Top Ten: Technical Analysis Tools

This week I want to share my top ten technical analysis tools. The tools under review are broadly available and provided as complimentary by most brokers platforms.

In no particular order:

1.Moving Average

A moving average is essentially a mean of a series of data points over a specified look back period. In trading a Moving Average is applied to price data for a specific instrument, and is continuously computing the mean of price data versus the look back period, some of the most common moving average used in trading are the 200 and 100 period look backs used to identify trend.

2.Fibonacci Retracement

The Fibonacci retracement is a ratio of calculations based on the golden mean which assists traders in identifying levels of retracement on a price chart which provide higher probability points of stalling or reversing a corrective cycle, most commonly the 23.6%, 38.2% and 61.8% retracements levels are monitored.

3. Fibonacci Extension

Fibonacci extension tool as its name implies works in the opposite direction to the Fibonacci retracement tool applying the same calculations to map future levels in price where profit taking may emerge post the completing of a Fibonacci correction and once price extends beyond the former highs or lows of the current swing, commonly applied levels of Fibonacci extensions are the 123.5% 138.2% 161.8% and the 200%.

4. Fibonacci Time Extensions

Fibonacci time extension works on the lower axis of our price charts applying the same mathematical principles used in measuring price retracements and extensions. The time extension tool is used to map time extensions forward to highlight time levels from two prior points in time normally between a significant high and low or low and high.

5.RSI

RSI or its full name the Relative Strength Index is a technical tool that come under the heading of oscillator, which means it displays a price derivative that rotates between to fixed levels most commonly 0 to 100. Its core purpose is to identify the relative strength and weakness of a financial instrument. Developed by J Welles Wilder in 1978 it has become one of the most popular trading tools.

6. Stochastic

The Stochastic Oscillator is another popular trading tool that is most commonly applied to price charts in order to establish near term momentum in a financial instrument. Developed by George Lane in 1950 it essential tracks the current price of an instrument versus its price over a fixed period attempting to discern points of exhaustion at upper and lower levels.

7.ADX

ADX or the Average directional movement index is another tool developed by the the market technician J. Welles Wilder, this tools aim to assist the trader in discerning the strength of series of price outputs, the Index is essentially the combination of two other indicators that Wilder developed and is smoothed moving average of the positive and negative directional indicators.

8.MACD

MACD or the moving average convergence divergence tool was developed by Gerald Appel in the late 1970’s. This tool as its name implies is an oscillator the demonstrates three derivatives of the price input. The ‘proper’, the ‘average’ and the ‘divergence’ the difference between the two. The MACD is most commonly used to discern the strength, direction. momentum and duration of the current trend.

9. Cycle Lines

Cycle lines are used to identify potential future time points of reversal as premised on previous cycles based on measuring highs to lows, lows to highs, highs to highs and lows to lows. Cycle lines use previous swing points to map forward defining points where similar cycle points will occur based on equality measurement overlaying previous cycles points.

10. OBV

A momentum indicator that uses volume flow to predict changes in stock price. On Balance Volume is a metric developed by Joseph Granville in the 1960s. He believed that, when volume increases sharply without a significant change in the financial instrument’s price, the price will eventually jump upward, and vice versa.

 

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