88 9

106 Vipul'sM TechnicalAnalysis

lysis (BFM) catorsand Oscillat
ndicat

Positivedivergence can act as an alert to watch for a resistance indicator.is always th best
when there 107
breakout. Same way, negative divergence acts as an alert that
pcoming changespersists
warn you of
don't
They
a
fair lolong trend.
ders use
stock can fall below suDDort. Some investors and traders,
rell you
whathat prices
pric
are
doing (ie, in
prices, they simply
indicatorssto predict the direction of future prices. Patterns stud.
ady in
vest
accordingly. They lowrising or falling) so that you
only price behaviour, whereas indicators study price as well
as well as
can
These trend followa simple rule ofa

following indicators makes "Trend is

y o u rt r i e n d "

volume, open interest, derivatives of prices in order to make

ake then
them A miss
out on the
you buy and
more reliable. ACD are examplesearlyof opportunities.
sellla
and the
trend Moving averages
and

indicators.
following, "lagging
or
8
4.2 TYPES OF INDICATORS:

ndicators can
broadly be classified as LEADING and 43 MOVING AVERAGEs:
LAGGING. Moving averages is one of the most
4.2.1 LEADING INDICATORS: common and familiar
1-following dicators. They smooth
a data
ns
chaos of market participants and make series, reduce
Leadingindicators lead the price action before it happens it easier to
spot trend,
Benefits of leading indicators are early mething that
somet is
especially helipful in volatile markets. The
signalling tor entry and two
exit, generating more signals and allow more opportunities
st
mo Dopular moving averages are SMA
to (simple moving average)
EMA (Exponential;moving
trade. Indicators consider the number of
days for which data will
and
average)
be taken to create indicator. Uses of Moving Averages:
They represent a form of price
momentum over a fixed look-back period, which is the number
of Three main uses of
moving averages are:
periods used to calculate the indicator. Some of the popular
Trend identification.
leading indicators include Commodity Channel Index (CCI),
Momentum, Relative Strength Index (RSI), Stochastic Oscillator, Support and resistance identification.
Williams %R etc.
Generating trading signals.
4.2.2 LAGGING INDICATORS:
Moving averages keep a trader in line with the present trend. It
Lagging Indicators are the indicators that would follow a trend helps to buy and sell stock in the direction of present trend, may
rather than predicting a reversal. be little late, and not exactly at the top or at the bottom. They
Lagging indicators help to
follow trend rather than predicting trend. So always fail to recommend buy or sell at the turning point. There
performance of the
are three ways to identify the trend with moving averages:
 tors and Oscillators
ndlcatorsa n d
108 Vipul'sTechnical Analysis
ysis (a(BFM
identification fechnique uses for5 periods, then he 109
Direction: The first trend ses .the
gverage
cand
ualue
alue and dividing
ividing the
the by simply
direction of the moving average to determine the
trend is considered up when moving average IS continuh.
trend.The
trend . days
days' moving resul
t h a tw h e

esult by 5. One needsadding all five

the result ofaverage remember
to
rising. If the moving average is declining, then the
the trend.
trend
uousy and the:
data and
is
the samecreated, it is based on past 5
is When 6th day data is taken will be
plotted gainst 5th
count for SMA against
considered down. The direction of a moving average Can into 5
and 2nd to account
aay
be lata is deleted
determined simply by looking at a plot of mo: the
the
moving 1#day
is then plotted
6th day data
calculation,
average.
Result
against 6 considered.
are considered.
moving average, which isday. Connecting
r e a t e

