Definition: Williams %R

Williams %R

Definition:

The main concept of Williams' %R is "gravitation towards the mean." If within a given time period, the price is near the high end of a period's range, the security tends to be overbought, and is vulnerable for a sell-off. Conversely, if the price is near the low end of a period's range a potential rally is could occur due to oversold market conditions. 
 

Most Charting programs do not plot Williams' %R as negative numbers, but on a scale of 0 to +100, so as to make its conventional signals in line with other common oscillators and indicators. An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100. 

Interpretation:

If Williams' %R moves above 80, it can be considered a signal of an overbought market. When Williams' %R moves below 20, it can be considered a signal of an oversold market. 

While Williams' %R is a very powerful indicator used by many market technicians, the following should be noted when using this indicator. Although %R has some tendencies to be a leading indicator (in other words, to bottom out or peak before the price does), some suggest that one might not consider buying in an oversold market until the price actually begins to turn upwards, or sell in an overbought market until the price actually begins to turn downward. This is due to potentially prolonged overbought/oversold periods. This suggests that %R should be confirmed with other indicators that may be able to distinguish between the two circumstances. 

The optimal period for %R is the cycle length of the security, although periods of ten and twenty are also commonly used. 

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Definition: Volume and Volume Average

Volume and Volume Average

Definition:

Volume is the total number of shares of transacted during a specified period. Although this is a rather basic indicator, volume can provide some very powerful clues to anticipate price behavior.

Interpretation:

One interpretation for volume can be used to determine the strength of a trend, or confirm the movement of the price. During trending markets, volume tends to be positively correlated with the direction of a trend. In a longer-term upward trend, there will tend to be higher volume as the price goes up and lower volume as the price goes down. During a longer-term downward trend, there will tend to be higher volume as the price goes down and lower volume as the price goes up. If these characteristics are not exhibited, it can potentially signal the changing of the overall trend. This analysis can also be done on shorter and intermediate trends with certain characteristics. 
 

During sideways markets, a higher level of volume can mean that the price will break out of that trading range. 

Prolonged periods of lower volume can indicate high levels of uncertainty about the future direction of the price, often found in sustained sideways markets or market bottoms. 

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Definition: Volatility

Volatility

Definition:

Volatility is a measure of a stock's tendency to fluctuate over a range of prices during a set period of time.
 

Interpretation:

Volatility has several uses and potential interpretations. 
 

First, the degree of volatility of a particular security can be used to determine whether or not a stock should be considered for selection. Low degrees of volatility can suggest that a stock will tend to stick to its underlying trend while high degrees of volatility can suggest that a stock will move greatly about its trend. This knowledge can be valuable for incorporating into trading and investment strategies in a number of ways, including the likelihood of a price change being a trend change, how price movement is related to industry or market movement, whether a stock is more appropriate for longer-term or shorter-term analysis, and so on. 

Second, when a stock tends to have a certain range of volatility over an extended period of time, and then breaks out of the range upward, it can mean that there will be a change in trend. If it breaks out of the range downward, it can mean that the frequency and severity of short-term price swings will decrease as the overall trend establishes itself among investors. 

Third, recognizing cycles in volatility can be useful in determining appropriate times to anticipate a price breakout. Many stocks can have cycles with a high degree of regularity. Volatility's tendency to be auto-correlative (meaning that reversals often continue in the new direction) can help create circumstances to be a powerful leading indicator. 

Finally, volatility can be used to calculate the theoretical option value. 

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Definition: Ultimate Oscillator

Ultimate Oscillator

Definition:

Larry Williams developed the Ultimate Oscillator as a way to account for the problems experienced in most oscillators when used over different lengths of time. Williams' Ultimate Oscillator, therefore, combines three oscillators which represent short, intermediate, and long term market cycles (7, 14, & 28-period). It is expressed as a single line plotted on a vertical range valued between 0 and 100. 
 

An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100. 

Interpretation:

Williams' suggested interpretations must meet fairly rigorous criteria, but can be very powerful in certain market climates and when verified with other indicators. 
 

