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Technical Analysis Indicators: Volume, Moving Averages, RSI and Ichimoku Cloud
Technical analysis 4 minutes to read
When I do my Technical Analysis I use a variety of Technical Studies and Indicators.
Below I have listed a short description of what I use and how I used them. They are not meant to be exhaustive in their use and understanding but merely just a brief walk-through for you to get a better understanding of my Technical Updates
I also use Trend lines and Fibonacci tools but that is for another day. I might also do a part two covering more Studies and Indicators
In this article:
- Volume
- Moving Averages
- Relative Strength Index RSI
- Ichomoku Cloud
Volume – Number of shares traded
- Price and volume cannot be separated. There is no market without price movement, and there is no price movement without volume.
- The Volume represents balance of supply and demand that moves prices higher or lower.
- Big volume surges indicate critical changes in the balance of supply and demand, thus changes in market sentiment and the coming of market reversals
- When there is a balance in volume vs price it is when prices are going up or down traded volume is also going up
- If prices are going up but the volume is declining that means there are less and less buyers pushing the price up. It is not sustainable in the long run and could be a warning of trend exhaustion. That is an imbalance also called Divergence
- If prices are going down and the volume is also declining that means there are less and less sellers pushing the price down. It is not sustainable in the long run and could be a warning of trend exhaustion. That is an imbalance also called Divergence
- Please note that Divergence is merely a warning sign NOT a reversal signal. Wait for other signals in the form of a Candle reversal pattern of a technical top and reversal pattern such Double/Bottom Top, Wedge break out or the like
Moving Averages
There are several different types of Moving Averages e.g.: Simple, Exponential, Volume Weighted. SaxoTrader offer the most used ones. Here I discuss the Simple Moving Averages
- Simple Moving Averages are the most common and popular form of moving averages. A Simple Moving Average is calculated by adding values over a set number of periods and then dividing the sum by the total number of values.
- As with other types of moving averages, Simple Moving Averages smooth the data by removing "noise" over the selected period. The ability to smooth data makes them a useful tool in identifying price trends and trend reversals.
- Moving Averages are Lagging Indicators
- Trend-following strategies
- Support and resistance
- Gold and Death cross: Crossing of a short and long moving average when they are both rising / falling
Settings:
Most traders are using 20, 50, 100 and 200. I use 21, 55, 100 and 200 time periods. Why 21 and 55? Because they are Fibonacci numbers and I feel they tend to work a bit better. It is a personal style
Relative Strength Index (RSI) – an Oscillator introduced by J. Welles Wilder, Jr.,
RSI is an internal strength indicator as it compares the price of a security relative to itself. It measures the relative strength of price gains on days that the security closes above the previous day’s close to price losses on day’s that the security closes below the previous days close.
The RSI is a momentum indicator that measures the magnitude of recent price changes (the ratio of higher closes to lower closes) to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator between values of 0 to 100.
Tops and Bottoms
- The RSI overbought/oversold indications are 70 and 30 respectively. Buy signals are triggered when RSI is in an oversold area, below 30, potentially meaning that the security is about to reach its low for this trend, and sell signals are triggered when RSI is in an overbought area, above 70, potentially signaling a market top. RSI often forms these tops and bottoms before the underlying market, which can signal an impending reversal
Trends- When the RSI crosses 60 and is moving in the 40-80 range it can be considered to indicate a bullish trend. When RSI crosses below 40 and is moving in the 20-60 range it can be considered to indicate a bearish trend
Support and Resistance
- Levels of support and resistance are usually highlighted in the RSI before they are highlighted in the price chart. Support/Resistance lines are drawn on RSI as they are on a price chart
Divergence
- When the price records a new high/low that is not confirmed by a new high/low in the RSI. Similar to the Volume indicator. When Price chart is making a new high/low but the RSI indicator is not that is a sign of Divergence and possible exhaustion of the trend
Default settings
- When the RSI crosses 60 and is moving in the 40-80 range it can be considered to indicate a bullish trend. When RSI crosses below 40 and is moving in the 20-60 range it can be considered to indicate a bearish trend
- 14 days (time periods) as used by Welles Wilder but some traders are using 9. It depends on your trading style. 9 periods reacts faster to price changes but can also generate more false signals or warning. 14 reacts slower but does not generate as many false signals. I use 14
- By default the two horizontal lines are set at 70 and 30 for Overbought/Oversold. I have set my lines at 60 and 40 for up or down trend confirmation
Ichimoku Cloud is a trend and momentum indicator and can be used to identify support and resistance levels
- The Cloud consists of five Moving Averages; a 9-period average, a 26-period average, an average of the 9 and 26 averages, a 52-period average, and a lagging closing price line.
Two of the Moving Averages are used to form a cloud where the space between those two lines are shaded i.e., the Cloud
When the price is above the Cloud it is considered being in an uptrend. When the price is below the Cloud it is in a down trend.
- If the Cloud is moving in the same direction up or down as the price trend the indication of the trend is considered to be stronger.
- Price is often finding support or resistance at the edges of the Cloud especially when the edge is horizontal.