a ting all the results

(ii) Location: The technique for trend smooth
second
fication
identification
be determined throue
is regularprice volatilit enough compared
pared to
price location. The basic trend can
location of the price relative to the moving average. If t
through E.g
the
price is located below the moving average, then the
securityis 12+13+13 + 14 +13 =65
considered in down trend and if price is above the movino
average, then the security is considered in uptrend.
noving -13
Gii) Crossovers: The third technique for trend identification is Tf the 6th day closing price is 15, then
the calculation will be:
location of the shorter moving average relative to the
longer 13+13+14 +13+15 =68
moving average. The trend is considered up, if the shorter
68
moving average is crossing above longer moving average 5
= 13.6
The trend is considered down, if the shorter moving
average
is 4.3.2 EXPONENTIAL MOVING AVERAGE (EMA):
crossing below the longer moving average
4.3.1 SIMPLE MOVING AVERAGE (SMA):
Exponential moving average gives lot of importance to present
data compared to older data. SMA is little slow to react to
recent
A simple moving
average is formed by taking the average price price change, which is one of its weakness. In order to reduce the
of a security over a
specified number of periods. It gives equal effect of lag in simple moving averages, technicians often use
importance to every price selected over the period. Moving exponential moving averages. The weighting applied to the most
averages can be created using open price, high price, low price recent price depends on the specified period of the moving
and close price. Most
moving averages are created using the average. The shorter the EMA's period, weight is applied to the
closing price. Few researchers work on moving averages based on most recent price. E.g: a 10-period exponential moving average
open, high and even low. Eg. if someone wants to find moving weighs the most recent price 18.18% while a 20-period EMA
 tors a n a OSCIlaloi
mdicators
a n do s
111
TechnicalAnalysis (BFM
V i p u l ' M
(BFM calcu
ulation. Exponential
moving average is more
110
9.52%.

EMA is
EN
Calculating
much r e c e np
t ric
rice change
then
simple moving average. responsive to
weighs the most recent price The important thino
thine
important
SMA.
The to ***
"T*
*****" *** **
calculating
an
average puts
**
Niny Weey
harder than moving more "
remember is that
the exponential ker to recent
react quicker
it will So
on recent prices.
weight
moving averdge
changes than a simple in ttwo ways:
can be specified
Averages
Exponential Moving Bke Lee mple Moviag vernge
Grocn Liae: Erponclai Moviag Arerngo
4) As a percent-based EMA.
EMA.
(ii) As a period-based **
EMA (prev)) (Multiplier
x
EMA (current) = (Price (current)
-
**
*******V*****
+EMA (prev). -
EMA will be
subtracted from thoe A auestion aabout moving averages that seems to weigh heavily
question
This means previous day's
multiplied by multiplier. The ninds whether to use the "simple" or
is
new and the result will be
price
ontraders'min "exponential"
EMA. of the type, the basic
result is then added to previous day's ving average. Regardless principle is that
"Multiplier" is equal to the is more buying than selling, prices will move above the
(i) For a percentagé-based EMA, ifthere
and the market will be in an uptrend. On the other hand,
EMA's specified percentage. average
will make the
prices drop below the
(ii) For a period-based EMA, "Multiplier"
is equal to heavy selling pressure
moving average, indicating downtrend.
a
2/(1+N)where Nis the specified
number of periods.
previous EMA, The choice of moving average depends on various factors like
As current EMA is calculated based on one
needs to remember one point clearly that SMA is calculated as the trader's trading frequency, investing style and the stock which has
be
of EMA and then EMA formula is applied on the been traded by him. The exponential moving average may
starting point
same for further calculation. prone quicker signals, which may turn false. Some traders
to
prefer to use exponential moving averages for shorter time
periods to capture changes quicker.
4.4 SIMPLE VERSUS EXPONENTIAL:
Some investors prefer simple moving averages over long time
There is hardly any visual difference between simple and much
periods to identify long-term trend changes. In addition,
exponential moving average. There is huge difference in terms of
will depend on the individual security in question. A 50- day SMA
 dicotorsand Oscillator
TechnicalAnalysis/
V i p u l ' s
(BFM) 113
112 in a partic
articular iod to avoid such false
support
levels a
signals. That me
neans after a
work great for
identifying work Detter for
for the nal
d i r e c t i o n a
breakout,
one more
period candle is in
night
g n t workk
HUL. OneMARUTI
needs tobut a 100-day
check
EMA may
ance on
moving average pertorman on th
the
the
thesame direction in order to initiate a trade. requirea
stock like
method to check moving average price
error Multiple It is always
trial and crossov
by oving averao
averages
some
out mov.
past data, carry offered ble
a d v i s a b l e to deploy more than
levels one moving rages to
security. Fol
resistance
perfect supPport and
and then decide the type
to use for
particular ollowing generate trac rading signals. Most of technical analysts use 2
thumb rule may
not prove
a great
indicator.
Moving ving averages and
very few use 3 moving averages.
any basic will depend greatly
on e whenever short term moving average crosses long term
average type and length of time
reacted in the past. moving average lownward, it would generate short signal
it has
individual security and how
and gernerate mo and whenever short term moving average crosses long term
sensitive ore and
are very
Shorter moving averages than the
which is generally
more sensitive moving average upward, it would
generate long signal. In
signals. The EMA, Combination of triple moving average, when the shortest moving average
generate more signals.
SMA, will also be likely to
will generate highest and term
short term time frame with
EMA concept cuts medium long moving average upward, on
combinations. On the every cut, it would confirm uptrend and it would generate
to any other
trading signals compared and late
less trading signals tradine buy call. As there are two confirmations in triple moving
contrary, SMA will generate
Signals, but prove more
reliable than EMA. averages, it is more reliable in detecting long term trend.
to experiment on different
Thus it requires every investor
their to examine the trade-off
moving averages -lengths and types RELATIVE STRENGTH INDEX (RSI:
4.5
between sensitivity and signal reliability.
momentum indicator. Momentum is simply the rate of
RSI is a
Trading Signals: the speed or slope at which security moves (either
change
(i) Moving average price crossover: Buy signal is generated
negative). RSI is also an oscillator. An oscillator is an
positive or
when the price crosses moving average upward and sell back and forth reference line or
indicator that moves across a
signal is generated when the price crosses moving average oscillator
between prescribed upper and lower limits. When an
downward. Longer the timeframe covered by moving and
reaches a new high, it shows that an uptrend is gaining speed
average, greater reliable is the signal. There are high chances to continue. When an oscillator traces a lower peak,
it
of false signals using moving average price crossover
is likely
means that the trend has stopped accelerating
and a reversal can
mechanism. But many technical analysts use filtration of one
be expected Watching a stock for impending
from there.
 ndicatorsa and Oscillotors
114 Vipul's Technical Analysis (R
ysis (BFM Average Loss previous A
nomentum change can provide a glimpse of what may
the future.
happen: appen in Average Loss x13+cur 115

