Last week, we looked at the fascinating concept of Ichimoku. We now go up a gear in terms of our analysis. So far, we've mostly been looking at tools or analysis directly on price. We're now going to look at various tools and indicators that are a derivative of the price action. They usually sit under the main price chart. Their role is to help confirm the price action and give the user another objective piece of analysis to aid decision making. Although, a lot of that decision making can become very subjective! I like to break my price confirmation tools down into 5 distinct types of indicators:

  • Trend

  • Momentum

  • Volume

  • Volatility

  • Sentiment

In this article, we are going to look at the first two: Trend and Momentum

An infinite number of technical analysis tools are available to almost anyone with a PC these days, as technology has allowed the analyst to very simply create their own. Here, we are focusing on some of the most popular and common indicators in use.

Trend

As we saw in earlier articles, moving averages, Bollinger bands, price envelopes and Parabolic SAR are all great tools directly applied on top of the price chart to help us distinguish the price trend. In article 12: Trending or Ranging, we also took a look at the Directional Movement Indicator created by Welles Wilder, which was extremely helpful for helping us decipher if the market we were looking at was trending or ranging. All of these indicators mentioned are excellent for helping to determine what the trend of any given market may be at any given point in time. We're going to take a more detailed look at two indicators previously not written about, that are a derivative of the price action and both very useful for trend spotting: MACD and CCI.

MACD

A very good example of a trend indicator which was developed by Gerald Appel. My personal experience with it is that I find it one of the slower signalling indicators. It uses convergence and divergence of moving averages to come up with a leading indicator. Why is it so popular and useful?  It combines some of the oscillator principles with a dual MA crossover approach.

Basic set up:

  • Difference between the 26 and 12-day Exponential Moving Average (EMA) to generate primary series. (MACD line). Slower line (Signal line) is the 9d EMA of the MACD…

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