What is Technical Analysis?

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Technical Analysis is the forecasting of future price movements of share/stock forex or commodity based on an examination of past price movements. Technical analysis does not lead to absolute predictions about the future. In lieu, technical analysis can help investors anticipate what is “likely” to happen to prices over time. In this the analyst uses a wide variety of charts and data to predict the future of the share forex commodity and even mutual funds. It enables them to define buying and selling patterns in every possible way, and get better chances at succeeding in financial market. One of its advantages is that it makes it easier to follow up with a number of stocks with technical analysis.

Technical analysts use technical Analysis Software to perform technical analysis or charting as it is also often called. These charting tools are helpful in providing information.

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Directional Movement System

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Directional Movement System contains five indicators; ADX, DI+, DI-, DX, and ADXR. The ADX (Average Directional Movement Index) is an indicator of how much the market is trending, either up or down- the higher the ADX line, the more the market is trending and the more suitable it becomes for a trend-following system. This indicator consists of two lines- DI+ and DI-, the first one being a measure of uptrend and the second one a measure of downtrend. The standard Directional Movement System draws a 14 period DI+ and a 14 period DI- in the same chart panel. ADX is also sometimes shown in the same chart panel. A buy signal is given when DI+ crosses over DI-, a sell signal is given when DI- crosses over DI+. The Directional Movement System helps determine if an instrument is trending.The system involves 5 indicators which are the Directional Movement Index (DX), the plus Directional Indicator (+DI), the minus Directional Indicator (-DI), the average Directional Movement (ADX) and the Directional movement rating (ADXR).

For intra-day analysis, he compared current period with the previous period.  the trading range for current period extended primarily above previous period then directional movement was considered to be up. If it extended primarily below previous period’s range then directional movement was considered to be down. There are also rules for handling inside, outside and limit periods. stating that the directional movement is the largest part of current period’s range that lies outside previous period’s range.

The key feature of the Directional Movement System is that it first identifies whether the market is trending before providing signals for trading the trend. It measures the ability of bulls and bears to move price outside the previous period’s trading range +DI measure positive, or upside, movement, -DI measures downward, or negative, movement.. The basic Directional Movement Trading system involves plotting the 14period +DI and the 14 period -DI on top of each other.  When the +DI rises above the -DI, it is a bullish signal.  A bearish signal occurs when the +DI falls below the -DI.

Detrended Price Oscillator

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Technical Analysis Software : Detrended Price Oscillator

The Detrended Price Oscillator is used when long-term trends or outliers must be removed from prices or index indicators. This indicator is often used to supplement a standard price chart. Other indicators can be plotted over the Detrended Price Oscillator. The Detrended Price Oscillator (“DPO”) attempts to eliminate the trend in prices & smoothes the trend in prices. It compares closing price to a prior moving average, eliminating cycles longer than the moving average. It is used to isolate short-term cycles. Short-term cycles add together like musical harmonics to create longer-term cycles. By studying the shorter-term harmonics of a long-term cycle, turning points in the major cycle can be determined. The DPO removes the longer-term cycles from prices, making the shorter-term cycles more visible. The Detrended Price Oscillator is most effective with indicator periods of 21 or less.

Detrended prices allow to more easily identifying cycles and overbought/oversold levels. Short- term cycles add together to create longer-term cycles. Analyzing these shorter-term components of the long-term cycles can be helpful in identifying major turning points in the longer-term cycle. The DPO helps to remove these longer-term cycles from prices.

Comparative Relative Strength

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Technical Analysis Software : Comparative Relative Strength

The Comparative Relative Strength index divides one price field by another price field. The base security is outperforming the other security when the Comparative RSI is trending upwards. Comparative Relative Strength compares two securities to show how the securities are performing relative to each other.

Comparative Relative Strength compares a security’s price change with that of a “base” security. When the Comparative Relative Strength indicator is moving up, it shows that the security is performing better than the base security. When the indicator is moving sideways, it shows that both securities are performing the same (i.e., rising and falling by the same percentages). When the indicator is moving down, it shows that the security is performing worse than the base security.

Comparative Relative Strength is often used to compare a security’s performance with a market index. It is also useful in developing spreads .

Commodity Channel Index

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The purpose of CCI indicator is to identify cyclical turns in commodities. This indicator oscillates between an overbought and oversold condition and works best in a sideways market. The assumption behind the indicator is that commodities (or stocks or bonds) move in cycles, with highs and lows coming at periodic intervals.

The Commodity Channel Index (CCI) is a timing tool that works best with seasonal or cyclical contracts. It keeps trades neutral in a sideways moving market, and helps get in the market when a breakout occurs.

The CCI is a versatile indicator capable of producing a wide array of buy and sell signals. CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back below +100.

CCI also help identify price reversals, price extremes and trend strength. CCI fits into the momentum category of oscillators