nt Loss

RSI
overbought-Oversold Signals: 14
oscillates between 0% to 100%. There is alway
ays The RSI is a
horizontal lines, which are known as reference lines.
pair
a
pair of price-followin oscillator
lines is at 30% and the
One ofof ththe
One 00. Generally, Generally,
technical that ranges between 0
analysts use 30% ranges between
another is at 70%. The zone lines to
Overboughtlines
70% to
one
between
between generate the buy oversold
ersold and
and 70%
70%
100% is known as and sell
'overbought zone'. The overbought
ht
region
region
arethe few signal methods
signals. Following
als. Following
refers to the case where the RSI
oscillator has moved into
nto aa region
of region Long when the
significant buying pressure relative to the recent past andis indicator moves
often then crosses reference into overso
Tsold zone and
an indication that trend is about line from
an
upward Zone end. Zone
to end.
below.
between 0 % to 30% is known as
'oversold zone' and the oversola Short when the ndicator
moves into
region refers to the lower part of the momentum oscillator
where
then crosses reference
line from overbought zone and
there is a above.
significant amount of selling pressure relative to the Following nifty daily chart
recent past and is shows
indicative of an end to a down swng. ichlighted parameters. Overbought and the trades based on

Calculation: chart
hart is highlighted along with price at thatoversold region in the
time. It is
100 rom the chart that a
sustainable positive / clearly seen
RSI=100-1+RS mediately after RSI leaving
overbought/ oversold region.
negative rally is seen

RS="Average Gain Nity Daily ch

Average Loss able ali

First step is to calculate average gain over specified

then
period and
average loss over specified period. Next step is to find RS
by Suaraabla
in ros hen
rnlly
dividing average gain by average loss. RSI formula is then
to find the
applied
indicator, which is then plotted on the graph, below ***********************
*********************"***e***********
***********
price move.
RSI Ccmina cat
as Comag ou
Second and subsequent calculations
afONetoapar
are based on
previously ********

found data.

