing price, a new white block is added in a new column if the previous high price is exceeded. A new black block is drawn if the close makes a new low. If there is neither a new high or low, nothing is drawn.
With a default Three Line Break, if a rally is powerful enough to form three consecutive white blocks, then the low of the last three white blocks must be exceeded before a black block is drawn. If a sell-off is powerful enough to form three consecutive black blocks, then the high of the last three black blocks must be exceeded before a white block is drawn.
To draw line break blocks, today's close is compared to the high and low of the previous block. A block is drawn only when today's close exceeds the high or low of the previous block. If today's close is higher than the top of the previous block, a new white block is drawn in the next column from the prior high to the new high price. If today's close is lower than the bottom of the previous block, a new black block is drawn in the next column from the prior low to the new low price. If the close fails to move outside the range of the previous blocks high or low, then nothing is drawn.With the default Three Line Break chart, a downside reversal (i.e., white blocks change to black blocks) occurs when the price moves under the lowest price of the last three consecutive white blocks. A black reversal block is drawn from the bottom of the highest white block to the new price. An upside reversal (i.e., black blocks change to white blocks) occurs when the price moves above the highest price of the last three consecutive black blocks. A white reversal block is drawn from the top of the lowest black block to the new high price.
Indicators calculated on Three Line Break charts use all the data in each column and then display the average value of the indicator for that column
The Time Series Forecast indicator is based on the trend of a security's price over a specified time period. The trend is determined by calculating a linear regression trendline using the "least squares fit" method. The least squares fit technique fits a trendline to the data in the chart by minimizing the distance between the data points and the linear regression trendline.
Any point along the Time Series Forecast is equal to the ending value of a Linear Regression trendline plus its slope. For example, the ending value of a Linear Regression trendline (plus its slope) that covers 10 days will have the same value as a 10-day Time Series Forecast. This differs slightly from the Linear Regression indicator (see Linear Regression Indicator) in that the Linear Regression indicator does not add the slope to the ending value of the regression line. This makes the TSF a bit more responsive to short term price changes. If you plot the TSF and the Linear Regression indicator side-by-side, you'll notice that the TSF hugs the prices more closely than the Linear Regression indicator.
Rather than plotting a straight Linear Regression trendline, the Time Series Forecast indicator plots the ending values of multiple Linear Regression trendlines. The resulting Time Series Forecast indicator is sometimes referred to as a "moving linear regression" study or a "regression oscillator."
The parameters for Fibonacci Time Zones are shown below. You can edit the parameters of Fibonacci Time Zones that are already plotted by right-clicking on them and choosing Fibonacci Time Zones Properties from the shortcut menu.
Date. This is the date/time on which the dotted "reference" line is drawn. The remaining time zone lines are drawn to the right of the reference line at the predefined Fibonacci intervals.
Show Lines in All Windows. Check this box if you want the time zones to extend vertically across all inner windows within the chart.
Tirone Levels are a series of horizontal lines that identify support and resistance levels. They were developed by John Tirone.
See Drawing a Line Study for more information on drawing line studies. See Tirone Levels for more information on the Tirone Level parameters.
The parameters for Tirone Levels are shown below. You can edit the parameters of Tirone Levels that are already plotted by right-clicking on them and choosing Tirone Levels Properties from the shortcut menu.
Midpoint or Mean. Choose the calculation method for the Tirone Levels. The Midpoint method displays three lines that divide the highest high and lowest low of the range into symmetrical segments. The Mean method displays five lines ranging between the extreme high and lows and the adjusted mean price.Tirone Levels require actual pricing data to plot. When it is plotted on kagi, point & figure, three line break, or renko charts, it uses all the data in all the columns.
The Trade Volume Index (TVI) is designed to calculate on intraday securities with "minutes per bar" set to zero (i.e., a tick chart). It is calculated by adding each trade's volume to a cumulative total when the price ticks up by a specified amount, and subtracting the trade's volume when the price ticks down by a specified amount. It's based on the premise that trades taking place at the higher "ask" price are buy transactions (from market marker or specialist to trader)and trades at the lower "bid" price are sell transactions (from trader to market maker or specialist). The TVI oscillates around zero. Values above zero indicate net buying pressure, whereas values below zero indicate net selling pressure.