A first set of signals is generated when there is a divergence between price action and what is seen on the Ultimate Oscillator. 

When the price reaches a lower low and is not supported by a lower low of the Ultimate Oscillator, a bullish signal is generated, provided that the Oscillator falls below thirty during this divergence AND the Oscillator then rises above its high during the span of the divergence.

The subsequent uptrend can be ended, according to Williams' interpretation, should the value of the Ultimate Oscillator rise above seventy OR rise above fifty and then dip below forty-five.

When the price reaches a higher high and is not supported by a higher high of the Ultimate Oscillator, a bearish signal is generated, provided that the Oscillator rises above fifty during this divergence AND the Oscillator then falls below its low during the span of the divergence.

The subsequent downtrend can be ended, according to William's interpretation, should the value of the Ultimate Oscillator rise above sixty-five OR fall below thirty. 

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Definition: Stochastics Oscillator

Stochastics Oscillator

Definition:

The Stochastics oscillator, a popular and dynamic indicator developed by Dr. George Lane, is based on the premise that during an upward trading market, prices tend to close near their high, and during a downward trading market, prices tend to close near their low. Stochastics measures at what point the price of a security is within the entire price range of the security over a given period. 
 

The stochastics indicator is plotted as two lines, %K and %D. The range of the Stochastics is between 0 and 100. With a price range of ten to twenty, ten would be given a 0 designation, fifteen would be at 50, and a price of twenty would be at the 100th percentile. The values of the stochastics calculations are dependent on the parameters given to %K and %D. 

There are two types of stochastics: fast stochastics and slow stochastics. When calculating fast stochastics, the raw value of %K is the point at which the current price lies within the historical price range of its given period, and the value of %D is the moving average of %K over a given number of periods. 

When calculating slow stochastics, the value of %K slow is the %D-period moving average of the point at which the current price lies within the historical price range of its given period (or raw %K), and the value of %D slow is the moving average of the %K slow over a given number of periods. 

An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100. 

Interpretation:

There are several major interpretations for stochastics, which may be more beneficial when combined with other indicators that discern whether a market is in a trending or cyclical rotation mode. 
 

One interpretation (and the one Dr. Lane believes to be most important) is to look for a divergence between %D and the price. An overbought market occurs when %D makes a series of lower highs while the price makes a series of higher highs. An oversold market occurs when the price makes a series of lower lows while %D makes a series of higher lows. 

A second interpretation is to receive signals based on a crossover of the two lines. When the %K line rises above the %D line it is considered bullish, and when the %K line falls below the %D line, it is considered bearish. You can eliminate some false signals by using only the signals which correspond to the direction of the intermediate to long term trends. 

A third interpretation is that a buy signal is generated when either line dips below and then rises above 20, and a bearish signal is generated when either line rises above and then dips below 80. 

Many investors combine several of these interpretations as a major criterion used for making trading decisions. 

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Definition: Relative Strength Index Classic (RSI)

Relative Strength Index Classic (RSI)

Definition:

Relative Strength Index (RSI), an oscillator introduced by J. Welles Wilder, Jr., could be more appropriately called the internal strength index, for it compares the price of a security relative to itself. The RSI is based upon the difference between the average of the closing price on up days vs. the average closing price on the down days over a given period, and is plotted on a vertical scale of 0 to 100. An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100. 
 

Wilder advocated a 14-day RSI, although shorter and longer periods have gained popularity when the market exhibits certain characteristics. Generally, RSI is measured in a period between 5 and 25. 

RSI Classic is the conventional calculation of the RSI indicator and is new with version 4.11. RSI is a value calculated with the following equation:

1

---

1 + U/D

Where U is the average of upward movement and D is the average of downward movement. RSI Classic uses this calculation. 

 

There are two formulaic differences between RSI Classic and RSI.

• Whereas RSI classic creates U by (total upward movement/number of up days) and creates D by (total upward movement/number of down days),
• RSI Classic uses an exponential moving average of (AvgGain/AvgLoss) where AvgGain = total gain in n periods. N is the rsi period.

