Category: Indicators

What is MACD in Stock Market

The Moving Average Convergence Divergence (MACD) is a popular technical analysis tool used to identify potential buying and selling opportunities in financial markets, particularly in stocks, currencies, and commodities. MACD is a trend-following momentum indicator that helps traders and investors analyze price movements and signal potential trend reversals.

The MACD indicator consists of three main components:

1. MACD Line:

The MACD line is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. It represents the difference between short-term and long-term moving averages and reflects the momentum of the price movement.

2. Signal Line:

The signal line, also known as the trigger line, is a 9-day EMA of the MACD line. It acts as a smoothing line to generate trading signals. When the MACD line crosses above the signal line, it generates a bullish signal, indicating a potential buying opportunity. Conversely, when the MACD line crosses below the signal line, it generates a bearish signal, indicating a potential selling opportunity.

3. MACD Histogram:

The MACD histogram represents the difference between the MACD line and the signal line. It helps traders visualize the strength and direction of the price momentum. The histogram fluctuates above and below the zero line, with positive values indicating bullish momentum and negative values indicating bearish momentum.

Key aspects of MACD:

1. Trend Identification:

MACD helps identify the direction of the prevailing trend. When the MACD line is above the signal line and the histogram is positive, it suggests a bullish trend. Conversely, when the MACD line is below the signal line and the histogram is negative, it suggests a bearish trend.

2. Momentum Analysis:

MACD provides insights into the strength and momentum of price movements. The steepness and divergence of the MACD line and the histogram can indicate the intensity of buying or selling pressure.

3. Signal Generation:

Traders often use MACD crossovers as trading signals. A bullish signal occurs when the MACD line crosses above the signal line, indicating a potential buying opportunity. A bearish signal occurs when the MACD line crosses below the signal line, indicating a potential selling opportunity.

4. Divergence Analysis:

MACD divergence occurs when the price and the MACD indicator move in opposite directions. Bullish divergence happens when the price forms lower lows while the MACD indicator forms higher lows. Bearish divergence occurs when the price forms higher highs while the MACD indicator forms lower highs. Divergence can signal a potential trend reversal.

It’s important to note that MACD is just one tool among many used in technical analysis, and it should be used in conjunction with other indicators and analysis techniques to make well-informed trading decisions. Traders and investors should consider factors such as market conditions, volume, and other supporting indicators when interpreting MACD signals.

Also Read | What is fundamental analysis in Share Market

19 June, 2023
What is RSI in Stock Market

RSI, or Relative Strength Index, is a technical indicator that is used to measure the strength of a stock’s price action. Developed by J. Welles Wilder, RSI is a momentum oscillator that compares the magnitude of a stock’s recent gains to the magnitude of its recent losses to determine whether the stock is overbought or oversold.

The RSI is calculated by dividing the average gain of the stock over a certain time period by the average loss over the same period of time. The result is then plotted on a scale from 0 to 100. If the RSI is above 70, the stock is considered overbought, and if it is below 30, it is considered oversold.

Relative Strength Index is typically calculated over a 14-day time period, but the time period can be adjusted to suit the needs of the trader. This can be used in conjunction with other technical indicators and chart patterns to make trading decisions.

One of the main advantages of using RSI is that it helps traders to identify potential trend reversals. When the RSI is above 70, it indicates that the stock is overbought, and there may be a price correction in the near future. Conversely, when the RSI is below 30, it indicates that the stock is oversold, and there may be a buying opportunity.

Another advantage of Relative Strength Index is that it can be used to confirm or refute other technical indicators. For example, if a stock is showing a bullish chart pattern, such as a double bottom, the trader can use RSI to confirm that the stock is indeed oversold and that there is a buying opportunity.

However, there are also some limitations to it. One of the main limitations is that RSI is a lagging indicator, which means that it does not predict future price movements. Instead, it provides information on past price movements.

Additionally, Relative Strength Index can give false signals in certain market conditions. For example, if a stock is in a strong uptrend, the RSI may remain above 70 for an extended period of time, indicating that the stock is overbought. However, in a strong uptrend, the stock may continue to rise despite being overbought.

In conclusion, RSI is a useful technical indicator that can help traders identify potential trend reversals and confirm other technical indicators. However, it is important to use RSI in conjunction with other technical indicators and to understand its limitations. Traders should also use risk management strategies to minimize potential losses.