Average Gain =previous Average Gain x 13 +current Gain

14
116
ViplsM Technical Analysis ndicat
tors and Oscillators
(BFM
Divergence Signals:
Following Nity daily time 117
One more way of
b e a r i s
looking at indicators is finding divergences ivergence. In timeframe chart shows
the pri
price peaks / troughs and indicator peaks/ troughs. If the price hottom but
ut RSI bullish
makes a new higher peak but the indicator fails to
RSI made divergence, bullish ana
make bott
previous bottom,
higher price made 1owwer
a hottom, i
compared toto immediate
suggesting bottom Compared
less power
corresponding higher peak, this indicates there is ess powe p o s
divergence, is
eminent.bullishness. Price rally
Same chart,
rally on the chary
divergence.

driving the new price high which reveals down reversal could ba
be and down is the
rally. case with negative
expected. negative
NiRy Daily chart
Similarly, if the price makes a new lower trough but the
the
momentum indicator does not make a
corresponding lower
trough, then it can be interpreted as the downward movement is
-sh Dverpe
running out of strength and a reversal upward could soon be
expected. This is illustrated in the chart below. A bullish nn************************.
**
and a ***
divergence represents upward price pressure .em****
bearish
divergence represents downward price pressure.
Strong Divergence **** *** ******* *****
*****-=gee-
******** o
Price
4.6 REAL LIFE PROBLEMS IN USE OF
RSI:
1) RSI in levels does not
overbought always signify an
overbought Market.
Bulish Divergence Bearish Divergence
2) RSI in oversold levels does not always signify an oversold
Market.
indicator
(3) The RSI can remain in overbought/ oversold zones for long
periods of time.
(9 A bullish divergence may not always lead to a rally.
(5) A bearish divergence may not always lead to a decline.
118 HJcators and scillators
Vipul'sM Technical Analysis,
sis (BFM)
nadlcote
Stochastic: nterpretation:
119
The Stochastic developed by eorge Lane
George Lane. t a)To define
indicator was ,
stic overbought and
compares where a
period.
security's price closes over
a selected
number
numberofa stochastic oscillator
reading
Oversold zone: Generally
The most commonly 14 periods stochastic is used.
used. The
n verbought.and above 80
stochastic is
considered
Stochastic indicator is designated by "%K" which is
is just
just si dered
consider
oversold. It oscillator readingg below
below 20 is
mathematical representation of a ratio. basically suggests
that:
(a) One should book
profit in buy
%k= (Today's Highest
close)-(Lower low over aselected perio
over Lowest low over riod)
avoid
new buy side side positions and should
positions
in an
a selected period)la selected period) (b) One should book overbought
zone.
avoid new sell
profit
in sell side
For example, if
today's close is 50 and high and low over last 14 side positionsns and
and should
should
days is 40 and 55 respectively then,
positions
in an
oversold zone
(2) B when%K line
crosses %D line to
(50-40) 0.666.
9%k (55-40) Oversold zone and sell when %K
the upside inn
line crosses % D line
downside in overbought zone. to the
These derived values are converted into percentage, which is
for better scaling. (3 Look for divergences: as seen in RSI, there are 2
divergences, positive and types of
negative. Positive
A
moving average of %K is then calculated, which is formed when price makes new low, but divergences are
stochastic oscillator
designated by %D. The most commonly 3 period's %D is used. fails to make new low. This
trend from down to up.
divergence suggests a reversal of
The stochastic indicator always moves between Negative
hand, are formed when price makesdivergences,
zero and on the other
hundred, hence it is also known as stochastic oscillator. The value new high, but
stochastic
of stochastic oscillator near to zero oscillator fails to make new high. This
signifies that today's close is
reversal of trend from up to down.
divergence suggests a
near to lowest
price security traded over a selected period and
similarly value of stochastic oscillator near to hundred
signifies Following is the Nifty daily chart, highlighting stochastic
that today's close is near to highest price security traded over a crossover, overbought-oversold trade setup and divergence.
selected period.
 ndicatorsand cillators
120 Vipul'sM Technicol Analysis (B
)Positive
Nay Dily chn Divergence are fomed 121
low, but
William % R formed
fails
when price
makes new
d * Nagsdve dhergence
divergencessuggests a to
make new low. This
Overtauga reversal of Tn
Negative Divergence are trend from down toto up.
C) Negative Divere up.
high, but
but formed when
William % R fails
to
price makes
nakes new
new
divergence suggests make
m*** * * * * * * * * * * * * * * * * * * * * * * * * **
. ***-s*

