Indicators

A review or analysis conducted by traders to predict currency exchange rates based on the existing chart. An aphorism says that 'the past will be repeated in the future'; this analysis says that if the price of the currency has ever been at one point for one time, within a certain time it goes back to that point.

The accuracy of the analysis very depends on your ability to read the charts to increase the prediction accuracy. The purpose of this analysis is to determine the average value of currency movements, what the trend is and how long the trend lasts, so that the price movement is predictable.

For beginner traders we also provide an introduction to the following indicator used in MetaTrader 4

Williams' Percent Range

%R (Williams Percentage Range) is a momentum indicator that helps to highlight overbought and oversold areas in a non-trending market. As seen from its name, it was developed by Larry Williams.

Williams %R

The Williams %R is interpreted as the Stochastic Oscillator but depicted upside-down. There is no internal smoothing in the Stochastic Oscillator. Readings in the 0 to -20% range show that it is overbought, while readings in the range of -80 to -100% demonstrate that the security is oversold. As with all overbought/oversold indicators, it's worth waiting for the security's price to change direction before you start trading. As the security's price continues to increase or decrease, it is quite untypical for overbought/oversold indicators to stay in that condition for a long time. Because it can take some time before the price shows signs of deterioration, selling on the first indication of an overbought signal may diminish profit.

The ability of the Williams %R indicator to anticipate a reversal in the basic security's price is extremely interesting. Williams %R usually creates a fall and turns upwards a few days before the security's price moves upwards. Also very often, the indicator reaches a high and turns down a few days before the security's price follows suit.

Stochastic Oscillator

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "doesn't follow price and doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price". As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first and most important signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, it is also useful for identifying overbought and oversold levels.

Standard Deviation

Standard Deviation measures volatility statistically. It shows the difference of the values from the average one. The volatility as well as the standard deviation gets higher if the closing prices and average closing prices differ considerably. If the difference is insignificant, the standard deviation and the volatility are low.

The reversals of trends such as bottoms or tops of the market are timed by high volatility levels. The new trends of prices growth after recessive periods are sometimes timed by low volatility levels.

The square root taken from the variance, which is the average from mean squared deviations, forms the Standard Deviation calculation. Considerable changes of the data under analysis, such as indicators or prices, gives High Standard Deviation values. Stable prices form low Standard Deviation values accordingly.

The biggest highs are thought to go along with the significant volatility that occurs due to processes of fear and euphoria of investors. Considerable lows do not give much profit expectations, which is why they generally pass more calmly.

Relative Vigor Index

The main point of Relative Vigor Index Technical Indicator (RVI) is that on the bull market the closing price is, as a rule, higher, than the opening price. It is the other way round on the bear market. So the idea behind Relative Vigor Index is that the vigor, or energy, of the move is thus established by where the prices end up at the close. To normalize the index to the daily trading range, divide the change of price by the maximum range of prices for the day. To make a smoother calculation, we use the Simple Moving Average. 10 is the best period. To avoid probable ambiguity we need to construct a signal line, which is a 4-period symmetrically weighted moving average of Relative Vigor Index values. The concurrence of lines serves as a signal to buy or to sell.

Relative Strenght Index

The Relative Strength Index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.

The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum.

The Relative Strength Index was developed by J. Welles Wilder and published in a 1978 book, New Concepts in Technical Trading Systems, and in Commodities magazine (now Futures magazine) in the June 1978 issue. It has become one of the most popular oscillator indices.

Parabolic SAR

In the field of technical analysis, Parabolic SAR (SAR - stop and reverse) is a method devised by J. Welles Wilder, Jr., to find trends in market prices or securities. It may be used as a trailing stop loss based on prices tending to stay within a parabolic curve during a strong trend.

The concept draws on the idea that time is the enemy (similar to option theory's concept of time decay), and unless a security can continue to generate more profits over time, it should be liquidated. The indicator generally works well in trending markets, but provides "whipsaws" during non-trending, sideways phases; as such, Wilder recommended establishing the strength and direction of the trend first through the use of things such as the Average Directional Index, and then using the Parabolic SAR to trade that trend.

A parabola below the price is generally bullish, while a parabola above is generally bearish.

On Balance Volume

The on-balance volume indicator (OBV) is one of the most well-known momentum indicators and was developed in 1963 by Joseph E. Granville whose new book ‘HOW TO READ THE STOCK MARKET’ outlines his entire OBV theory.