Also Read | Common Mistakes by Traders

1 May, 2023
What is Pivot Point in Share Market
Pivot point analysis is a popular technical analysis tool used by traders to predict potential market trends and reversals in the price of a financial asset. Pivot points are calculated using the previous period’s high, low, and close prices, and provide key levels of support and resistance for the current period.

The pivot point itself represents the average of the previous period’s high, low, and close prices. This value is used to calculate several other levels of support and resistance, including:
1. First level of support (S1) and resistance (R1): These levels are calculated by multiplying the pivot point by 2 and subtracting the previous period’s high or low, respectively.
2. Second level of support (S2) and resistance (R2): These levels are calculated by multiplying the pivot point by 3 and subtracting 2 times the previous period’s high or low, respectively.
3. Third level of support (S3) and resistance (R3): These levels are calculated by multiplying the pivot point by 4 and subtracting 3 times the previous period’s high or low, respectively.
These support and resistance levels can be used to identify potential entry and exit points for trades, as well as to set stop loss and take profit orders.

Pivot point analysis is particularly useful in short-term trading, where traders are looking to profit from quick price movements in the market. However, it is important to note that pivot point analysis is just one tool in a trader’s toolbox and should not be relied on exclusively. Other technical indicators and fundamental analysis should also be considered before making trading decisions.

Below are the importance of Pivot Point in Share Market:
1. Identifying key levels of support and resistance: Pivot point analysis provides traders with key levels of support and resistance that are important in determining potential entry and exit points for trades. These levels can help traders to identify potential price movements and set stop loss and take profit orders.
2. Predicting market trends and reversals: Pivot point analysis can be used to predict potential market trends and reversals based on the levels of support and resistance. Traders can use these levels to identify when a market is likely to reverse or continue its current trend, helping them to make profitable trading decisions.
3. Providing a simple and easy-to-use analysis tool: Pivot point analysis is a simple and easy-to-use tool that requires only basic math skills. It can be applied to a wide range of financial assets and timeframes, making it a versatile tool for traders.
4. Incorporating multiple timeframes: Pivot point analysis can be used across multiple timeframes, allowing traders to identify potential trends and reversals in both short and long-term trading. This can help traders to make more informed trading decisions and increase the accuracy of their analysis.
5. Incorporating other technical analysis tools: Pivot point analysis can be used in conjunction with other technical analysis tools, such as moving averages, trend lines, and chart patterns, to provide a more comprehensive analysis of the market.
In conclusion, pivot point analysis is a technical analysis tool used to predict potential market trends and reversals in the price of a financial asset. It provides key levels of support and resistance for the current period, which can be used to identify potential entry and exit points for trades. While it is a useful tool in short-term trading, it should be used in conjunction with other analysis methods.
13 April, 2023
MOVING AVERAGE
Definition:

              “ A moving average is simply the average value of data over a specified time period, and it’s used to figure out whether the price of a stock or a commodity is trending up or down. Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, ranging from tick data to monthly price data or longer.”

          Moving Average (MA) is a stock indicator that is commonly used in technical analysis. Technical Analysis is more important than Fundamental Analysis. Moving Average is one of the most popular techniques. moving averages that are used in timing a financial market. These averages are employed to detect the direction of the stock price trend and identify turning points in the trend in real time.

                  Moving Average smooth the price data to form a trend- following Indicator. They do not predict price direction, but rather define the current direction with a lag. Moving Average is primarily the summary of momentum & trend. Moving average reduces the noise in the price and also helps to follow trends.

Popular Time Period Of Moving Average:
1. 10 Period MA
2. 20 Period MA
3. 50 Period MA
4. 200 Period MA
Moving Average COMBINATION:

This is the main calculation

Sr.No. DAILY WEEKLY

1 10 SMA 2 SMA

2 50 SMA 10 SMA

3 100 SMA 20 SMA

4 200 SAM

MOVING AVERAGE SETUP FOR:

DAILY INCOME TRADING (DIT)
1. I put 10 EMA, 21/20 SMA & 50 SMA on the daily chart.
2. If 10 below 20/21 below 50 I consider that stock is trading in the down trend & I focus on short trades.
3. If 50 below 20/21 below 10 I consider that stock is trading in the up trend & I focus on long traders.
4. Apply your strategy & take your trade accordingly.
TYPES OF MOVING AVERAGE:

The most popular type of moving averages are Simple moving average & Exponential moving average. These moving average uses for identifying the trend of the market.

a. SIMPLE MOVING AVERAGE

                   SMA is the easiest moving average to construct. The Simple Moving Average (SMA) is calculated by adding the price of an instrument over a number of time periods and then dividing the sum by the number of time periods. The SMA is basically the average price of the given time period, with equal weighting given to the price of each period. Most moving averages are based on closing prices

CALCULATING SIMPLE MOVING AVERAGE

                              If you plotted a 5 period simple moving average on 1hour chart, you would add up the closing prices for the last 5 hours, then divide that number by 5.

