The esignal Formula Engine

Transcription

1 21 APPENDIX A - THIS CHAPTER DEFINES esignal Advanced Charting formulas and studies and provides you with the basics required to start applying formulas to esignal Advanced Charts. It is organized into the following four sections: The esignal Formula Engine and Formula Basics The esignal Formula Library (descriptions of the over 50 customizable sample formulas) esignal Advanced Charting Studies (descriptions of over 20 technical studies) esignal Advanced GET Premium Technical Studies The esignal Formula Engine esignal uses simple JavaScript language for developing custom studies, so you ll be able to test your trading strategies on days, weeks and years of historical data. The sample formulas are written in JavaScript and are saved in plain text as.efs files in the formula folder under the esignal directory. You can view and modify them in esignal s formula editor, or you can open the editor and use your knowledge of Java- esignal 21-1

2 Formula Basics The Lifetime of a Formula Script to create your own custom formulas from scratch. You can also modify or create formulas in any text editor. You create a formula when you add it to a chart. When a formula is created, a function called premain ( ) is called once for the formula and then the main ( ) function is called for each available bar. Whenever you change a formula s properties (by selecting Edit Studies from the Advanced Chart right-click menu), the initial formula destructs and a new formula is created that reflects your formula properties changes. Lifetime of a Global Variable Formula Iteration A Global variable comes to life the first time setglobalvalue( ) is called. A global variable remains available in the global variable pool until removeglobalvalue( ) is called, or when esignal is closed. The main ( ) function is used to build individual bars and is called once for each chart bar. Bars are iterated from left to right (from the oldest to the newest bar). Whenever another tick occurs, the main ( ) function is called to iterate the most recent bar so that it is based on the latest data esignal

3 Sample Formula The following section displays a sample formula for an RSI Color Line Bar Formula. Comments that explain the various parts of the formula are contained within the /* */ esignal 21-3

4 markers. When you open a formula in the Formula Editor Window, various components of the formula are color coded so that you can identify them more easily. We ll discuss this in further detail later in the Formula Editor section of this appendix. Basic Formula Elements Punctuation Marks Punctuation marks are used in formulas to separate or group formula elements, to declare inputs or variables, to identify the end of a statement, and to include comments. Commonly-used punctuation marks are defined in the table below. ; A semicolon is used to end a statement ( ) Parentheses group elements so that they are calculated first. They are also placed around array elements to define them., Commas are used to separate inputs or variables and also separate parameters or inputs that are part of a set required by a reserved word or statement. : Colons are used to declare the list of inputs or variables in a statement. Quotation marks define a text string [ ] Square brackets are used to reference a value from a previous bar. /* */ /* */ are placed around comments that you want to include in a formula (i.e. /*comment*/) and are ignored in calculating the formula 21-4 esignal

5 Operators Mathematical Operators are symbols that represent an operation. For example, * indicates multiplication. The following table displays common mathematical operators, their meanings and an example of each. Operator Meaning Example + Addition A+B ++ * Add one to the operand and return a value. If used postfix, with operator after operand (for example, x++), then it returns the value before incrementing. If used prefix with operator before operand (for example, ++x), then it returns the value after incrementing. if x = 3, then y= x++ sets y to 3 and increments x to 4. If x is 3, then the statement y = ++x increments x to 4 and sets y to 4. - Subtraction A-B -- Subtract 1 from var-- or --var This operator subtracts one from its operand and returns a value. If used postfix (for example, x--), then it returns the value before decrementing. If used prefix (for example, -- x), then it returns the value after decrementing. if x is three, then the statement y = x-- sets y to 3 and decrements x to 2. If x is 3, then the statement y = --x decrements x to 2 and sets y to 2. * Multiplication A*B / Division A/B % Percentage 10% esignal 21-5