The OBV stresses the importance of volume and its relationship to the price and momentum of any given stock. Fundamentally, the On-Balance Volume indicator compares the positive and negative volume flows of a stock against its price over a time period.

The basic concept that Granville used to design his OBV indicator was that when a stock closed higher than its previous daily close, then all of the day’s volume was considered as up-volume.

Whereas, if a stock closed lower than the previous daily close then all of its day’s volume was considered down-volume. The cumulative total of the positive and negative volume flows then formed the OBV line as the following chart shows.

Granville’s studies indicated that changes in the direction of the On-Balance Volume indicator forecasted potential reversals in price direction. For instance, if the market started to heavily buy a stock then the increased volume would force the OBV line to climb which in turn would drag the price higher.

The OBV can also be used to detect new trends. For instance, if the OBV shows higher consecutive peaks and troughs then a bull channel is in session, whereas if it indicates lower consecutive highs and lows then a bear channel is predominant.

As the OBV does not reflect any comparison between stocks, traders should instead concentrate on its trend. By doing so, a trader can detect if the OBV indicator and commodity price are still trending or diverging.

Granville also explained that if volume was not rising anymore within a buying channel then this was indicative that buying pressure was starting to wane and that the probabilities were increasing that the bull trend was no longer sustainable. He made similar comments regarding bear channels.

To provide further confirmation that a trend may be weakening, Granville recommended using a 20 period moving average in conjunction with the OBV. As a result, OBV users could then observe such events more easily by noting any crossovers of the OBV line and its moving average.

In summary, the On Balance Volume indicator is regarded by the industry as one of the most simple and popular momentum indicators and is best used to detect any new trade opportunities in the following ways.

If the OBV shows a divergence from price movement then a possible price reversal is imminent. For instance, if price is rising but the OBV has begun to drop then a possible selling opportunity may exist.

If the price and OBV are both in the same trend movement and the OBV begins to breakout then this is again signs of a new trading opportunity. These events can best be confirmed by noting any crossovers of the OBV and its moving average.

For instance, if both price and the OBV are in a bear channel and the OBV starts breaking to the upside, then a buying opportunity may be beginning to form.

Moving Average of Oscillator

OsMA (Moving Average of Oscillator, or Oscillator of Moving Average) is usually the distinction between the oscillator and the smoothing of the oscillator. Then the signal line of the MACD is used for smoothing and the basic line of MACD is used as an oscillator.

If OsMA stops decreasing and starts increasing, it is the signal for buying. If OsMA ceases increasing and starts decreasing, it is the signal for selling. The discrepancy between price and OsMA is a trustworthy signal.

Moving Average Convergence Divergence

Developed by Gerald Appel in the late seventies, the Moving Average Convergence-Divergence (MACD) indicator is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, the MACD offers the best of both worlds: trend following and momentum. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centreline crossovers and divergences to generate signals. Because the MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.

Moving Average

Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount of time. By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favour.


Types of Moving Averages

There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential.

Simple Moving Average (SMA)

This is the most common method used to calculate the moving average of prices. It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation. For example, in a 10-day moving average, the last 10 closing prices are added together and then divided by 10. As you can see in Figure 1, a trader is able to make the average less responsive to changing prices by increasing the number of periods used in the calculation. Increasing the number of time periods in the calculation is one of the best ways to gauge the strength of the long-term trend and the likelihood that it will reverse.

Many individuals argue that the usefulness of this type of average is limited because each point in the data series has the same impact on the result regardless of where it occurs in the sequence. The critics argue that the most recent data is more important and, therefore, it should also have a higher weighting. This type of criticism has been one of the main factors leading to the invention of other forms of moving averages.

Linear Weighted Average

This moving average indicator is the least common out of the three and is used to address the problem of the equal weighting. The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods. For example, in a five-day linear weighted average, today's closing price is multiplied by five, yesterday's by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers.

Exponential Moving Average (EMA)

This moving average calculation uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average. Having an understanding of the calculation is not generally required for most traders because most charting packages do the calculation for you. The most important thing to remember about the exponential moving average is that it is more responsive to new information relative to the simple moving average. This responsiveness is one of the key factors of why this is the moving average of choice among many technical traders. As you can see in Figure 2, a 15-period EMA rises and falls faster than a 15-period SMA. This slight difference doesn’t seem like much, but it is an important factor to be aware of since it can affect returns.