Interpretation:

There are several possible interpretations for the Relative Strength Index, any of which can be very powerful depending on the market conditions and trading/investment approach: One interpretation is that buy signals are triggered when RSI is in oversold (20-30) area, potentially meaning that the stock is about to reach its low for this trend, and sell signals are triggered when RSI is in overbought (70-80) area, potentially signaling a market top. 
 

A second mode of interpretation is to look for support and resistance lines or common chart formations such as head and shoulders in the RSI itself, indicating potential reversals that the stock chart may not. 

A third mode of interpretation is to recognize divergences in the RSI, such as when the price is moving up when the RSI is moving down or vice versa. This can mean that the price is going to "correct" and move in the direction of the RSI. 

A fourth mode of interpretation for the RSI is to view it as a bullish or bearish signal when it crosses 50. When the RSI crosses above 50 it can be considered bullish, and when it crosses below 50 it can be considered bearish


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Definition: Relative Strength Index (RSI)

Relative Strength Index (RSI)

Definition:

Relative Strength Index (RSI), an oscillator introduced by J. Welles Wilder, Jr., could be more appropriately called the internal strength index, for it compares the price of a security relative to itself. The RSI is based upon the difference between the average of the closing price on up days vs. the average closing price on the down days over a given period, and is plotted on a vertical scale of 0 to 100. An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100. 
 

Wilder advocated a 14-day RSI, although shorter and longer periods have gained popularity when the market exhibits certain characteristics. Generally, RSI is measured in a period between 5 and 25. 

RSI is most charting programs original method of displaying this indicator. Classic is the conventional calculation of the RSI indicator and is new with version 4.11. RSI is a value calculated with the following equation:

1

---

1 + U/D

Where U is the average of upward movement and D is the average of downward movement. RSI Classic uses this calculation. 

 

There are two formulaic differences between RSI Classic and RSI.

• Whereas RSI classic creates U by (total upward movement/number of up days) and creates D by (total upward movement/number of down days).
• RSI Classic uses an exponential moving average of (AvgGain/AvgLoss) where AvgGain = total gain in n periods. N is the rsi period.

Interpretation:

There are several possible interpretations for the Relative Strength Index, any of which can be very powerful depending on the market conditions and trading/investment approach: One interpretation is that buy signals are triggered when RSI is in oversold (20-30) area, potentially meaning that the stock is about to reach its low for this trend, and sell signals are triggered when RSI is in overbought (70-80) area, potentially signaling a market top. 
 

A second mode of interpretation is to look for support and resistance lines or common chart formations such as head and shoulders in the RSI itself, indicating potential reversals that the stock chart may not. 

A third mode of interpretation is to recognize divergences in the RSI, such as when the price is moving up when the RSI is moving down or vice versa. This can mean that the price is going to "correct" and move in the direction of the RSI. 

A fourth mode of interpretation for the RSI is to view it as a bullish or bearish signal when it crosses 50. When the RSI crosses above 50 it can be considered bullish, and when it crosses below 50 it can be considered bearish. 

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Definition: Relative Strength Ranking (RSR)

Relative Strength Ranking (RSR)

Definition:

Relative Strength Ranking (RSR) is based on the idea that most successful stocks must rank well as compared to the overall market based on several criteria. RSR measures the perfromance of a stock based on the past year's worth of data. Relative Strength Ranking is measured on a scale of 0 to 100, where each number can be considered a performance percentile out of all available individual stocks in the market. 
 

Interpretation:

Relative Strength Ranking can be used as part of an overall selection criteria for purchasing new stocks, and as verification for a stock that has limited potential for a major price advance. Many of the biggest price advances in recent history have been for stocks with an RSR topping eighty.

• Choose leading stocks with high RSR.
• Avoid laggard stocks with low RSR. 

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Definition: Money Flow

Money Flow

Definition:

Money Flow is one of the more sophisticated and powerful technical indicators relating price to volume, and is calculated based in each tic during the trading day. The value increases by the shares traded on the level of an uptick, and decreased by the shares traded on the level of a downtick. 
 