6 String Operators String Operators are used to link two text expressions or strings as detailed in the table below. + Used to link two text expressions together in a series += Can also be used to link strings. For example, if the variable mystring has the value "alpha," then the expression mystring += "bet" evaluates to "alphabet" and assigns this value to mystring. Relational Operators Relational operators are used to compare the value of two operands. == Equal, Returns true if the operands are equal. 3 == var1!= Not equal (!=) Returns true if the operands are not equal. var1!= 4 > Greater Than. Returns true if left operand is greater than right operand. var2 > var1 >= Greater Than or Equal to. Returns true if left operand is greater than or equal to right operand. var2 >= var1 var1 >= esignal

7 < Less Than. Returns true if left operand is less than right operand. var1 < var2 <= Less Than or Equal to. Returns true if left operand is less than or equal to right operand. var1 <= var2 var2 <= 5 Assignment Operators An assignment operator assigns a value to its left operand based on the value of its right operand. The basic assignment operator is equal (=), which assigns the value of its right operand to its left operand. That is, x = y assigns the value of y to x. Additional assignment operators are shorthand for standard operations, as shown below: = Equals Assigns the value of the second operand to the first operand += x += y x = x + y -= x -= y x = x - y *= x *= y x = x * y /= x /= y x = x / y %= x%= y x = x% y Adds 2 numbers and assigns the result to the first. Subtracts 2 numbers and assigns the result to the first. Multiplies 2 numbers and assigns the result to the first Divides 2 numbers and assigns the result to the first Computes the modulus of two numbers and assigns the result to the first. esignal 21-7

8 &= x &= y x = x & y Performs a bitwise AND and assigns the result to the first operand. ^= x^=y x = x ^ y = x = y x = x y Performs a bitwise XOR and assigns the result to the first operand. Performs a bitwise OR and assigns the result to the first operand. <<= x <<= y x = x << y Performs a left shift and assigns the result to the first operand >>= x >>= y x = x >> y Performs a sign-propagating right shift and assigns the result to the first operand 21-8 esignal

9 Bitwise Operators Bitwise operators treat their operands as a set of bits (zeros and ones), rather than as decimal, hexadecimal, or octal numbers. For example, the decimal number nine has a binary representation of Bitwise operators perform their operations on such binary representations, but they return standard JavaScript numerical values. & a&b ^ a^b a b Returns a one in each bit position if bits of both operands are ones. Returns a one in a bit if bits of either operand is one. Returns a one in a bit position if bits of one but not both operands are one. ~ Flips the bits of its operand. example: ~ a << Shifts a in binary representation b bits to left, shifting in zeros from the right. example: a<< b >> a >> b Shifts a in binary representation b bits to right, discarding bits shifted off. esignal 21-9

10 Logical Operators Logical operators take Boolean (logical) values as operands and return a Boolean value. && expr1 && expr2 Returns expr1 if it converts to false. Otherwise, returns expr2. expr1 expr2 Returns expr1 if it converts to true. Otherwise, returns expr2!!expr If expr is true, returns false; if expr is false, returns true. Reserved Words/Statements Break Comments Continue Do while For Statement that terminates the current while or for loop and transfers program control to the statement following the terminated loop. Notations by the author to explain what a script does. Comments are ignored by the interpreter. Statement that terminates execution of the block of statements in a while or for loop, and continues execution of the loop with the next iteration. Executes its statements until the test condition evaluates to false. Statement is executed at least once Statement that creates a loop that consists of three optional expressions, enclosed in parentheses and separated by semicolons, followed by a block of statements executed in the loop esignal

11 For in Function If else Return Switch var While Statement that iterates a specified variable over all the properties of an object. For each distinct property, JavaScript executes the specified statements. Statement that declares a JavaScript function name with the specified parameters. Acceptable parameters include strings, numbers, and objects. Statement that executes a set of statements if a specified condition is true. If the condition is false, another set of statements can be executed. Statement that specifies the value to be returned by a function. Allows a program to evaluate an expression and attempt to match the expression's value to a case label. Statement that declares a variable, optionally initializing it to a value Statement that creates a loop that evaluates an expression, and if it is true, executes a block of statements. Variables with Statement that establishes the default object for a set of statements. Variables are placeholders that hold a value that is subject to change. Once you define and assign a value to a variable, you can reference it throughout a formula to perform a calculation. Sample Variable var vvalue = call("/library/rsistandard.efs", ninputlength) You declare a variable by putting var in front of it. In the above statement, the variable has been declared as vvalue (var vvalue). The variable var v Value is then assigned the value call ("/library/rsistandard.efs", ninputlength) which calls the RSIStandard.efs formula from the esig- esignal 21-11

