Getting Started With Common Technical Indicators

Getting Started With Common Technical Indicators

Definition of Technical Analysis

❖ Technical analysis refers to the sum of the methods of taking market behavior as the research object, judging the market trend and following the cyclical changes of the trend to make stock and all financial derivatives trading decisions. Technical analysis accounts to the market behavior including digesting all information, prices fluctuate in a trending manner, and history will repeat itself.
❖ Since the emergence of the stock market, people have begun to explore the theory of stock investment, and have formed a variety of theoretical results. Technical analysis is a ‘Stock Investment Theory’ created in the ignorant period more than 100 years ago. It is a number of so-called “pattern” about stock market fluctuations that are gradually summarized by savvy investors after long-term observation of stock price changes and accumulation of experience. Descendants carried forward to analyze all financial commodities, such as foreign exchange, precious metals, crude oil, agricultural products and other trends.

Advantages of Technical Analysis

1. Able to Assist Judgments Objectively:
Analysis of technical indicators can help investors utilize the data to more objectively judge the current situation, enter and exit the market according to the signals of technical indicators, and even can improve their operations after more and more exercises, moreover, can prevent over-subjective judgments throughout each transaction.
2. Auxiliary to Determine the Entry & Exit:
After researching and judging the rhythm of the ups and downs on the prices, you can estimate the position where future prices may form from the current price trend, which can be used as a reference for entry and exit for both buying and selling for goods.

Disadvantages of Technical Analysis

1. Not 100% Accurate:
The technical analysis method can only grasp “part” of the stock price trend. Even if it fully conforms to the theory of technical analysis, there will still be lapses. This is a matter of probability. Although it is on the side with a higher chance of winning, but doesn’t mean it will definitely take place. In fact, all methods are not 100% accurate.
2. When Major Changes Occur Will Invalidate the Forecast:
Technical analysis is based on an assumption – “Historical trends will roughly repeat over and over again”, but if the market fails due to the inevitable occurrence, such as encountering a unexpected natural disaster (earthquake, storm or tsunami), sudden political event (war, geopolitical tension, etc.), or other major events, technical analysis may well be disturb and fail.

Stochastic Oscillator(KD)

Operation Method:
1. Judgment of overbought and oversold areas:
– K value > 80 & D value > 70 are generally considered as Overbought criterion;
– K value < 20 & D value < 30 are regarded as the general standard for Oversold.

2. The intersection of the K & D(❹) generates a Buying & Selling signal:
– If the K < 20-30 breakthrough D, it is a Buy signal;
– If the K > 70-80 dips below D, it is a Sell signal.

Pros & Cons of KD

★ Pros:
The KD indicator is more sensitive, the trading signals appear more frequently, and it’s suitable for short-term
★ Cons:
1. The KD indicator is not suitable for inactive varieties.
2. Passivation: In a long-term upward trend, KD often hovers in the high-end of the overbought zone, that is, when the stock price reaches the overbought zone, it may extend uptrend further. Therefore, in a soaring Bullish market or a big Short market, KD is oftenly passivated and inaccurately.

Moving Average Convergence Divergence

How to Assess
1. DIF Line & DEA Line are Above/Below 0 axis
– Dual Line in Golden-Cross❹ or Death-Cross❹
2. MACD column in Positive or Negative value
Cons —
*The MACD is a lagging indicator and therefore is used to confirm the momentum rather than predicting the trend. Profitability is ineffective when confronted within a consolidation pattern. Unpredictable highs and lows.

Application on MACD

BOLLINGER BANDS – Formula

● An trajectorial band with the moving average as the center line and the mean squared deviation (standard deviation) of the closing price as the bandwidth.
● The BOLL band draws the support line (LOWER), the resistance line (UPPER), and the median line (MID).
● MID: N-day moving average of closing prices; UPPER: MID + Deviation; LOWER: MID – Deviation.
● Parameter: N, nominates the interval(days) of statistic, usually 10 OR 20
P set BOLL band width, usually 2 mean square errors (standard deviation)
⬌ Moving average – N mean square deviations (standard deviation)
●⬌ Moving average + N mean square deviations (standard deviation)

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