Therefore, if there is an uptick on 5,000 shares traded, money flow will increase by 5,000. If there is then a downtick on 600 shares traded, money flow will decrease by 600. If these two trades comprised the entire trading day, price would have ended even for the day, while money flow would have increased by 4,400. 

Interpretation:

Signals are generated when there are divergences between the Money Flow and price.

• When price is increasing while money is flowing out of the security, it is a warning of an impending collapse in the price of the stock.
• When the price is trending downward while money is flowing into the security, it is a sign that some savvy buyers are accumulating the stocks.

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Definition: Momentum (Rate-Of-Change/ROC)

Momentum (Rate-Of-Change/ROC)

Definition:

Momentum is a relatively straightforward indicator that measures the rate of change in price as opposed to price itself. It is calculated by subtracting the price of x periods ago from the price now. This indicator can also be referred to as rate-of-change (ROC). 
 

To reduce the choppiness of the indicator, the value given in most charting programs is a five-period exponential moving average of itself. 

Interpretation:

The conventional interpretation is to use momentum as a trend-following indicator. This means that when the indicator peaks and begins to descend, it can be considered a sell signal. The opposite conditions can be interpreted when the indicator bottoms out and begins to rise.

If momentum reaches very high or low values relative to its range historically, a continuation of the current trend is likely, and a change might not be considered until the actual price begins to dip down or rise, respectively. 

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Definition: McClellan Oscillator

McClellan Oscillator

Definition:

The McClellan Oscillator is a technical indicator based on the New York Stock Exchange, not any one particular stock. It is a short term and intermediate term "market breadth" indicator, meaning it is designed to determine the strength of a market trend. This is based on the concept that a robust uptrend or downtrending market is characterized by a large number of stocks advancing or declining moderately, rather than a small number of stocks making large gains or losses. 
 

The McClellan Oscillator is calculated by subtracting a 39-day exponential moving average of the difference between the advancing issues and the declining issues from a 19-day exponential moving average of the difference between the advancing issues and the number of the declining issues in the New York Stock Exchange. 

Interpretation:

Volatility has several uses and potential interpretations. 
 

There are two major sets of interpretations for the McClellan Oscillator. 

The first interpretation is to use regions to derive bullish and bearish signals. If the Oscillator extends below -100 or above 100, it represents extreme oversold/overbought conditions, and suggests a continuation of the current downtrend or uptrend for a short-to-intermediate period of time, respectively. 

If the McClellan Oscillator falls into the -70 to -100 region and turns up, it can be considered bullish. On the other hand, if it rises into the +70 to +100 region and turns down, it can be considered bearish. 

The second interpretation is to look at whether the Oscillator is positive or negative.

• When the indicator goes from negative to positive, a bullish signal is generated.
• When the indicator goes from positive to negative, a bearish signal is generated. 

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Definition: Moving Average Convergence and Divergence (MACD)

Moving Average Convergence and Divergence (MACD)

Definition:

Moving Average Convergence and Divergence (MACD) is the difference between a fast exponential moving average (fast EMA) and a slow exponential moving average (slow EMA). The name was derived from the fact that the fast EMA is continually converging towards and diverging away from the slow EMA. 
 

Charting programs show the difference between the two moving averages (the MACD) plotted as green or blue vertical lines, and a red signal line plotted over the MACD which is a moving average of the MACD line. 

Interpretation:

The MACD can be a very helpful technical indicator, and is subject to several conventional interpretations which can all be useful depending on your trading and investment philosophies.

One interpretation is that a positive MACD value is a bullish signal, and a negative MACD value is a bearish signal. 

The crossover interpretation posits that the signal line can be used alongside the MACD to determine the appropriate entry and exit point. (The signal line is a moving average of the MACD line). When the MACD falls below its signal line, it can be considered a sell signal. Similarly, a buy signal can be interpreted when the MACD rises above its signal line. 

A third popular method of interpretation is that when the MACD is making new highs or lows, and the price is not also making new highs and lows, it signals a possible trend reversal. This type of interpretation is often verified with an overbought/oversold oscillator. 