Example:

A 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. 10+ 11 + 12 + 13 + 14 = 60 (60 / 5) = 12

b. Exponential moving average

                          Exponential Moving Average can be specified in two ways- as a percent based EMA or as a period based EMA. A percent based EMA has a percentage as its single parameter. A period based EMA has parameters that represent the duration of the EMA.

CALCULATING EXPONENTIAL MOVING AVERAGE

EMA = K * (Current Price – Previous EMA) + Previous EMA

K: The weighting factor the EMA

K = 2/(n+1)

Where:

n = the selected time period
16 October, 2020
SUPPORT & RESISTANCE
INTRODUCTION:

In the share market, support & resistance these two concepts are highly discussed among the trades & investors. Trading by using support & resistance concepts is considered an old methodology. It has been popular for a long time.

                       Support & Resistance play a key level in trading. And obviously each & every traders and even investors are aware about this concept/levels. Support & Resistance are the zones where price will either halt & reverse or break through. These zones can also be called supply & demand zones, where buyers & sellers are active.

                             It is the most powerful concepts in Technical Analysis. Most of the technical analysis use support & resistance levels to identify price points on the chart where the possibilities of prices are reversal or pause of a prevailing trend.

                              The past price action indicates where these zones are. Mark them on the chart for future reference. An important concept to remember is that support & resistance zones marked from higher time frame charts are relatively more reliable. If you trade the 5 min chart, then go to 15 mins or hourly chart to mark these levels & import them on your 5 min chart & observe the reactions off these.

TWO TYPES OF SUPPORT & RESISTANCE
- HORIZONTAL SUPPORT & RESISTANCE
a. Horizontal Support



                          The first support is called Minor support. When market return touch this level and take support & go up side, then these second support is considered as a strong support. Third time price return comes to this level & return move up side.,then this level is called Major Support. The third support is most strong.

b. Horizontal Resistance



                                          We see the price going up & stop at a level or take a resistance & return goes down. This first resistance is called minor resistance.When Price goes up again & price goes around the first resistance & goes down again, so that is Second resistance which is called as strong resistance.When the price once again becomes the resistance to the same level, then you call that level a major resistance. It is not necessary that only 3 resistances are made. There is more supply compared than demand. When we look at the Horizontal Support & Resistance chart, we have to note that at least 7 to 8 candles between the levels are deferred.
- TRENDING SUPPORT & RESISTANCE
a.Trending Support

When the market starts moving towards the uptrend and when the market comes down it makes it’s first support and then it returns towards the up side.The second support is made higher than the first support. As we have got two supports so if we touch the lowest of first & second supports then it makes a Trendline. Then there are chances that third support touches the trendline & goes upside. It is a bullish continuation signal.

b. Trending Resistance

When the market starts moving towards downside then resistance is formed. When the second resistance is formed it is lower than the first resistance. We have to touch the highest point of the first & second resistance than draw the trendline. There is a possibility that the third resistance will touch the trendline & move towards the downside. It shows a bearish continuation signal.
- Importance for S&R Zones
a. Number of Touches

                                   The more times the price tests a support or resistance area, the more significant the level becomes. When prices keep bouncing off a support or resistance level, more buyers and sellers notice and will base trading decisions on these levels.

b. Preceding Price Move.

                                   Support and resistance zones are likely to be more significant when they are preceded by steep advances or declines. For example, a fast, steep advance or uptrend will be met with more competition and enthusiasm and may be halted by a more significant resistance level than a slow, steady advance. A slow advance may not attract as much attention.

c. Volume at Certain Price Levels

                                   The more buying and selling that has occurred at a particular price level, the stronger the support or resistance level is likely to be. When strong activity occurs under high volume and the price drops, a lot of selling will likely occur when price returns to that level, since people are far more comfortable closing out a trade at the break-even point rather than at a loss.

d.Time

Support and resistance zones become more significant if the levels have been tested regularly over an extended period of time.