The TVI is similar to On Balance Volume, except the TVI continues to cumulate the volume (be it on the buy or sell side) if the price is unchanged. Tick charts (especially of stock prices) will often display trades at the bid or ask price for extended periods without changing (creating a flat spot). The TVI continues to assign the trade volume during these extended flat periods to either the buy or sell side (depending on its last price change). The On Balance Volume indicator only assigns volume when price changes occur. This works well for daily charts but not for tick charts.
MetaStock Pro prompts you to enter the "Minimum Tick Value." The Minimum Tick Value controls when volume switches from the buy side to the sell side. If the absolute value of the uptick or downtick is less than the Minimum Tick Value, MetaStock Pro will continue to assign the volume to the current side (i.e., buy or sell side). If the absolute value is greater than the Minimum Tick Value and the price changes direction, MetaStock Pro will switch and begin assigning volume to the opposite side.
Although the TVI will plot on any chart, it was originally designed to analyze intraday tick charts. Therefore, you may want to use On Balance Volume for non-tick charts (i.e., 5-minute, hourly, daily, weekly, monthly). However, the TVI can be used with non-tick data by increasing the Minimum Tick Value. For example, you could set the Minimum Tick Value to a large value (e.g., 1, 2, 3, 4 points or more) on a daily stock chart. This produces a smoothing effect when compared to On Balance Volume. Volume will cumulate in the direction of the trend until the price reverses by the specified number of points from a previous trough or peak. When this occurs, volume will then begin to cumulate in the opposite direction.
MetaStock Pro provides two commands that deal with trendline angles: Gann Lines (see Gann Fans, Grids, and Lines), and Trendline by Angle (see Trendline By Angle). The following discussion explains how these commands function and their differences.
There are basically two ways to quantify the angle of a line drawn on a chart. The first method is relative to the computer screen (or the piece of paper). If you draw a line at 45 degrees using a protractor on the screen, the line should rise by one inch for each inch it extends (runs) to the right. This 45 degree angle also could be expressed as a slope of 1.
The Trendline by Angle commands work in this manner--relative to the computer screen. We say it is relative to the computer screen because we are discussing inches, not prices, on the screen. Regardless of how many days are displayed or what the x- and y-axes of the chart are set to, a 45 degree angle will slope up and to the right at 45 degrees relative to the computer screen.
A second way to quantify the angle of a line drawn on the chart is relative to the x- and y-axes of the chart itself.
A 45 degree angle relative to the x- and y-axes would rise one y-axis unit (point) for each x-axis unit (day) that the line extends (runs) to the right.
1point rise / 1period run
This is how Gann Lines are drawn: relative to the x- and y-axes of the chart. The difference between these two methods, i.e., relative to the screen (inches) or to the axes (points), is substantial.
Gann Lines specifically ask for the ratio, i.e., the periods (run) and the points (rise). If you enter 1 x 1, you will get a line that rises one point for each day it travels to the right. The line may or may not appear to rise at 45 degrees relative to the screen, depending on how many periods you have loaded and how the left scale (y-axis) is set.
If you want a 1 x 1 Gann Line to appear to rise at 45 degrees relative to the computer screen, you will have to use the X- and Y-Axis Parameters dialog (see X-Axis Properties and Y-Axis Properties ) to manually adjust the x- and y-axis.
The Trendline by Angle command draws trendlines relative to the computer screen. Changing the x- and y-axes will have no effect on the angle of the trendline.
displays the percent rate-of-change of a triple exponentially smoothed moving average of the security's closing price.
It is the 1-period percent change of an x-period exponential moving average of an x-period exponential moving average of an x-period exponential moving average of the closing price.
An article on the TRIX indicator appears in Volume One of Technical Analysis of Stocks & Commodities magazine (TASC). The TRIX indicator presented in the TASC article uses a slightly different method to calculate the exponential moving averages and displays the 1-period change in "points multiplied by 1,000" (whereas MetaStock Pro displays the change as a percentage).
The Typical Price indicator is calculated by adding the high, low, and closing prices together, and then dividing by three. The result is the average, or typical price.
