THE ETERNAL SOVEREIGN

Technical Indicators – Part 2

Stochastic Oscillator

The Stochastic Oscillator is a popular technical analysis indicator used to measure the momentum of a financial asset — basically, how fast the price is moving compared to its recent range.

  • It compares the closing price of an asset to its price range over a specific period of time.
  • It helps traders identify overbought or oversold conditions in the market.
  • Values range between 0 and 100.

How it works

  • When the oscillator is above 80, the asset is considered overbought (price might be too high, possible reversal or pullback soon).
  • When it is below 20, the asset is considered oversold (price might be too low, possible upward reversal).
  • It’s often used to spot potential trend reversals or entry/exit points.

Typical usage

  • Traders watch for crossovers between %K and %D lines for buy/sell signals.
  • Also, look for divergences between price and the oscillator to spot weakening trends.

Notes

  • %K and %D are the two main lines used to generate signals:
    • %K — The Fast Stochastic Line
    • %D — The Slow Stochastic Line

Average True Range (ATR)

Average True Range (ATR) is a technical analysis indicator that measures market volatility.

  • It was introduced by J. Welles Wilder Jr. in his 1978 book New Concepts in Technical Trading Systems.
  • ATR shows how much an asset’s price moves, on average, during a given period.
  • It helps traders understand the degree of price fluctuations or volatility.

How is ATR calculated

  1. True Range (TR) for each period is the greatest of:
    • Current High − Current Low
    • Absolute value of (Current High − Previous Close)
    • Absolute value of (Current Low − Previous Close)
  2. Then, ATR is the moving average (usually 14 periods) of the True Range values.

Why use ATR

  • It tells you how much the price typically moves, regardless of direction.
  • Higher ATR = higher volatility (bigger price swings).
  • Lower ATR = lower volatility (smaller price movements).
  • Traders use ATR for:
    • Setting stop-loss orders to avoid getting stopped out by normal volatility.
    • Identifying periods of high or low market volatility.
    • Confirming breakouts or trend strength.

Volume indicators

Volume indicators are tools used in technical analysis to measure and analyze the amount of a security (like stocks, forex, crypto) traded during a specific period of time.

What do Volume Indicators tell you

  • Trading activity strength: They show how strong or weak a price movement is by looking at the number of shares/contracts traded.
  • Confirm trends: High volume during a price rise can confirm a strong uptrend, while low volume might indicate weakness.
  • Spot reversals or breakouts: Sudden spikes or drops in volume often precede or accompany major price changes.

Common Volume Indicators

  1. On-Balance Volume (OBV):
    It adds volume on up days and subtracts volume on down days to show cumulative buying or selling pressure.
  2. Volume Moving Average:
    Smooths volume data over a period (like 20 days) to identify trends in trading activity.
  3. Volume Rate of Change (VROC):
    Measures the percentage change in volume between two periods to detect unusual volume spikes.
  4. Chaikin Money Flow (CMF):
    Combines price and volume to show buying or selling pressure over a period.

Important notes

These indicators are most effective when the market is moving sideways.