This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Duration: 12:32

Instructor:

Contributor: MarketLife

Level: Beginner

In this unit we’re going to talk about indicators. What are indicators? What can they do? Also, very importantly, what can they not do? We’re going to look at some common indicators, such as MACD, ADX, RSI, Stochastic and think about some ways that we might use them.

Read More

Study Notes:

Using Indicators

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

Trend

  • Moving Averages
  • MACD
  • Parabolic SAR
  • ADX

Momentum Indicators

  • RSI
  • Stochastic
  • Williams %R
  • CCI

Volatility

  • ATR
  • Historical Volatility

Different Ways to Measure

Bounded (Oscillators)

  1. Chaikin Oscillator
  2. Williams %R
  3. Stochastic
  4. RSI

Unbounded

  • Momentum
  • Rate of Change
  • MACD

Using Line Crossings as a Signal

Using Indicator for OB/OS

Divergence

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.

Summary

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.

Disclosure: MarketLife

These videos and accompanying educational materials (collectively, “the Educational Materials”) are created and authored by Adam Grimes (the “Content Creator”) and are published and provided for informational and entertainment purposes only. The information in the Educational Materials constitutes the Content Creator’s own opinions. None of the information contained in the Educational Materials constitutes a recommendation that any particular asset, instrument, security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Content Creator is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the Educational Materials may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Any statements about income, expressed or implied, does NOT represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. From time to time, the Content Creator or its affiliates may hold positions or other interests in assets mentioned the Educational Materials and may trade for their own account(s) based on the information presented. The Content Creator may also take positions inconsistent with the views expressed in the Educational Materials.

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.  In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses is material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

Futures Trading Disclaimer: Transactions in securities futures, commodity and index futures and options on futures carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged”. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit.

The risk of trading can be substantial and each investor and/or trader must consider whether this is a suitable investment. You should use risk capital, and not capital required for other purposes, such as retirement savings, student loans, mortgages or education. Past performance, whether actual or indicated by simulated historical tests of indicators, is not indicative of future results.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Academy that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Academy are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from MarketLife and is being posted with permission from MarketLife. The views expressed in this material are solely those of the author and/or MarketLife and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

trading top