Money Flow Index

The Money Flow Index (MFI) is an oscillator that uses both price and volume to measure buying and selling pressure. Created by Gene Quong and Avrum Soudack, MFI is also known as volume-weighted RSI. MFI starts with the typical price for each period. Money flow is positive when the typical price rises (buying pressure) and negative when the typical price declines (selling pressure). A ratio of positive and negative money flow is then plugged into an RSI formula to create an oscillator that moves between zero and one hundred. As a momentum oscillator tied to volume, the Money Flow Index (MFI) is best suited to identify reversals and price extremes with a variety of signals.

Momentum

Momentum are simple technical analysis indicators showing the difference between today's closing price and the close N days ago. Momentum is the absolute difference in stock and commodity:

momentum = close today - close N days ago

Rate of change scales by the old close, so as to represent the increase as a fraction,

Rate of Change = (Close today - Close N days ago ) : Close N days ago

"Momentum" in general refers to prices continuing to trend. The momentum and ROC indicators show trend by remaining positive while an uptrend is sustained, or negative while a downtrend is sustained.

A crossing up through zero may be used as a signal to buy, or a crossing down through zero as a signal to sell. How high (or how low when negative) the indicators get shows how strong the trend is.

The way momentum shows an absolute change means it shows for instance a $3 rise over 20 days, whereas ROC might show that as 0.25 for a 25% rise over the same period. One can choose between looking at a move in dollar terms, relative point terms, or proportional terms. The zero crossings are the same in each, of course, but the highs or lows showing strength are on the respective different bases.

The conventional interpretation is to use momentum as a trend-following indicator. This means that when the indicator peaks and begins to descend, it can be considered a sell signal. The opposite conditions can be interpreted when the indicator bottoms out and begins to rise.

Market Facilitation Index

The Market Facilitation Index, developed by Dr. Bill Williams, reproduces volume and price characteristics in order to make the trade more accurate. 1-point price changing can be shown by BW MFI (Bill Williams Market Facilitation Index). You should not regard absolute indicator values, or whether its changes are important. Bill Williams singles out the following processes of MFI and volume changing:

Both MFI and volume go up. It means that more players are joining the market (volume increases) and these players make bar development possible. Movement commencing and higher speed follows it.

Both MFI and volume go down. In this case, the participants have lost their interest.

MFI rises while volume gets lower. This situation describes a lack of ability for the market to support the volume from customers. In this case, the price varies according to the speculations of traders, brokers or dealers.

MFI decreases while volume rises. This situation is called the battle between bulls and bears. In this case, the volumes being bought or sold are considerable regardless of small price changes as long as the affecting forces are approximately at the same level. It is inevitable that either bulls or bears will win. In most cases the end of this process lets you see whether the trend is continuing or whether it is about to change. According to Bill Williams, it is called "curtsying".

Ichimoku Kinko Hyo

Ichimoku Kinko Hyo Technical Indicator is predefined to characterize the market Trend, Support and Resistance Levels, and to generate buying and selling signals. This indicator works best on weekly and daily charts.

When defining the dimension of parameters, four time intervals of different length are used. The values of individual lines comprising this indicator are based on these intervals:

Tenkan-sen shows the average price value during the first time interval defined as the sum of maximum and minimum within this time, divided by two;

Kijun-sen shows the average price value during the second time interval;

  1. Senkou Span A shows the middle of the distance between two previous lines shifted forwards by the value of the second time interval;
  2. Senkou Span B shows the average price value during the third time interval shifted forwards by the value of the second time interval.

Chinkou Span shows the closing price of the current candle shifted backwards by the value of the second time interval.

The distance between the Senkou lines is hatched with another colour and called "cloud ". If the price is between these lines, the market should be considered as non-trend, and then the cloud margins form the support and resistance levels:

If the price is above the cloud, its upper line forms the first support level, and the second line forms the second support level;

If the price is below cloud, the lower line forms the first resistance level, and the upper one forms the second level;

If the Chinkou Span line traverses the price chart in the bottom-up direction it is a signal to buy. If the Chinkou Span line traverses the price chart in the top-down direction it is a signal to sell.

Kijun-sen is used as an indicator of the market movement. If the price is higher than this indicator, the prices will probably continue to increase. When the price crosses this line further trend changing is possible.

Another kind of use of Kijun-sen is giving signals. A signal to buy is generated when the Tenkan-sen line crosses the Kijun-sen in the bottom-up direction. A top-down direction is the signal to sell.