12 Global Variables nal Formula Library, considers the number of bars used in the formula and returns the value of the Standard RSI Study. For a detailed, up-to-date list of common variables used in esignal s Library of formulas, go to All formulas can have access to global variables that are shared across/among all formulas. The following is an example of how to set up a global variable. You can access this formula by opening the formula file called Globalvaluetest.efs in the esignal formula Editor window. To open the Formula Editor window, select Editor from the Formulas menu, then open the file called GlobalValuetest.efs. This sample formula is shown below. It shows you how to set up a global variable. You can modify the formula to create your esignal

13 own global formula(s) and then save it under a different name to reflect the global variable you create. Here is another example of a global variable that is used to set up a counter: /* A global counter */ var vvalue = getglobalvalue( mycounter ); if(vvalue!= null) { setglobalvalue( mycounter, vvalue+1); } else { setglobalvalue( mycounter, 1);} To get further details about global variable properties, the methods used to set them up and to view a list of common global variables, go to Working With Dates & Times If you write your own formulas or modify one from the esignal formula library, you ll need to know how to work with dates and times. Constructors Date Functions allow you to work with dates while time functions let you work with time. The following is an example of how to construct date objects that can be used to get the new date and/or time. var newdateobject = new Date(); var newdateobject = new Date(dateValue); esignal 21-13

14 var newdateobject = new Date(year, month, day, [hours], [minutes], [seconds], [milliseconds]); var newdateobject = new Date(year, month, day); var newdateobject = new Date(year, month, day, hour, minutes, seconds); If datevalue is a numeric value, it represents the number of milliseconds since January 1, :00:00. The ranges of dates is approximately 285,616 years from either side of midnight. Negative numbers indicate dates prior to Year: The full year (1980). Month: 0-11 (January to December) Day: 1-31 Hour: 0-23 Minutes: 0-59 Seconds: 0-59 Milliseconds: Syntax Used to Access the Date Object Once the date object is constructed, methods can be accessed by the following syntax: var today = new Date(); var h = today.gethours(); var s = today.tostring(); Local Time is defined as: the time on the computer from where the script is executed esignal

15 Date Methods Time Functions UTC (Universal Coordinated Time) refers to the time as set by the World Time Standard. Also known as GMT (Greenwich Mean Time). The following is an example of a method used to get the date of an object: gated( ) - Returns the day of the month of the date object according to local time. gated( ) returns a value between 1 and 31. var today = new Date( ); var date = The Date is: + today.getmonth( ); date += / + today.getdate( ); date += / + today.getfullyear( ); For a listing of other Date Function methods, refer to The following is an example of a method used to get the time of a particular variable. teatime( ) Returns the number of milliseconds since 1/1/ :00:00 according to local time. Negative numbers indicate a date prior to 1/1/1970. Units 1 second = 1000 milliseconds. 1 minute = 60 seconds * 1000 milliseconds = 60,000 ms 1 hour = 60 minutes * 60 seconds *1000 milliseconds = 3,600,000 ms 1 day = 24 hours * 60 minutes * 60 seconds * 1000 milliseconds = 86,400,000 ms esignal 21-15

16 Color Functions Color Properties Color Methods var today = new Date(); var days = Math.round(today.getTime( ) / ) + days elapsed since 1/1/ 1970 ; For a listing of other time properties and functions, go to The Color object is a static class meaning that all methods and properties are fixed. The Color class can not be created using the new operator. If the Color class is constructed, an error will occur. You may want to define the color of the bars a formula draws on an Advanced Chart. The following is an example of how to set the bar color to white. white RGB(0xFF, 0xFF, 0xFF) setbarfgcolor(color.white) The following methods are used to create a color s RGB value: RGB(rValue, gvalue, bvalue) creates an RGB value. rvalue is a value between 0 and 255 (or 0x00 to 0xFF) gvalue is a value between 0 and 255 (or 0x00 to 0xFF) bvalue is a value between 0 and 255 (or 0x00 to 0xFF) setbarfgcolor(color.rgb(0x00, 0xFF, 0x00) ); esignal