Tools for Support & Resistance
- Top & Bottom (Historical High & Low)
- Elliot Wave
- Trend Lines
- Moving Averages
- Pivot Points
- Gann Square of 9
- Bollinger Band
- Fibonacci Retracement & Extensions
19 September, 2020
VWAP INDICATOR
DEFINITION:

“Volume Weighted Average Price (VWAP) is a technical analysis tool used to measure the average price weighted by Volume. VWAP is typically used with intraday charts as away to determine the general direction of intraday prices. VWAP is similar to a moving average in that when price is above VWAP, prices are rising & when price is below VWAP, prices are falling VWAP is primarily used by technical analysts to identify market trend.”

Full form of VWAP is Volume Weight Average Price. The average price weighted by volume. VWAP is a trading tool calculated by taking the number of shares bought times the share price & dividing by total shares.

Volume Weighted Average Price is an Indicator, or used for Intraday trading. VWAP equals the dollar value of all trading periods divided by the total trading volume of the current day.

The VWAP appears as a single line on intraday chart (1min,5min,15min & so on), similar to how a moving average looks. The calculation starts when trading opens & when it closes. Because it is good for the current trading day only , intraday periods & data are used in the calculation.

HOW TO CALCULATE VWAP:

VWAP is calculated through the following steps:
1. For each period, calculate the typical price, which is equal to the sum of the high, low, and close price divided by three [(H+L+C)/3]. One bar or candlestick is equal to one period. What this period is set at is up to the trader’s discretion (e.g., 5-minute, 30-minute, etc.).
2. Take the typical price (TP) and multiply by the volume (V), giving a value TP*V.
3. Keep a running tabulation of the TP*V totals as well as a running tally of volume totals. These are additive and aggregate over the course of the day.
4. VWAP is calculated by the formula: cumulative TP*V / cumulative volume
This calculation, when run on every period, will produce a volume weighted average price for each data point. This information will be overlaid on the price chart and form a line, similar to the first image in this article.

Moving VWAP is simply adding up various end-of-day VWAP figures and averaging them out over a user-specified number of periods.

VWAP will be calculated automatically in one’s charting software. There should be no mathematical or numerical variables that need adjustment. On the moving VWAP indicator, one will need to set the desired number of periods.

HOW TO ANALYSIS VWAP:

VWAP initiate at the opening price level, & will move up or down with price movement & volume as the session continues. It can help to eliminate a lot of the noise within a stock throughout the day, even more so than a moving average would. It is compared at time to a moving average, & though it shares similarities, they are not the same.

It’s said when price is below the indicators, the stock is in downtrend or there is a downtrend bias to the day and when price is above the indicator, the stock is a uptrend.

Find the average price the stock traded at over the first five-minute period of the day. To do this, add the high, low, and close, then divide by three. Multiply this by the volume for that period. Record the result in a spreadsheet, under column PV.

Divide PV by the volume for that period. This will give the VWAP value.

To maintain the VWAP value throughout the day, continue to add the PV value from each period to the prior values. Divide this total by total volume up to that point. To make this easier in a spreadsheet, create columns for cumulative PV and cumulative volume. Both these cumulative values are divided by each other to produce VWAP.

VWAP Pullback Entry:

Entry Option 1 – Aggressive Traders

Wait for a break of the VWAP and then look at the tape action on the time and sales.

You will need to identify when the selling pressure is spiking, and the tape is going crazy.

This, my friend, is more art than science and will require you to practice reading the tape.

The goal is to identify when the selling pressure is likely to subside and then enter the trade.

This approach will break most entry rules found on the web of simply buying on the test of the VWAP. The problem with this approach is you don’t know if the price will breach the VWAP by 1% or 4%.

I learned the hard way, and if the VWAP were at $10, I would place my limit order at $10. At times there were traders who couldn’t care less about the VWAP, and it would slice through the indicator with such swiftness, the lasting sting to my psyche persists until this day.

This technique of using the tape is not easy to illustrate looking at the end of day chart. You will need to practice this approach using Tradingsim to assess how close you can come to calling the turning point based on order flow.

VWAP Breakout Entry:

Entry Option 2 – Risk Averse Traders

This is what I would recommend to traders that are new to the VWAP indicator.

Essentially, you wait for the stock to test the VWAP to the downside. Next, you will want to look for the stock to close above the VWAP.

You will then place your buy order above the high of the candle that closed above the VWAP.

While this is a more conservative approach for trade entry, it will open you up to more risk as you will likely be a few percentage points off the low.

You will need to determine where you are in your trading journey and your appetite for risk to assess which entry option works best for you.

It goes without saying that while we have covered long trades; these trading rules apply for short trades, just do the inverse.
1 June, 2019