Tenkan-sen is used as an indicator of the market trend. If this line increases or decreases, the trend exists. When it goes horizontally, it means that the market has come into the channel.

I Exposure

Heikin Ashi

Most profits (and losses) are generated when markets are trending--so predicting trends correctly can be extremely helpful. Many traders use candlestick charts to help them locate such trends amid often erratic market volatility. The Heikin-Ashi technique--"average bar" in Japanese--is one of many techniques used in conjunction with candlestick charts to improve the isolation of trends and to predict future prices.

Calculating the Modified Bars

Normal candlestick charts are composed of a series of open-high-low-close (OHLC) bars set apart by a time series. The Heikin-Ashi technique uses a modified formula:

  • xClose = (Open+High+Low+Close)/4

Average price of the current bar

  • xOpen = [xOpen(Previous Bar) + Close(Previous Bar)]/2

Midpoint of the previous bar

  • xHigh = Max(High, xOpen, xClose)

Highest value in the set

  • xLow = Min(Low, xOpen, xClose)

Lowest value in the set

Constructing the Chart

The Heikin-Ashi chart is constructed like a regular candlestick chart (except with the new values above). The time series is defined by the user--depending on the type of chart desired (daily, hourly, etc.). The down days are represented by filled bars, while the up days are represented by empty bars. Finally, all of the same candlestick patterns apply.

Gator Oscillator

The Gator oscillator uses the same working principle as the Alligator indicator. What’s more, they even have the same settings. The difference is the way the various gator actions are being displayed.

The Gator oscillator is a histogram with three types of bars: green, red and mixed. The green bar indicates that its value is greater than the previous one; the red indicates the opposite. Let’s see how the gator’s actions are illustrated:

The gator awakes: if the gator has been sleeping and we see that the bars are both green and red (it doesn’t matter which one is on top), then the gator is waking up.

  • The gator eats: the bars are solid green.
  • The gator is fed: after solid green bars, we see mixed bars.
  • The gator is sleeping: the bars are solid red.

When we see that the gator is eating, this means that the trend is strong, but we can’t determine the direction by the oscillator itself. That’s why you should read this momentum indicator together with multiple different indicators to confirm the direction.

There is one more thing we should mention here. The Gator oscillator is moving ahead of the price itself, just like the Alligator indicator. However, this could mess up your analysis of the previous events on the chart. That is why we recommend changing the “shift” settings to “0”, so that the oscillator will move together with the price. That is how we like it; try it yourself and find out your strategy.

Fractals

All markets are characterized by the fact that on the most part the prices do not change too much, and only short periods of time (15–30 percent) account for trend changes. Most lucrative periods are usually the case when market prices change according to a certain trend.

A Fractal is one of five indicators of Bill Williams trading system, which allows us to detect the bottom or the top.

Fractal Technical Indicator is a series of at least five successive bars, with the highest HIGH in the middle, and two lower HIGHs on both sides. The reversing set is a series of at least five successive bars, with the lowest LOW in the middle, and two higher LOWs on both sides, which correlates to the sell fractal. The fractals are have High and Low values and are indicated with the up and down arrows.

The fractal needs to be filtrated with the use of Alligator. In other words, you should not close a buy transaction, if the fractal is lower than the Alligator’s Teeth, and you should not close a sell transaction, if the fractal is higher than the Alligator’s Teeth. After the fractal signal has been created and is in force, determined by its position beyond the Alligator’s Mouth, it remains a signal until it gets attacked, or until a more recent fractal signal emerges.

Force Index/FRC

This index created by Alexander Elder calculates the Bulls Power at every rise and fall. The Force Index links the main parts of market data: price trend and decreases, volumes of transactions. It is better to approximate this index with the help of moving average. Approximation with the help a short moving average contributes to finding the best opportunity to open and close positions though this index can be also used as it is. Two intervals can be used in a short moving average. If the approximation is made with a long moving average (period 13), the index demonstrates the tendencies and their fluctuations.

It is worth purchasing when the forces fall below zero (become minus) - when the indicator increases tendency. The force index demonstrates the continuation of the increasing tendency when it rises to the new high. The signal to sell occurs if the index becomes positive during the decreasing tendency. The force index demonstrates the Bears Power and continuation of the decreasing tendency if the index falls to the new bottom.