MACD Slope Indicator

The MACD slope indicator is based on the MACD. The MACD slope indicator plots the change in the slope of the MACD signal line. When the slope changes from positive to negative, a red arrow is plotted, possibly indicating prices heading lower. When the slope changes from negative to positive, a green arrow is plotted, possibly indicating higher prices ahead.

MACD Delta

The MACD Delta measures the difference between this period’s MACD histogram value and last period’s histogram, showing whether it is rising or following. 


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Definition: Force Index

Force Index

Definition:

The ForceIndex indicator relates price to volume by multiplying net change and volume.

ForceIndex is calculated using the following equation: 

ForceIndex = Volume(today) * (Close(this period) - Close(last period))

ForceIndex is typically presented as two smoothed averages (slow and fast) to reduce the likelihood of false signals. 

Interpretation:

ForceIndex is used by some investors as a running total of where money is flowing. Because this indicator multiplies price movement in a period by the volume of that period, the value of ForceIndex will change the most when net change is accompanied by higher relative volume. Investor can use this index to both (a) compare current price movements to past ones and (b) evaluate the current trend. 
 

The periods used are a moving average of the ForceIndex values, which reduces choppiness. Generally, investors use periods which match the length of the trends in which they are studying. The longer-average will be the intermediate or longer-term trend and the shorter-average will be a shorter-term trend. Some conventional interpretations follow: 

One interpretation is to look for a confirmation or divergence between ForceIndex and the price. When ForceIndex moves up with price increases or down with price decreases, it can indicate that the current trend is has momentum. When ForceIndex diverges from price, it can indicate that the trend may change. 

Another interpretation is to receive signals based on a crossover of the two lines. When the slow line crosses above the fast line and they are both increasing, it can be considered a confirmation of an uptrend. Conversely, when the fast line crosses below the slow line and they are both increasing, it can be seen as confirmation of a downtrend. When a crossover occurs when the lines are going in opposite directions, it can indicate a trend reversal. 

Some traders seek to eliminate some false signals by using only the signals which correspond to the direction of the intermediate to long term trends. 

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Definition: Directional Movement Index (DMI)

Directional Movement Index (DMI)

Definition:

The Directional Movement Index (DMI) is a trend-following indicator developed by J. Welles Wilder, Jr., designed to determine whether a security is in a trending or non-trending market. Since the market is in a strong trend only about 30% of the time and in sideways about 70% of the time, this indicator is used to capture the period when the market shows significant trending or directional behavior. 
 

The calculation of the DMI is fairly complex, and consists of three lines:

• +DI: current positive directional index, the range of highs divided by the price range over the last day and previous close, smoothed over a given number of periods.
  
  
• -DI: current negative directional index, the range of lows divided by the price range over the last day and previous close, smoothed over a given number of periods.
  
  
• ADX: modified moving average of the difference of +DI and -DI divided by the sum of +DI and -DI, multiplied by 100.

Interpretation:

When the +DI rises above the -DI, it can be considered a signal for an uptrend. When the +DI crosses below the -DI, it can be considered a signal for a downtrend. 
 

According to conventional interpretation, three criteria should be met for a signal to be considered valid in most circumstances.

1. ADX should be rising
2. ADX should be above 50
3. Confirmation from another indicator is encouraged pointing towards strong trending or volatility characteristics.

A more strict interpretation of the Directional Moving Index calls for a fourth criterion to be met. For an uptrend to be valid, the price of the security must rise above the high of the day that the +DI crossed above the -DI. For a downtrend to be valid, the price of the security must dip below the low of the day that the +DI crossed under the -DI. 

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Definition: Commodity Channel Index (CCI)

Commodity Channel Index (CCI)

Definition:

The value of the Commodity Channel Index (CCI) is not limited to commodities, and was developed by Donald Lambert as a market timing tool, designed to keep trades neutral in a sideways moving market, and identify entry points when a breakout occurs. Specifically, this oscillator measures how high or low prices are relative to their statistical mean. A high value means prices are relatively high and while a low value means the opposite. An oscillator refers to a momentum or rate-of-change indicator that is usually valued from -1 to +1 or 0% to %100.

