Directional Movement Index (DMI)

This indicator was created by J. Welles Wilder to complete the ADX in terms of measuring the strength of a trend. Wilder said the DMI should be used in conjunction with the ADX as a filter.

In general, the second line of ADX and DMI line is displayed in a chart oscillators simultaneously with three different colors. The combination of these colors depends on the charting software that is used.

DMI consists of two lines called lines DI plus (DI+) or often called the Positive Directional Indicator; and DI minus (DI-) or Negative Directional Indicator. Expressed as a buy signal if the 'DI+' line cut into the top line of 'DI-'; and sell signals when the 'DI+' line cut down the 'DI-' line.

Standard period used for the ADX and DMI is to use a period of 14 days (on the daily charts). Can also be used on a weekly chart or monthly chart with a period of 14 weeks or 14 months. However, the standard period of perceived less effective because too often produce bad signals. To get good accuracy of this period would need to be repeated by adjusting the settings (back test) on each stock that have different characteristics.

Average Directional Index (ADX)

Average Directional Index (ADX) is an indicator that was created to measure the strength of a trend (either uptrend or downtrend). First put forward in the book titled 'New Concept in Technical Trading Systems' by its discoverer J. Welles Wilder, who also created the RSI and Parabolic SAR indicator. ADX line is displayed between the values of 0-100 in the vertical scale.

There are several ways of reading the ADX line, there are:

The basic theory of this method declared on the ADX line is increased language support defines the market was in a strong trend. When the ADX line is weakened or declining trend means the market is sideways. These indicators can help traders to assess whether a market is likely to be in a strong trend or sideways.

However common the ongoing trend reversal even (or be turned sideways direction) when the ADX line was at a high level and when in a low level, so that some traders to implement strategies that contrarian (opposite) of the ADX line is in extremes.
How to determine the ADX line in extreme conditions is to compare the history of this ADX line with previous ADX line. The ADX line starts to bend downwards at high levels is a signal that the ongoing trend will be reversed, signaling sell / buy signal to liquidate stock positions already held (not to open new positions), similarly when the ADX line starts to bend upward at a very low level.

ADX line indicating the direction of divergence with the stock can also be used as a sign of a weakening trend which is ongoing. When a new price movement creates a higher peak (higher highs) accompanied by ADX line opposite or forming lower highs, then gave a bearish sign. Conversely, if price movements form the basis of the lower (lower low), but in fact there was an increase ADX line or forming higher lows, then gave a bullish sign.

MACD Histogram (+2 Lines)

Some charting software menu also provides options to incorporate MACD (2 lines) with the MACD histogram into a single oscillator as shown in the chart below.

 

To read the Oscillators is the same with readings on the MACD and the MACD Histogram.

MACD Histogram

The display of MACD lines can be converted into the form of the MACD Histogram. Histogram consists of bars facing down or up the line level 0 (zero). The second function of this indicator exactly the same, just different way of reading.

If the MACD line cut to the top of the line signal on the MACD indicator, the MACD histogram will be formed on the first bar that leads to the top of Level 0 (buy signal). When the MACD line cut down on the MACD signal line, the MACD histogram will be formed on the first bar megnarah downward from level 0 (sell signal).

Through this histogram can also be drawn divergence, to give signal bearish or bullish. For the example see the picture.

MACD Histogram formula:
Histogram = MACD line value - the value of signal line

Moving Average Convergence Divergence (MACD)

This indicator was created by Gerald Appel in the 1960's by assessing the correlation between the two EMA (Exponential Moving Average) different time periods. The combination of period EMA is more commonly used is the EMA (26) with EMA (12). MACD technique is to change the moving averages are lagging indicators characterized essentially, a form of leading indicator (momentum oscillator). Chart oscillator is divided into two sections that do not have a limit as low or high limit by a line level 0 (zero).

In the oscillators we will see two lines called the MACD line and signal lines. Expressed as a buy signal if the MACD line cut to the top of the line signal. While the sell signal is obtained when the MACD line cut down the signal line (see picture).

This technique is similar to the method on indicators doublecross Moving Averages, but the MACD signal produces a more responsive to price movements than the Moving Averages. MACD indicator line on the chart are in line oscillator is also not like Moving Averages are arriving near the stock price. Thus MACD also serves as another oscillator that can indicate overbought and oversold.

The MACD line is the result of the difference of two EMA, EMA (12) and EMA (26) which uses the closing price. While the signal line which is slower than the MACD line is the moving average of the MACD line it self. These signal lines generally have the shortest period, the standard recommended Gerald Appel is the period of 9 days. If this period is replaced with a shorter signal it will produce a faster or more responsive. Instead a longer period will give the signal a little slow, but more muffled bad signals.

The method uses the deviation of stock prices by the line indicator can also be applied in the MACD. When the MACD line began to decline in the overbought area while increasing the price movement, then it indicates a bearish signal. Conversely, if the MACD line in oversold area increasing to declining prices indicate a bullish signal.

MACD formula =

Lines MACD = EMA (12) - EMA (26) ; Signal line = EMA (9) ari MACD

Stochastic

Stochastic indicator invented by George C. Lane (president of Investment Educators, Inc.) Indicator is similar to Momentum and RSI as it also related to the velocity or speed of change in stock price, which is then displayed in the form of oscillator.