17 For a listing of how to set other bar colors and to view more detail on color methods, go to Using Arrays An array represents an array of elements. esignal provides support for creation of arrays of any data type. Constructors Array( ) Array(size) Array(element1, element2,, elementn) Properties length The number of elements in the given array object. Array Methods concat(array2) Concatenates array2 into the array object. Array a = new Array(1,2,3); Array b = new Array(4,5,6); a.concat(b); Contents of a is now: { 1, 2, 3, 4, 5, 6 } For a listing of additional array methods, go to esignal 21-17

18 The esignal Formula Library Customizable Formula Studies The basic esignal package provides more than 50 customizable sample formulas and over 20 analytical studies that you can apply to esignal s Advanced Chart window. You can access studies (Add Study) and formulas (Add Formula) via the right click or Chart Options menus. esignal also offers a Premium Technical Analysis package from Advanced GET that provides over 15 proprietary formulas. If you subscribe to the Advanced GET service, the Advanced GET formulas are also available through the main Advanced Chart window right-click menu (select Add Advanced to access them). esignal Advanced Charting Formulas are stored and accessed in plain text JavaScript, making them easy to view and modify. You can also modify or create a formula in any text editor. When you right-click on an Advanced Chart window and select Add Formula, you will see the formula folders shown in Figure Each of these formula folders and the sample formulas they contain is described in the next section. Figure Advanced Charting Formula Folders esignal

19 Helpers 123 Down Bar Study The esignal Advanced Charting formula Library includes the following Helper formulas. They are called Helpers because they use color coding to make it easier for you to spot issue price trends and the entry and exit signals of various studies. (file name=123down.efs) When you examine a bar chart for signs that a price trend is strengthening or weakening, it is helpful to visualize a series of bars that may signal up or down trends. A series of bars with lower highs and lower lows indicates a downward trend in the price of an issue. The 123 Down Bar Study makes it easy to spot down trends by color coding 3 or more consecutive bars that have lower highs. So, if there were 7 consecutive bars with lower highs, bars 3 through 7 would be color coded green in the 123 Down Bar Study to visually display this downward price trend. The 123 Down Bar Study gives you a quick view of bars where there are lower highs, signifying a downward price trend. The 123 Down Bar Study appears as a separate study below the main area of the Advanced Chart Window. Lower Lows also indicate a downward trend. So, you might want to plot both the 123 Down Study and the Lower Lows Price Study (appears on the main area of the chart) esignal 21-19

20 on the same chart to confirm downward price trends and to pinpoint lower low prices as shown in Figure Lower Low Price Study 123 Down Bar Study Figure Down Bar and Lower Lows Price Studies esignal

21 123 Up Bar Study Higher Highs Study Lower Low Study (file name=123up.efs) The 123 Up Bar Study color codes 3 or more consecutive bars that have higher highs. A series of bars with higher highs may indicate an upward price trend. You might add both the 123 Up Bar Study and a Higher High Helper formula to an Advanced Chart Window. The Higher High formula plots in the chart bar area and connects the actual Higher High prices. The 123 Up Bars would be clearly color coded as a separate study below the chart and the Higher High prices would be plotted over the chart making it easy to spot the Higher High bar prices and price trends. (file name=hh.efs) The Higher Highs Study is displayed on the main chart area and is shown as a line connecting bars with higher highs. If you run the Advanced Chart window cross hairs over the Higher High bars, your cursor window will display the actual higher high price associated with a particular bar. (file name=ll.efs) The Lower Low Study is displayed on the main chart area as a line that connects the bars with lower lows. As you run the Advanced Chart window cross hairs over the Lower Low bars, your cursor window will display the actual lower low price associated with a particular bar. esignal 21-21