a
reversal of trend high.
new high. This
This
from up to down.
A MOVING
MOVING
AVERAGE
******m*u.
DIVERGENCE (MACD: CONVERGENCE AND
AND

William's R: MACD stands for

Moving Average
The William %R indicator was developed by Lary technical analysis indicator
Willams tis a technical
Convergence/
indicator created1
rgence / Divergence.
created by Gerald
Divergence.

This is almost similar to stochastic oscillator 1070s. 1he

The MACD indicator is Appeal in the
except for a negative ate 119708. basical late
basically refinement of the a
scale. The William %R indicatór always moves between zero
and two mOving averages system and measures the
distance between
minus hundred (-100) the two moving average lines.

Interpretation of William %R Indicator: What is MACD and how it is calculated:

Most popularly stochastic indicator is used in two

ways The MACD does not
completely fall into either the trend-
To define leading indicator trend following
or
indicator; it is in fact a hybrid
overbought and oversold zone: Generally William ith elements of
with of both.
both. The MACD
% R reading between 0 and 20 are considered overbought and comprises two lines, the fast
line and the slow or signal line. These are
William % R reading between -80 to -100 are considered oversold. easy to identify as the
slow line will be the smoother of the two.
It basically suggests that:
Step 1: Calculate a 12 period exponential moving average of
(1) One should book profit in buy side positions and should
the close price.
avoid new buy side positions in an overbought zone.
Step 2: Calculate a 26 period exponential moving average of
(2) One should book profit in sell side positions and should
the close price.
avoid new sell side positions in an oversold zone.
Look for Step 3: Subtract the 26 average from the 12
period moving
Divergences: Divergences are of two types ie.
positive and negative. moving average. This is the fast MACD line.
122 Vipul'sM Technical Analysis ta
lysis (BFM ndicators and scillators

