A time series derived from price data
- (OHLC and sometimes V)
- Might sometimes consider related markets or other data series
Vary in complexity
- Difference between two closes is a simple indicator
- More complex indicators could be thousands of lines of code
Historically, grew up with the rise in the easy availability of computing power
- At one time, calculating a moving average was a chore!
A Common Misconception
Many technical analysis texts (and websites) say there are leading and lagging indicators.
This is not true! Technical indicators are all calculated from (past and current) price data, so they reflect the past.
(There are leading economic and fundamental indicators, but there are no leading technical indicators.)
There’s always a tradeoff: If we try to make an indicator more sensitive to recent data it will also provide more false signals.
There are no leading technical indicators.
Guidelines for Using Indicators
Understand the calculation and tool you are using.
- Maybe should be able to do it by hand?
- At least have that degree of understanding.
- Names for indicators can be imprecise and misleading
Understand what it shows and what its quirks are.
If you combine indicators, be careful of overlap.
Categories of Indicators
- Moving Averages
- Parabolic SAR
- Williams %R
- Historical Volatility
Different Ways to Measure
- Chaikin Oscillator
- Williams %R
- Rate of Change
Using Line Crossings as a Signal
Using Indicator for OB/OS
Much More Is Possible
Can combine indicators
Can take indicator signals as entries, exits, or input to other stages of your process.
Indicators may be adaptive or adapted to cycles in the market.
Indicators may be calculated on other indicators!
- RSI of MACD, for instance
Understand what you’re trying to accomplish and what the indicator measures.
Indicators are calculated from OHLCV (and possibly OI) data.
They are usually visual presentations of processed price data.
Understand how the indicator you choose is calculated and what it measures.
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