Fibonacci Retracement

A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going higher). The Fibonacci retracement is the potential retracement of a financial asset's original move in price. Fibonacci retracements use horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trendline between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

Envelope

A type of technical indicator typically formed by two moving averages that define upper and lower price range levels. An envelope is a technical indicator used by investors and traders to help identify extreme overbought and oversold conditions in a market. The envelopes, which typically appear overlaid on a price chart, are also useful in identifying trading ranges for a particular trading instrument.

A moving average envelope calculates two moving averages using the high price and low price inputs. Both averages are calculated using price data from the same number of bars, as determined by the input length. The average of the high price is increased by a user-specified percent and then plotted; the average of the low price is reduced by a user-specified percentage and then plotted. The envelope inputs can be customized to suit each investor's or trader's style and preferences.

De Marker

The DeMarker indicator is an oscillator designed by Tom Demarker, which attempts to identify new buying and selling opportunities. The DeMarker Indicator is similar to the Directional Movement Indicators developed by Welles Wilder.

Demarker produced his indicator in an attempt to overcome the problems associated with other technical tools used in the market to identify overbought and oversold trading conditions of a stock or commodity.

The DeMarker indicator tracks the market sentiment of a stock or commodity by comparing the asset’s present price to that of the previous period. The main concept behind the DI is that it can be used to detect changing market interest in a stock and by doing so identify market tops and bottoms.

The DeMarker indicator oscillates with a range between -100 to 100 and makes no attempt to filter its raw data.

The DI is useful in identifying trade exit and entry points.

There are, in fact, two variants of the DeMarker indicator with one operating between -100 and 100 whilst the second has a range between 0 and 1. Both operate using the same formula.

CCI (Commodity Chalenge Index)

Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can be successfully applied to indices, ETFs, stocks and other securities. In general, the CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In this way, CCI can be used to identify overbought and oversold levels.

Bulls Power

In the Forex market, there are two types of trader:

  1. Bulls – who buy a currency because they believe the market will go up
  2. Bears – who sell because they think the market will go down

Currency prices go up when bulls predominate, and go down when bears predominate. If you can determine which force is stronger, you can predict currency price changes.

The Bulls Power indicator shows the strength of the bulls. It was developed by Alexander Elder, who described it in his book “Trading for a Living”. If the indicator is above zero, the bulls are strong; if it is below zero, they are weak. The indicator is based on two premises:

  1. The moving average of a price indicates where buyers and sellers agree
  2. The highest price in a day is reached when buying pressures are strongest

Therefore, the difference between highest price in a day and the moving average shows how strong the bulls are; the bigger the gap, the more the bulls pushed up the price.

Bolinger Bands

Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s, and a term trademarked by him in 2011.[1] Having evolved from the concept of trading bands, Bollinger Bands and the related indicators %b and bandwidth can be used to measure the highness or lowness of the price relative to previous trades.

Bollinger Bands consist of:

  1. an N-period moving average (MA)
  2. an upper band at K times an N-period standard deviation above the moving average (MA + Kσ)
  3. a lower band at K times an N-period standard deviation below the moving average (MA − Kσ)

Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages are a common second choice.[note 1] Usually the same period is used for both the middle band and the calculation of standard deviation.

Bears Power

In the Forex market, there are two types of trader:

  1. Bulls – who buy a currency because they believe the market will go up
  2. Bears – who sell because they think the market will go down

Currency prices go up when bulls predominate, and go down when bears predominate. If you can determine which force is stronger, you can predict currency price changes.

The Bears' Power indicator shows the strength of the bears. It was developed by Alexander Elder, who described it in his book “Trading for a Living”. If the indicator is below zero, the bears are strong; if it is above zero, they are weak. The indicator is based on two premises:

  1. The moving average of a price indicates where buyers and sellers agree
  2. The lowest price in a day is reached when selling pressures are strongest

Therefore, the difference between lowest price in a day and the moving average shows how strong the bears are; the bigger the gap, the more the bears brought down the price.

Awesome Oscillator

Bill Williams Awesome Oscillator (AO) is designed to show current market momentum and is displayed as a histogram. The Awesome Oscillator is created using the difference between the 34-period and 5-period simple moving averages of the bar’s midpoints (H+L)/2.

Each bar of the histogram that is higher than the preceding bar is green. Each bar that is lower than the preceding bar is red.

Awesome Oscillator Interpretation and Signals

Zero Line Cross

As with other oscillators such as CCI, the Awesome Oscillator generates a trading signal when the zero line is crossed. A buy signal is generated when the histogram is crossed from below. A sell signal is generated when the histogram is crossed from above.

