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TECHNICAL ANALYSIS TERMS

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Day moving averages: an average price using a specified time period.

  1. 50DMA: calculated by taking the closing prices for the last 50 days and adding them together, divided by the number of periods, 50.
  2. Used to analyse trends over time.
  3. Combining the plots of the moving averages and comparing it with the EMA will allow us to differentiate between the short and long term investors?
  4. When the short term average goes above the long term moving average, it is a signal to buy.
  5. Exponential moving average (EMA): expresses the moving average in percentage terms to more accurately compare prices that have changed significantly.

MACD: Moving average convergence divergence

  1. A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
  2. The purpose of MACD is to give an indication of when might be a good time or buy or sell.
  3. Calculation of deviation: Historgram = MACD – signal. This gives deviation of the moving average to a standard line.
  4. There are three common methods used to interpret the MACD:

    1. Crossovers - As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering  into a position too early, as shown by the first arrow. 

    2. Divergence - When the security price diverges from the MACD. It signals the end of the current trend.

    3. Dramatic rise - When the MACD rises dramatically - that is, the shorter moving average pulls away from the longer-term moving average - it is a signal that the security is overbought and will soon return to normal levels.

    Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. As you can see from the chart above, the zero line often acts as an area of support and resistance for the indicator.
  • (Information from investopedia)

 

Money flows

  1. Dollar volume in a day of trading. Amount of money flowing into the market in a particular day. Analysis can be for both the entire market or a particular stock.

 

The typical price for each day is the average of high, low and close,

technical_1

Money flow is the product of typical price and the volume on that day.

technical_2

Totals of the money flow amounts over the given N days are then formed. Positive money flow is the total for those days where the typical price is higher than the previous day's typical price, and negative money flow where below. (If typical price is unchanged then that day is discarded.) A money ratio is then formed

technical_3

From which a money flow index ranging from 0 to 100 is formed,

technical_4

This can be expressed equivalently as follows. This form makes it clearer how the MFI is a percentage,

technical_5

MFI is used as an oscillator. A value of 80 is generally considered overbought, or a value of 20 oversold. Divergences between MFI and price action are also considered significant, for instance if price makes a new rally high but the MFI high is less than its previous high then that may indicate a weak advance, likely to reverse.

  • (Information from Wikipedia)

Overbought/Oversold

  • Overbought A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the stock is trading out of its trading envelope and is approaching the theoretical high. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.
  • Oversold A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp decline from $30 to $15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the stock is trading below its trading envelope and is approaching theoretical lows. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.
expl-obos

 

 

Relative strength Index

  1. A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:

RSI = 100 -

100

______

1 + RS

 

RS = Average of x days' up closes / Average of x days' down closes


The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and should be sold. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued and may be a good time to buy.



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