Bollinger Band consists of three lines. The center line is Exponential Moving Average. The top and bottom line represent the standard deviation. The three line represent a band.
- When stock prices continuously touch the upper line, it is considered as overbought condition. In case it touches continuously touches the lower line, it is considered as oversold condition.
- Typical value of the time period is 20 days.
- When the band widens, it indicates more volatility.
Exponential Moving Average
Simple Moving average has a flaw that they are susceptible to price hikes and also give equal weightage to the data in the history. Exponential Moving Average (EMA) fixes this by giving more weightage to the data of the recent past.
Please see stochastic oscillator before KDJ indicator. KDJ introduces a new J line on top of K and D line of Stochastic oscillator. J line represents the divergence of %D value from %K value. J value can go beyond 0,100 range.
- Negative value of J with K and D on the bottom range indicates an over sold condition.
- J beyond 100 and K and D on the top range indicate an over bought condition.
Moving Average Convergence Divergence
The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. This is known as fast line. A signal line is plotted over the top of MACD, which is 9 day EMA of fast line. The fast line shows the short term consensus and the signal line depicts the long term consensus.
The buy and sell signals come when the MACD does a crossover over the signal line.
A rising MACD-Histogram shows that bulls are becoming stronger. A falling MACD-Histogram shows that bears are becoming stronger.
Related to MACS is MACD histogram which is the difference between fast and slow line. If it is positive it is plotted over the zero line and the negative difference is plotted below the zero line. A rising histogram peaks confirms a bullish trend, whereas the constantly lowering of histogram peaks on the negative side confirms the down trend.
Divergence between MACD histogram and prices occur only few time but it is a strong signal of reversing sentiments. When prices go to new high, but MACD-Histogram makes a lower top, it creates a bearish divergence. A lower top in MACD Histogram shows that bulls are weak even though prices are high. Bearish divergences shows weakness at market tops. This is a strong sell signal though many traders might feel that it is going to make new highs. Similarly the situation can be reversed when the stock makes a new low but the divergence occurs by making a lower low on the MACD histogram.
Relative Strength Index
It tells about the overbought and oversold condition. RSI value ranges from 1- 100.
- Overbought - RSI > 70
- Oversold - RSI < 30
- A large surge in prices in any direction can give a false signal.
RSI = 100 - (100/(1+RS))
RS - (Sum of closing Prices of Up days/n)/(Sum of closing prices of down days/n)
n - Trading days, usually taken as 14 days, but can be adjusted.
Stochastic Oscillator is uses to track the momentum, the oversold and overbought condition. It is mapped on a scale of 0 to 100.
- > 80 - overbought condition
- < 20 - oversold condition.
There is a slow and fast moving stochastic oscillator. Fast (%K) is similar to Williams (%R). Fast moving one uses the actual price. Slow Moving Oscillator (%D) uses the moving average and is more smooth.
Stochastic Oscillator = 100*(closing price - price low)/(price high - price low).
The usual period is 4, 9 or 15 days.
Volume Moving Average
It's an average of the volume of a certain period. As new variables are included in the series, the oldest one is deleted.
It tells about the oversold and overbought condition. It is represented on a negative scale from 0 to -100. For convenience, 100 is added to it to make it 0 to 100. It is usually calculated on a 10 day period.
- %R > -20 is overbought (In 0 to 100 it is above 80)
- %R < -80 is over sold. (In 0 to 100 it is below 20).