Average True Range

Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. As with most of his indicators, Wilder designed ATR with commodities and daily prices in mind. Commodities are frequently more volatile than stocks. They are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this "missing" volatility. It is important to remember that ATR does not provide an indication of price direction, just volatility.

Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, RSI and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder's indicators have stood the test of time and remain extremely popular.

Alligator Indicator

Bill Williams introduced the Alligator indicator in 1995. The Alligator is as much a metaphor as it is an indicator. It consists of three lines, overlaid on a pricing chart, that represent the jaw, the teeth and the lips of the beast, and was created to help the trader confirm the presence of a trend and its direction. The Alligator indicator can also help traders designate impulse and corrective wave formations, but the tool works best when combined with a momentum indicator.

The “traits” of the Alligator are numerous. If the three lines are entwined, then the Alligator’s mouth is closed and he is said to be sleeping. As he sleeps, he gets hungrier by the minute, waiting for a breakout from his slumber when he will eat. When the trend takes shape, the Alligator wakes and starts eating. Once satiated, the Alligator closes his mouth once again and goes to sleep.

Alligator Formula

  1. The Alligator indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps:
  2. The Alligator’s Jaw, the “Blue” line, is a 13-period Smoothed Moving Average, moved into the future by 8 bars;
  3. The Alligator’s Teeth, the “Red” line, is an 8-period Smoothed Moving Average, moved by 5 bars into the future;

The Alligator’s Lips, the “Green” line, is a 5-period Smoothed Moving Average, moved by 3 bars into the future.

ADX (Average Directional Movement Index)

The Average Directional Movement Index (ADX) technical analysis indicator describes when a market is trending or not trending. When combined with the DMI+ plus and DMI- minus the ADX can generate buy and sell signals.

However, the main purpose of the ADX is to determine whether a stock, future, or currency pair is trending or is in a trading range. Determining which mode a market is in is helpful because it can guide a trader towards the use of certain other technical analysis indicators.

Accumulation/Distribution

Developed by Marc Chaikin, the Accumulation Distribution Line is a volume-based indicator designed to measure the cumulative flow of money into and out of a security. Chaikin originally referred to the indicator as the Cumulative Money Flow Line. As with cumulative indicators, the Accumulation Distribution Line is a running total of each period's Money Flow Volume. First, a multiplier is calculated based on the relationship of the close to the high-low range. Second, the Money Flow Multiplier is multiplied by the period's volume to come up with a Money Flow Volume. A running total of the Money Flow Volume forms the Accumulation Distribution Line. Chartists can use this indicator to affirm a security's underlying trend or anticipate reversals when the indicator diverges from the security price.

Accelerator/Decelerator Oscillator/AC

Acceleration/Deceleration Technical Indicator (AC) is introduced by Bill Williams in his book “Trading Chaos”. The AC indicator measures acceleration and deceleration of the current driving force (Awesome Oscillator). It is represented in a separated histogram chart. When the AC value of the current bar is greater than the previous bar value, the histogram bar is coloured in green (and vice versa - lower value, red bar). According to Williams, this indicator will change direction before any changes in the driving force, which will change its direction before the price. When the AC value is near to the zero line, this means that the driving force is balanced. If Accelerator Oscillator is higher than zero, then it is usually easier for the acceleration to continue the upward movement and we can expect a rise in the market price. Normally, a green bar on the AC shows us that we can open a long position, and respectively, a red bar - that we can enter a short position.

Aaron Oscillator

The Aroon indicator is young, developed by Tushar Chande in 1995.

Aroon was created to measure the strength of a trend and the potential for its continuation, as well as the quality and type of trend: up-trend, down-trend or sideways moving market.

There are two parts to the Aroon Indicator – two coloured lines: Aroon up (red line) and Aroon down (blue line).

The Aroon indicator scale ranges from 0 to 100.

There are 4 important levels to monitor when trading with the Aroon indicator: 0, 30, 70 and 100.

The default time period for the Aroon indicator is 25, on some panels - 14. But, it can be changed to, for example, 10-periods for shorter term trades or to 50-periods for longer ones.

As the market changes, traders adjust their trading approaches and methods from trend following to tools used during market consolidations. The Aroon indicator helps traders to determine when to use a trend following indicators and tools and when to switch to oscillator-like tools that work best in consolidating markets.