Step 4: Calculate a 9 period exponential moving average

verage ofthe rlying security, each
u n d e

fast MACD line calculated above. This is the slow or

or sign rown trading style, individual can set 123
MACD line. her
objectives and risk MACD to suit his orot
MACD benefits:
seof MACD line:
tolerance
MACD generates
The
Lhe importan
importance of MACD lies in the fact that it takes iintc signals from three
account the aspects of both momentum and trend in one
indica Moving average crossover main sources:
As indicato
The
a
trend-following indicator, it will not be wrong foor
very long,
very lono (2) Centreline crossover.
use of moving that the indic
averages ensures
icator will (3) Divergence.
eventually follow the movements of the underlying security.
urity. By
using exponential moving averages, as opposed to simple
le moving (1) Crossoverof fast and slow
movino lines
averages, some of the lag has been taken out. As a momentum CD
The MAC
proves
indicator, MACD has the ability to foreshadow moves in
um most effective in
the markets. We will first consider the use wide-swinging
ging trading
of the two MACD lines.
underlying security. MACD divergences can be key factors in he to
signals go long or short are
predicting a trend change. A negative divergence signals that fast and slow lines. The basic
provided by a crossing
ng of the
bulish momentumn is MACD trading rules are
going to end and there could be a potential as follows:
Go long when the fast line crosses
change in trend from bullish to bearish. This can serve as an alert above the slow line.
for traders to take Go short when the fast
profits in long positions, or for aggressive
some line crosses below the slow line.
traders to consider
initiating a short position. These signals are best when
they occur some distance above or
MACD can be applied to daily, weekly or monthly charts. The below the reference line. If the lines remain
near the reference line
MACD ndicator is for an extended period as
basically a refinement of the two
moving usually occurs in a sideways market,
averages system and the distance between the two
measures
then the signals should be ignored.
moving average. The standard setting for MACD is the difference (2) Centreline crossover:
between the 12 and 26- period EMA. However,
any combination A bullish centreline crossover
of moving averages can be used. The set of occurs when MACD moves
moving averages used above the zero line and into
in MACD can be tailored for each individual positive territory. This is a clear
security. For weekly eekly indication that momentum has changed from negative to positive
charts, faster set of moving averages may be
a
Forappropriate. or from bearish to bullish. After a positive divergence and bullish
volatile stocks, slower moving averages may be needed to help
moving average crossover, the centreline crossover can act as a
smooth the data. No matter what the characteristics of the
124
Vipul'sM Technical Analysissis (BE
(BFM) jicators nd scillators
confirmation signal. Of the three signals, moving averao
crossover are probably the second most common signals. average erves as lagging
ndicator. Buy and 125
ignificant opportunity iis sell
signal is
ount of missed. But it generated after
A bearish centreline crossover occurs when MACD D mov
moves stainable a
also
a
below rally. helps to
capture a
zero and into
that momentum has
negative territory. This is a clear indication
changed from positive to negative or or from
irom
dication Nity AMonthly c

a
bullish to bearish. The centreline crossover can act asas ar
an
independent signal, or confirm a prior signal such as a; moving moving
average crossover negative divergence. Once MACD
or CD crosses
crosse
into
negative territory, momentum, at least for the short term,
erm, has
turned bearish. ******** * *****
*********"******* nuneamo **
********************************* * ******
(3) Divergence: Buy slgrat
An indication that end to the current trend
an may be near ***
A
**
Occurs when the MACD ******T***
diverges from the security. A positive 2
divergence occurs when MACD begins to advance and the
security is still in a downtrend and makes a lower reaction low, 4.8 MONEY FLOW INDEX
(MFI):
MACD can either form as a series of MFI considers volume action and on
higher lows or a second low the basis of volume action;
that is higher than
the previous low. Positive divergences are it attempts to measure the
strength of money flowing in and out
probably the least common of the three signals, but are usually the the security. This is also known as smart money flow indicator.
most reliable and lead to the biggest moves.
To understand
calculation aspect of MFL, one should first
A negative divergence forms when the
security advances or understand positive money flow and negative money flow which
moves sideways and MACD declines. The
negative divergence in is the basis of MFL. When day's
average price is greater than
MACD take the form of either a lower high or a
can
straight previous day's average price, it's said to be positive money flow
decline. Negative divergences are probably the least common of and similarly when day's average price is less than previous day's
the three signals, but are usually the most reliable and can warn of average price; it's said to be negative money flow. Money flow for
an impending peak. a specific day is calculated by multiplying the average price by the
volume. Positive money flow is calculated by summing the
Following is the monthly chart of Nifty with MACD,
highlighting buy and sell signal. It is clearly seen that MACD positive money flow over a specified number of periods. Negative
126 Vipul'sTM Technlcal Analysis ( tors and Oscillators

money flow is calculated by summing the negative mone

ney flow of oversold zone
Out

and aa posi 127

Over a
specified number of periods. positive ve divergence. positive spike after MFI
creates
When one divides positive money flow by negative moneu
flow, one gets money ratio. Finally, MFI 100-100/ (1+ money
money lnten Ovorseas Bank
money
=

ratio).
Interpretation:
To
define overbought and oversold zone: Generally M Poative Divcenoo
****** *****************.-s.

reading above 80 is considered overbought and MFI reading mcld

*************** *******************
w* ** *********** .A
w

below 20 is considered oversold. It basically suggests that:

N
One should book profit in buy side positions and should
** * * *************.