Typical Price = ( high + low + close ) / 3
Oscillators typically compare a security's (smoothed) price with its price x-periods ago. Larry Williams notes that the value of this type of oscillator can vary greatly depending on the number of time periods used during the calculation. Thus, he developed the Ultimate Oscillator that uses weighted sums of three oscillators, each of which uses a different time period.
The three oscillators are based on Williams' definitions of buying and selling "pressure."
Vega shows the change in the option price due to an assumed 1% increase in the underlying security's volatility. Vega shows the dollar amount of gain that should be expected if the volatility goes up one point (all else being equal).
The Vertical Horizontal Filter (VHF) determines whether prices are in a trending phase or a congestion phase. The VHF compares the sum of a one period rate-of-change to the range between high and low prices over the specified period.
The age-old problem for many trading systems is their inability to determine if a trending or trading range market is at hand. Trend-following indicators such as MACD and moving averages, tend to be whipsawed as markets enter a non-trending congestion phase. On the other hand, oscillators (which work well during trading range markets) tend to overreact to price pull-backs during trending markets. The VHF indicator attempts to remedy this by measuring the "trendiness" of a market.
MetaStock Pro prompts you to enter the number of periods to use in the calculation. The default value is 28.
The Volatility indicator compares the spread between a security's high and low prices. This is done by first calculating a moving average of the difference between the daily high and low prices and then calculating the percent rate-of-change of that moving average.
Before calculating the Volatility indicator, you are asked to enter the number of time periods in the moving average and the number of time periods in the R.O.C. The author of this indicator (Marc Chaikin) recommends 10-periods for both the moving average and the R.O.C.
The Volume Oscillator displays the difference between two moving averages of a security's volume. The difference between the averages can be expressed in either points or percentages.
The Volume Rate-Of-Change (R.O.C.) indicator is calculated by dividing the volume change over the last x-periods by the volume x-periods ago. The result is the percent by which the volume has changed over the last x-periods.
If volume is higher today than x-days ago, the R.O.C. will be a positive number. If volume is lower today then x-days ago, the R.O.C. will be negative.
Volume is the number of units (i.e., shares or contracts) traded during a specific time period. The analysis of volume is a basic yet very important element of technical analysis. Volume helps measure the intensity of price movement.
Often, the y-axis scale for volume is displayed in multiples of 10s or 100s rather than the actual number (i.e., 500 = 500,000 shares). If there is a scaling multiple, it will be displayed at the bottom of the y-axis scale. Volume is normally displayed in a histogram line style below the prices (see Moving Inner Windows).
Some real-time data vendors do not provide volume with every tick. If this is the case, MetaStock Pro will automatically assign a volume value of "1" for every incoming tick. This allows you to at least see the number of "ticks" that have come in during a specified period. In other words, if the volume on a 1-minute bar is 22, then you know that 22 trades came in during that minute.
If your real-time data vendor does not supply trade volume with updates, and a symbol is added during a trading session, the first tick will contain the total volume up to that point in the trading session. MetaStock will then calculate the trade volume for all subsequent ticks.
The Weighted Close indicator is calculated by multiplying the close by two, adding the high and the low, and dividing by four. The result is the average price for the day with extra weight given to the closing price.
Weighted Close =[ (close x 2) + high + low ] /4
The Wilder's Smoothing indicator was developed by Welles Wilder, best known as the developer of the Directional Movement system (see Directional Movement) and the Relative Strength Index (see Relative Strength Index).
Wilder used this smoothing indicator as a component of many of his other studies. It is basically a type of moving average, similar to the "exponential" method in that it retains a decreasingly smaller percentage of all historical data in the series.
The formula used to calculate Williams' %R is similar to the Stochastic Oscillator:
Williams' %R is plotted on an upside down scale with 0 at the top and 100 at the bottom. To show the indicator in this upside down fashion, MetaStock Pro places a minus symbol before the %R values. You should ignore the minus symbol.
The formula used to calculate Williams' %R is similar to the Stochastic Oscillator:
Williams' %R is plotted on an upside down scale with 0 at the top and 100 at the bottom. To show the indicator in this upside down fashion, MetaStock Pro places a minus symbol before the %R values. You should ignore the minus symbol.
The Zig Zag indicator filters out changes in the data item (i.e., the security or an indicator) that are less than x percent or points. It is used primarily to aid in the visual inspection of a chart--punctuating the significant moves.
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