22 Moving Average Cross Over Study (file name=ma Cross Over.efs) The Moving Average Cross Over study color codes penetrations of the 50 day moving average making them simple to spot. If a bar s closing price is greater than the 50 day moving average, it is color coded green. If the bar s close is lower than the 50 day moving average, it is color coded red. The Moving Average Cross Over is the simplest of the moving average systems. It often makes sense to combine it with another system that identifies ranging markets, when price whipsaws back and forth across the Moving Average, resulting in losses. Moving Average Cross Over Trading Signals Signals are generated when price crosses the Moving Average: Go long when the price crosses above the MA from below. Go short when price crosses below the MA from above. MACD Color Study (file name=macd Color.efs) The MACD (Moving Average Convergence/Divergence) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is the difference between a 26-day and 12-day exponential esignal

23 moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line, is plotted on top of the MACD to show buy and sell opportunities. MACD Trading Signals RSI Color Line Study RSI Color Line Bar Study The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. The MACD Color Study sits below the price area of an Advanced Chart. This study makes it easier for you to see buy and sell signals because it colors bars that are below its signal line red (a sell signal) and colors bars that are above its signal line green (a buy signal). (file name=rsicolorline.efs) This formula plots an RSI study where when the RSI falls below 30 (aka: oversold), the RSI line turns green. When the RSI goes above 70 (aka: overbought), the RSI line turns red indicating an overbought condition. (file name=rsicolorlinebar.efs) The RSI Color Line Bar Study is an RSI study with custom formatting. When the RSI goes below 30 (aka: oversold), a big green bar appears (and the RSI line turns a thicker black). When the RSI goes above 70 (aka: overbought), a red bar appears (and the RSI line turns thicker black). The great thing about this formula is that when the RSI goes < 30 or > 70, you get a visual indicator (the red or green bar) that really stands out. The RSI Color Line Bar esignal 21-23

24 Library Formulas Accumulation/Distribution study is an enhancement over the standard RSI study, because with the standard RSI study you have to look to see if the line is < 30 or > 70, and this requires more effort. (file name=accdist.efs) Accumulation/Distribution is a momentum indicator that associates changes in price and volume and can be a leading indicator of price movements. The indicator is based on the premise that the more volume accompanying a price move, the more significant that price move will be. When the Accumulation/Distribution moves up, it shows that an issue is being accumulated (bought), as most of the volume is associated with upward price movement. When the indicator moves down, it shows that an issue is being distributed (sold), as most of the volume is associated with downward price movement. Traders use the Accumulation Distribution indicator to uncover divergences between volume and price activity. These divergences can indicate that a price trend is weakening. Trading Signals Look for divergences between price action and volume and: 1 Go long when there is a bullish divergence. A bullish divergence occurs when prices are flat to down but the Accumulation Distribution Index is moving upward. 2 Go short when there is a bearish divergence. A bearish divergence occurs when prices are moving up but the Accumulation Distribution is moving downward. 3 When using these trading signals, stop-loss orders are often placed below the most recent low (when going long) and above the latest high (when going short) esignal

25 Aroon Indicator (file name =Aroon.efs) The Aroon indicator system was developed by Tushar Chande and can be used to determine whether a stock is trending or not and how strong the trend is. The Aroon indicator consists of two lines, Aroon(up) and Aroon(down). The Aroon up and down lines use a single parameter (number of time periods) in the calculation. Aroon (up) formula: [ (# of periods) - (# of periods since highest close during that time) ] / (# of periods) x 100. Aroon (down) formula: [ (# of periods) - (# of periods since lowest close during that time) ] / (# of periods) x 100. Interpretation Guidelines: 1 When Aroon(up) and Aroon(down) are moving lower in close proximity, it signals a consolidation phase is under way and no strong trend is evident. 2 When Aroon(up) dips below 50, it indicates that the current trend has lost its upward momentum. Similarly, when Aroon(down) dips below 50, the current down trend has lost its momentum. 3 Aroon (up) values above 70 indicate a strong trend in the same direction as the Aroon (up or down) is under way. Values below 30 indicate that a strong trend in the opposite direction is underway. esignal 21-25