The CCI is often best-suited for securities with cyclical patterns, with an optimal period being at least less than 1/3 the number of periods of the cycle.

Interpretation:

The Commodity Channel Index can be interpreted in several different ways, and can be incorporated into many different types of trading schemes or philosophies depending on the type of security and the periods being analyzed. 
 

One interpretation is to use CCI as an overbought/oversold oscillator, meaning that when CCI is in its upper ranges, extending beyond +100, CCI is overbought and a price correction is forthcoming. When CCI is well into its lower ranges, extending below -100, a price rally is approaching. 

A second interpretation is that when the CCI breaks into triple digits it will continue a trend.

• When the CCI rises above +100, it is a bullish signal.
• When the CCI dips below -100, it is a bearish signal.

Critics of the indicator say that CCI often misses the early part of the price movement. To overcome this, some traders use signals when the CCI crosses the zero.

• When CCI crosses zero from negative to positive, it is potentially a bullish signal.
• When CCI crosses zero from positive to negative, it is potentially a bearish signal.

A third interpretation is to integrate the two views, and look for divergences as the distinguishing factor. For instance, if the price is breaking new highs, as the CCI is not, the security is potentially oversold, whereas is both are reaching new highs, then an uptrend will possibly ensure. The reverse conditions can hold true when the price reaches new lows over a given period. 

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Definition: Breadth Advance/Decline

Breadth Advance/Decline

Definition:

The Breadth Advance/Decline is a market breadth indicator developed by Martin Zweig. It is an indicator designed to track the momentum of the broader market and anticipate large upswings or downswings in price. This is based on the concept that the number of advancing securities accompanying a market rise is positively correlated with the probability for further advances. Likewise, the number of declining issues pushing the market downward can be correlated with the probability for further declines. 
 

The Breadth Advance/Decline is calculated by taking the 10 day simple moving average of the number of advancing issues and dividing that number by the sum of the total amount of advancing issues and the total amount of declining issues on the New York Stock Exchange. The neutral point of the Breadth Advance/Decline indicator is .500 in a range of zero to one.

 Interpretation:

There are several common modes of interpretation for Breadth Advance/Decline.

One type of interpretation involves extremely bullish or bearish behavior. When the Breadth Advance/Decline goes above .66, it can be considered very bullish conditions. If it falls below, .37, it can be considered very bearish conditions. Other indicators can verify whether these conditions warrant an overbought/oversold market or whether the market will continue in its current trend. 

A second type of interpretation involves the rapidity of a rise or decline in the indicator. A rapid decline (defined as approximately .2 with 10 days) can indicate that the market has shifted from a simply overbought market to one of true weakness, potentially forecasting a prolonged bear market. A steep increase (defined as approximately .2 within 10 days) can indicate that the market has shifted from an oversold market to one of robust strength, potentially forecasting an extended period of strong growth. Remember, the Breadth Advance/Decline studies the entirety of the NYSE, and not individual stocks. 

A final type of interpretation involves a crossover of the neutral line. 

When the indicator goes from negative to positive (crosses above .500) a bullish climate can be interpreted for the market, and confirmed by other indicators for individual stocks or industries.

When the indicator goes from positive to negative (crosses below .500) a bearish signal can be interpreted for the market, and confirmed by other indicators for individual stocks or industries. 

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Definition: Average True Range

Average True Range

Definition:

Average True Range is a measure of volatility, and is measured by taking a moving average of the greatest value of the following:

• The distance between this period's high & low,
• The distance from last period's close to this period's high or
• The distance from last period's close to this period's low

Interpretation:

Like other indicators that measure volatility, the conventional interpretation is for high periods or peaks in ATR to sometimes be considered clues that investors are having a bull vs. bear struggle, perhaps signalling that a top or bottom is approaching.

During low periods or valleys in ATR, some investors consider this a sign of consolidation or sideways periods.