Based on his research, George C. Lane argued the meaning of the relationship between the last closing price with the highest price and lowest price, for a certain period of time. The last closing price has consistently indicated the highest rates closer to or accumulation of impulse buying (bullish sign). While approaching the last closing price indicates the price terndah pressure selling or distribution (bearish sign).

Stochastic oscillator displays two lines in the so-called lines %K and %D lines, both of these lines ranged between vertical scales of 0-100. Above level 80 called overbought, while under level 20 is expressed as oversold.

% K line is the line First and foremost, is called the signal line. While the %D line is often called the trigger line is a moving average of %K line.  The intersection of two lines is what will produce a signal to sell or buy signal. Is a buy signal if the oversold zone line %K crosses to above the %D; a sell signal when the overbought zone lines %K crosses %D line to the bottom (see picture). To reduce the bad signals, some traders waited for the line %K crosses the line 20-80 as a confirmation signal to the oscillator sale / purchase before making an action (see picture).

How to calculate the value of making the stochastic indicator is divided into two types, namely Fast Stochastic and Slow Stochastic.

• Fast Stochastic %K using the value of the percentage ratio between the last closing price with the highest price and lowest price during a certain period. Fast Stochastic %D value obtained from the average (Simple Moving Average) of the value of %K during the last 3 days.
• The Slow Stochastic is using the average value of the last 3 days to the value of %K it, then the value of %D is taken from the average during the last 3 days of the value of %K Slow Stochastic.

But the more commonly used is the Slow Stochastic is because they can dampen the volatility of the Fast Stochastic, while increasing the accuracy of the acquired signal.

Divergence between lines %K with the direction of price movements also provide an important signal that must be considered. When the %K line in the overbought area declined and the stock price is still rising, it indicates a bearish signal. But if the %K line rose in oversold area, while the direction of movement of stock prices to decline, it is a bullish sign.

Summary of how to use the Stochastic is as follows:

• The area above level 80 called overbought zone
• Area under level 20 called oversold zone
• It is a buy signal if the oversold zone line% K crosses% D line upward from the bottom
• It is a sell signal when the overbought zone lines% K crosses% D line down from above.
• Divergence between the stochastic lines with extreme price movements in the area also provides the buy and sell signal.

Stochastic formula =

%K (fast) = 100 x ((Closing Price - Lowest Price n days (n days Highest Price - Lowest Price n days))

%D (fast) = 3 - moving average period from %K
%D (fast) = %K (slow)
%D (slow) = 3 - moving average period from %K (slow)
n = Period that Is used in the stochastic

William %R

William% R is a momentum indicator developed by Larry Williams in 1973 to identify overbought and oversold areas. This indicator is also similar to other momentum indicators, which are more effective when applied in nontrending markets (Sideways).

William% R is quite popular because it was reviewed by the Wall Street Journal, Forbes, Fortune, Technical Analysis of Stocks and Commodities, and many other leading business magazines. Generally use the default setting with a period of 14 days. Sebagal leading indicator, Williams %R is quite reliable in providing the initial signal that precedes the reversal of price movements.

As with other indicators, William% R can also be used for intraday trading using charts minutes, or a more long term with the daily charts, weekly charts to monthly charts. Of course setting period must also be tailored to the characteristics of each stock to smooth the signal, because each share can have different volatility.

Single line at the William% R oscillator is shown on the vertical scale of -100 (minus 100) to 0 (zero). Below the level of -80 and -20 above the level declared as areas of extreme or danger zone. If the line is under level -80 called oversold and if the line is above -20 called overbought.

Williams %R indicates the meaning of the correlation between the closing price at the highest price / lowest price in a given period. Closer to the closing price of the highest prices, Williams% R line will be increasingly close to a 0 (zero) or overbought area on the display oscillators. If the closing price is closer to the lowest price, then the line of William% R will be increasingly under or near the level of -100 (oversold area). If the closing price equal to the lowest or the highest price, then the line of William% R will be at the level of -100 or 0.

It is important to remember again, that the indicator line in the overbought zone does not necessarily give sell signals, as well as when you are in oversold zone. Stock prices are uptrend could continue to rise although the indicator on the oscillator lines showing the condition of being overbought. Likewise, in a strong downtrend, the price could go down even though the pad line indicates oversold oscillators.

Signs are said to be a validation of reading William% R indicator is when there is divergence between the indicator line with the direction of price movement 'when in areas of extreme'. If price movements continue to increase in a market uptrend, but the line indicator is not able to make the new higher peaks such as price movements, it is a sell signal validation. Conversely, if a line indicator which increases as opposed to price movements that leads down (downtrend), then provide the validation signal to buy.

Apart from effective to reduce bad signal if using other indicators as an additional aspect, is also important for traders to pay attention to any 'major trend' in progress. In uptrending charts, try waiting for a chance to buy when the indicator is showing bullish signals. While in downtrending charts, it's better to wait for the signal sell when the indicator to confirm.

We see that William% R is very concerned with the closing price comparison with the highest price / price terndah in a period. This is very similar to the Stochastic. But the line of William% R which consists of one line is called a lack of internal smoothing factor to dampen the bad signals. While the stochastic indicator to apply a double line with the second line as a validation signal to the first line.

Formula Williams %R =

% R = ((Highest Price in n days - Last Closing Price) / (Highest Price in n days - Lowest Price in n days)) x -100
N = period of days used in William's% R