26 Aroon Oscillator Aroon (down) Aroon (up) (file name =ArrOsc.efs) This formula plots the Aroon Oscillator which is a single line that is defined as the difference between Aroon(up) and Aroon(down) for a default of 14 periods. Since Aroon(up) and Aroon(down) both oscillate between 0 and +100, the Aroon Oscillator ranges from -100 to +100 with zero serving as the crossover line. The Aroon Oscillator signals an upward trend when it rises above zero and a downward trend when it falls below zero. The farther away the oscillator is from the zero line, the stronger the trend. (file name = AroonDown.efs) Aroon (down) for a given time period is calculated by determining how much time (on a percentage basis) elapsed between the start of the time period and the point at which the lowest closing price during that time period occurred. When the stock is setting new lows for the time period, Aroon(down) will be 100. If the stock has moved higher every day during the time period, Aroon(down) will be zero. (file name=arronup.efs) Aroon(up) for a given time period is calculated by determining how much time (on a percentage basis) elapsed between the start of the time period and the point at which the highest closing price during that time period occurred. When the stock is setting esignal

27 Average True Range new highs for the time period, Aroon(up) will be 100. If the stock has moved lower every day during the time period, Aroon(up) will be zero (file name=atr.efs) The Average True Range (ATR) indicator was developed by J. Welles Wilder and measures a security's volatility. ATR does not provide an indication of price direction or duration, simply the degree of price movement or volatility. Wilder designed ATR with commodities and daily prices in mind because commodities were (and still are) often subject to opening gaps and limit moves. A limit move occurs when a commodity opens up or down its maximum allowed move and does not trade again until the next session. The resulting bar or candlestick would simply be a small dash. In order to accurately reflect the volatility associated with commodities, Wilder tried to account for gaps, limit moves and small high/low ranges in his calculations. Wilder defined the true range (ATR) as the greatest of the following: The current high less the current low. The absolute value of: current high less the previous close. The absolute value of: current low less the previous close. If the current high/low range is large, chances are it will be used as the ATR. If the current high/low range is small, it is likely that one of the other two methods would be used to calculate the ATR. The last two possibilities usually arise when the previous close is greater than the current high (signaling a potential gap down and/or limit move) or the previous close is lower than the current low (signaling a potential gap up and/or limit move). To ensure positive numbers, absolute values are applied to differences. Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. For this example, the ATR will esignal 21-27

28 be based on daily data. Because there must be a beginning, the first ATR value in a series is simply the high minus the low and the first 14-day ATR is found by averaging the daily ATR values for the last 14 days. After that, Wilder sought to smooth the data set, by incorporating the previous period's ATR value. The second and subsequent 14-day ATR value would be calculated with the following steps: Multiply the previous 14-day ATR by 13. Add the most recent day's TR value. Divide by 14. Chaikin Money Flow (file name=cmf.efs) Chaiken's Money Flow indicator is based on accumulation and distribution of the selected security. This is really a breakdown of the price action in an issue and is based on the assumption that if the issue price closes above the mid-point of the trading day then there has been accumulation. If the reverse is true and the price closes below the mid-point then there has been a distribution. Chaiken's Money Flow is then determined by adding up the accumulations and the distributions for X number of days and then dividing by the X value. esignal s Chaikin Money flow formula uses a default of 21 periods and considers the close, low, high, and volume for the issue in the calculation. Interpreting the Chaikin Money flow Traditionally, positive numbers are considered bullish while negative numbers are bearish. Positive and negative numbers over.10 or under -.10 are considered important enough to warrant your attention. Numbers above +.25 or under -.25 are thought to be even more important. The way this indicator is supposed to work is when it s showing highly bullish or negative numbers, the price of the underlying esignal

