Friday, July 31, 2009

Chaikin Oscillator, Bollinger Bands, Momentum and Williams %R

Once again, MarketVolume® is one step ahead of the competition. We are enhancing our services and adding new studies (indicators) to our charts. Right now, our development team put the finishing touches on our new Indexes charts. MarketVolume® is the only source of real-time intraday index volume and advance / decline charts for major US indexes and exchanges. Now, we are raising the bar even further.From now on you may monitorChaikin Oscillator  for U.S. indexes and Exchanges.


Chaikin Oscillator

Chaikin Oscillator (named after its creator) is the next step in accumulation/distribution concept and allows to analyze buying and selling pressure in smaller not growing numbers.

Chaikin Oscillator calculations are based on the applying fast (smaller bar period setting) and slow (bigger bar period setting) exponential moving averages to the Accumulation/Distribution line and calculating the difference between them:

Chaikin Oscillator  = (fast exponential MA of Accumulation/Distribution) - (Slow exponential MA of Accumulation/Distribution)

Principles of Chaikin Oscillator calculation are similar to MACD. In the same way as the MACD-Histogram is used in technical analysis to show moving average crossovers, the Chaikin Oscillator is used to see changes in the Accumulation/Distribution Line. Furthermore, majority of the principles used in MACD to generate trading signals could be used in trading system based on Chaikin Oscillator.

Bollinger Bands

Bollinger Bands was developed by John Bollinger, Bollinger Bands to compare volatility and relative price levels over a selected period of time.

The Bollinger Bands were designed to identify periods of high and low volatility and to define periods when prices are at extreme, and possibly unsustainable, levels. Ability to identify volatility helps to adjust a trading system to generate signals in time and not when its too late or too early. At the same time changes in the volatility may alert to monitor stock (security) for a possible changes in the trend. In this case other technical indicators could become handy and help in determination of a potential reversal.

As a rule, stocks (securities) go through periods of high volatility and low volatility. Historically noticed that the sharp changes in price trend can occur when volatility is low. Bollinger Bands allow visually identify these periods: tight bands indicate low volatility and wide bands indicate high volatility. Volatility can be important for options players as well, simply, because options price depends on the volatility of underlying security and the lower volatility of stock is the cheaper options are on that stock.

In addition to volatility analysis Bollinger Bands may be used in junction with other indicators to predict significant moves. "Double Bottom Buy" and "Double Top Sell" are commonly used techniques in technical analysis to predict Buy and Sell points.

Momentum

Momentum indicator is a simplified version of ROC (Rate of Change) and measures the security's price change over a given time span. The same as ROC Momentum Indicator provides an indication of a market's velocity and to some degree, a measure of the extent to which a trend still holds true.

Momentum Indicator could be used to spot possible reversal points. Both Momentum Indicator and ROC could be used as trend following (lagging) indicators in similar to MACD way: buy when indicator start to move up after hitting a bottom and sell when indicator start to decline after hitting a top.

The Momentum indicator could be used as leading indicator as well. In many cases, Momentum indicator rally up sharply before a reversal down and declines sharply before a reversal up.

Williams %R

Williams %R was developed by Larry Williams and is a momentum technical indicator that is used in technical analysis much like the Stochastic Oscillator. The same as Stochastics, Williams %R serve to define overbought and oversold levels and reading in the range between 0 and minus 20 are considered as overbought while readings in the minus 80 and minus 100 range are considered oversold. The difference between Stochastics and Williams %R indicators is that the first one is always positive and moves between 0 and 100 and second one is always negative and moves in the range between minus 100 and 0.

The same as with Stochastics and other aspects of technical analysis that serve defining overbought/oversold levels, the overbought market (stock, security) does not necessarily imply time to sell and oversold market does not necessarily imply time to buy. A stock (security) could be heavily overbought and still move up while strongly oversold stock may continue to drop pushed by panic selling. It is recommended to wait when Williams %R moves above minus 80 after being below this level (after being oversold) to buy and wait when Williams %R drops below minus 20 after being above it (after being overbought) to sell. One of the conservative approaches could be to wait when Williams %R crosses minus 50 for confirmation of a trend reversal.

Once a security becomes overbought or oversold, traders should wait for a signal that a price reversal has occurred. One method might be to wait for Williams %R to cross above or below -50 for confirmation. Price reversal confirmation can also be accomplished by using other indicators or aspects of technical analysis in conjunction with Williams %R.

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