2 ..
***** ****************** M
*****************
avoid new buy side positions in an overbought zone.

One should book profit in sell side positions and should 49 BOLLINGER BANDS:
avoid new sell side positions in an oversold zone.
useful technical indicator developed
A
Look for Divergences: Divergences are of two types ie. by John Bollinger in the
early 1980s. Bollinger, a CFA and CMT, created the
positive and negative. bands as a
means for anticipating price trends in a
systematic way before
Positive Divergence are formed when price is making new price reversals occur. Bollinger devised this indicator in the belief
lows, but MFI fails to break previous lows. This divergence that volatility levels are dynamic and rarely static for a particular
suggests a reversal of trend from down to up. security. Changes in volatility levels, whether attributed to a

Negative Divergence are formed when price is making specific security or responsive to larger market causes, anticipates
new highs, but MFI fails to make, new changes in price direction and momentum. This concept that
high. This
volatility acts in a dynamic manner - went against the popular
divergence suggests a reversal of trend from up to down.
technical thinking of the 1980s, when the bands were introduced.
Following s the weekly chart of Indian Overseas Bank. MFI
The use of three bands is crucial because the span between top
index with overbought, oversold and divergence situation is
and
shown. Chart clearly shows downfall, after MFI attempts to come and bottom to the middle simple moving average expands
relative values on
out of overbought zone, shows positive bounce after MFI comes contracts volatility changes. The bands place
as

traders recognize emerging price

high and low volatility and help
 aators and Oscillators
128
wT Vipul'sM Technical Analysis (8e
patterns, also
improving the timing of entry and exit. Whe y Dly stun 129
combined with candlestick patterns confirming indicators
licators,
n
as
Bollinger bands add the element of changing volatility tothe
to the
study of the price trend.
Bollinger bands display changes in momentum, volume, and '
trader sentiment that collectively strengthen the use of
candlestick
signals in spotting and timing reversals, or in noting continuation
indicators. Because the bands test both momentum and
ntinuation *
direction.
sa ptr***************T********** nyesen
they are valuable tools for testing overall sentiment about *****"
**********is*y*************************
the *********
security.
4.10 EXERCISE
Interpretation: 1) Match the Columns:
Mr.
Bollinger described following important interpretation of Column 'A'
Bollinger bands in projecting price trends. Column B
(a) Moving averages
(1)
0) 0% to 100%
Big move in price is witnessed on either side when bands (b) RSI
(i) Extremely low indicator
tightens/contracts as volatility lessens. (c) Oversold
(ii) Calculations on averages
(2) The upper band act (d) MACDD
as area of resistance and lower band act (iv) Lagging Indicator
as area of support. (e)Bollingerbands (v) Relative strength index
3) When prices
( )RSIRSI oscillates
between (vi) Simple Moving Averages
move outside the band, it signifies strong (Nov. 18)
breakout, hence continuation of the trend and sometimes (g Positive Divergence (Nov. (vil) Supports/ resistances
emergence of new and strong trend. 18)
(h) Bollinger band (Nov. 18) (vi)This divergence suggests a
(4) Bottoms and tops made outside the band, followed
by tops reversal of trend from down
and bottoms made inside the band reversal of the totop
suggests
trend. 0 SMA(Nov. 18) (ix) Two bands with one
average
Following is an
example of Nifty daily chart, highlighting (9) (vi); (h) (iv);
support at the lower end of band, resistance at the upper end of
[Ans.: (a) (vil); (b) (V); (¢) (); () (iü): (e) () (9 (Ö:
band and crossover at middle of band.