background image background image background image

Technical Analysis Indicators: Volume, Moving Averages, RSI and Ichimoku Cloud

Technical analysis 4 minutes to read
KCL
Kim Cramer Larsson

Technical Analyst, Saxo Bank

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
Divergence
Volume

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

sma

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

  • 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
rsi trends
Divergence example

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.
I have removed some of the Moving Averages on my charts as the Cloud is the most important part, and to keep things simple
Cloud

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.