For certain volatility studies (because the value of Average True Range is expressed as an average of the distance between two prices rather than a percentage), the value of the ATR should not only be considered relative to itself, but also relative to the price of the stock.

In other words, a change in ATR value from 2 to 3 for a $15 stock represents a move of Price/ATR from 13% to 20%. A change in ATR value from 2 to 3 on a $50 stock represents a move of Price/ATR from 4% to 6%.

The typical moving average used for Average True Range is 14, which matches the default value in your charting program. A higher moving average might be used for long-term study while a shorter moving average can be used for very short-term study.

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Definition: Keltner Channel

Keltner Channel

Definition:

The Keltner Channel has two bands drawn above and below an exponential moving average, and is based on Average True Range.

Average True Range is measured by taking a moving average of the greatest value of (a) the distance between this period's high & low, (b) the distance from last period's close to this period's high or (c) the distance from last period's close to this period's low.

Peaks in ATR indicate potential trend reversals after panic sell offs or frantic buying, valleys can indicate consolidations.

The Keltner Channel uses the ATR calculation as values for the bands.

Formula:

The formula for the upper band of the Keltner Channel is to take twice the value of a 10-period ATR and add it to a 20-period exponential moving average. The formula for the lower band subtracts the same value from the 20-period EMA.

Interpretation:

The Keltner Channel is typically used to ride upward and downward volatility. When the price spikes above the upper band it can be considered a buy signal until the close for the period evaluated falls below the upper band. Conversely, when the price dips below the lower band it can be considered a sell signal.

Because the Keltner Channel is meant to take advantage of volatility swings and is a trend following indicator, it typically does not work well in sideways markets but works better in taking advantage of breakouts within in an established trend.

As with all band indicators, most traders looks for confirmation from other technical indicators.


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Definition: Darvas Box

Darvas Box

Definition:

The Darvas Box is considered by some to be a trading system wrapped up into a single indicator. The indicator uses a series of “states” to determine the upper and lower lines of a box by finding highs and lows.

Formula:

The calculation of a Darvas box is complex and is based on a series of states, and a box is not formed until all states have been met. 


Essentially, the Darvas Box requires the successful “finding” of a high and low over a set of three periods for each. Bar charts or candlestick charts are required because the high and low of a period is needed for the calculation.

State 1 can start with any bar, and establishes the high (or BoxTop, which is simply a horizontal line crossing the high).

A bar moves to State 2 when the period’s high is lower than the State 1 period, otherwise it remains in State 1 and forms a new BoxTop.

A bar moves to State 3 when the period’s high is lower than the State 2 period, otherwise it returns to State 1 and forms a new BoxTop. In State 3 a BoxBottom is formed, which is simply a horizontal line crossing the low.

A bar moves to State 4 when the period’s low is higher than the State 3 period, otherwise it remains in State 3 and forms a new BoxBottom. (If the period’s high is higher than the BoxTop, form a new BoxTop and return to State 1.)

A bar moves to State 5 when the period’s low is higher than the State 4 period, otherwise it returns to State 3 and forms a new BoxBottom. (If the period’s high is higher than the BoxTop, form a new BoxTop and return to State 1.)

Only after State 5 is reached is a box formed on the chart.

Interpretation:

The prevailing interpretation of a Darvas Box is to locate breakouts above established highst an lows. Some traders consider it bullish when the price breaks above a BoxTop and bearish when it breaks below a BoxBottom.

Some traders also use the Box as a stop-loss by setting it as the BoxBottom in a long position or the BoxTop in a short position (or a percentage above/below the BoxBottom/BoxTop).


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Definition: Filtered Wave

Filtered Wave

Definition:

Filtered Wave automatically draws lines between the top and bottom of a price movement that is at least 10%. 

Interpretation:

The Filtered Wave does not have any predictive value in it of itself. However, it is useful in studying the degree of retracements during major price movements and can be used alongside other types of indicators (such as Elliot Wave analysis or Fibonacci Retracements).

The Filtered Wave can also be used as a way of ignoring the "market noise" generated by the daily fluctuations of stocks, only showing the major movements of a stock. 

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