CHAPTER - 11 (II)
Indicators (Part 2)
1. The Bollinger bands
The Bollinger Bands are the most valuable indicators. These bands help to identify the overbought or oversold market. When the price is at the top of the BB, the trader will try to sell the share (an overbought market) & when the price is at the bottom of the BB, the trader will try to buy the share (an oversold market)
The Bollinger bands consist of 3 bands – The middle one is the 20 day SMA of the closing price.
The upper band is a middle band + (2* standard deviation of the middle line)
The lower band is a middle band - (2* standard deviation of the middle line)
Standard deviation (SD) is the volatility in the stock.
Let's understand this with an example.
20 day SMA = 7,500
Deviation is 0.95%
7500*0.95% = 71
Upper band = 71*2= 142
= 7,500+142
= 7,642
Lower band = 7,500-142
=7,358
2. Stochastic Oscillator
A stochastic oscillator is a momentum indicator. It compares the current price of the share to its price range over a period. It indicates if the market is overbought or oversold. A stochastic Oscillator is a range bounded indicator which moves between 0 & 100.
The formula for stochastic oscillator:
% K = (C-Ln) / ( Hn – Ln) *100
Where C= Current closing price
Ln = Lowest price in n period
Hn = Highest price in n period
% K = value of the stochastic indicator
3. Fibonacci retracement:
In Fibonacci sequence, each number is a sum of the previous two numbers. The word retracement means going in opposite direction.The Fibonacci retracement assists in identifying the extent to which the market will move against the current trend.
When the traders think that the market is about to show a significant move, they often use Fibonacci retracement to confirm the same.
The sequence helps traders identify the support & resistance levels, which allow traders to decide entry & exit points, stop losses.
The fibonaaci retracement levels are 23.6%, 38.2%, 61.8% & 100%.
4. Standard Deviation :
Standard deviation helps predict the change in the price.SD compares the current market price of the share to historical price movements. However, the SD cannot predict the direction in which the share price will move.
5. Average Directional Index (ADX) :
ADX indicates the strength of the current price trend. It is range bounded & works on the scale of 0 to 100. The ADX of more than 25 is considered a strong trend & below the level of 25 is regarded as a weak trend.
ADX helps traders identify if the trend will continue or there will be a reversal.
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