29 stock is supposed to continue in that direction. EMA/EMA with Reference (file names: emawithref.efs and ema.efs) An EMA (Exponential Moving Average) assigns a weight to the price data as it is calculated. The more recent the price the heavier its weighting. The oldest price data in the exponential moving average is never removed from the calculation, but its weighting is lessened the further back it gets in the calculations. The longer the period you use to calculate an exponential moving average, the more accurate the result. So you may want to retrieve chart data going back one year or more before adding this formula to your chart. esignal uses a default of 50 periods in this formula. For example, to calculate a 50 period exponential moving average: 1 Add up the closing prices for the first 50 periods and divide by 50. This is the result for the 50th period (there are no results for periods 1 through 49). 2 Then take 49/50 of the 50th period result plus 1/50 of the 51st period close. This is the 51st day result, etc. esignal 21-29

30 Keltner Channels Moving Average (file name =Keltner.efs) Keltner Channels were created by Chester Keltner who was a famous grain market trader with over 30 years of commodity trading experience. He was one of the first to pioneer systems work using trend-following rules. The Keltner Channel is a volatility-based envelope technique that uses the range of high and low. Moving average bands and channels, like the Keltner Channels, all fall into the general category of envelopes. Envelopes consist of three lines: a middle line and two outer lines. Envelope theory states that the price will most likely fall within the boundaries of the envelope. If prices drift outside our envelope, this is considering an anomaly and a trading opportunity. Keltner Channels Trading Signals When the price touches or moves outside either of the outer bands, a reaction toward the opposite band is expected. When price reaches the upper band, it is believed to be overbought, and when price reaches the lower band, it is believed to be oversold. (file name=ma.efs) This formula draws a simple moving average for a period of 50 bars that is based on the closing price for each bar. A moving average is the average price of an issue over the previous n-period closes. For example, a 50-period moving average is the aver esignal

31 age of the closing prices for the past 50 periods, including the current period. For intraday data the current price is used instead of the closing price. Moving averages help you observe price changes. They smooth price movement so that the longer term trend becomes less volatile and therefore more obvious. Moving Average Price Signals 1 When the price rises above the moving average, this is a bullish indication. When the prices falls below, this is a bearish indication. 2 When a moving average crosses below a longer term moving average, this indicates a down turn in the market. When a short term moving average crosses above a longer term moving average, this indicates an upswing in the market. Trading Signals Signals are generated when price crosses the Moving Average: Go long when price crosses above the Moving Average from below. Go short when price crosses below the Moving Average from above Shorter length moving averages are more sensitive and identify new trends earlier, but also give more false alarms. Longer moving averages are more reliable but only pick up the big trends. As a general rule of thumb, it is best to use a moving average that is half the length of the cycle that you are tracking. Commonly used moving average periods are: 200 day (40 Week) moving averages are popular for tracking longer cycles; 20 to 65 day (4 to 13 Week) moving averages are useful for intermediate cycles; and 5 to 20 Days for short cycles. esignal 21-31

32 MACD (file name=macd.efs) Moving Average Convergence and Divergence (MACD) is a trend-following indicator that is the difference between a fast exponential moving average (fast EMA) and a slow exponential moving average (slow EMA). The name was derived from the fact that the fast EMA is continually converging toward and diverging away from the slow EMA. MACD Interpretations and Uses One line crossing another indicates either a buy or sell signal. When the MACD rises above its signal line (a moving average of the MACD line), an upturn may be starting, suggesting a buy. Conversely, when the MACD crosses below the signal line this may indicate a down trend and a sell signal. Crossover signals may be applied to daily, weekly and intraday charts. However, crossover signals are often more reliable when applied to weekly charts. Another interpretation is that a positive MACD value is bullish while a negative MACD value is bearish. Overbought/Oversold Indicator The MACD can signal overbought and oversold conditions, if analyzed as an oscillator that fluctuates above and below a zero line. The market is oversold (buy signal) when both lines are below zero, and it is overbought (sell signal) when the two lines are above the zero line. Identifies Divergences Another popular interpretation is that when the MACD is making new highs or lows, and the price is not also making new highs and lows, it signals a possible trend rever esignal

33 MACD Fast MACD Slow sal. This type of interpretation is often confirmed with an overbought/oversold oscillator. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. This can be an early signal of an uptrend losing momentum. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these signals are most serious when they occur at relatively overbought/oversold levels. Weekly charts are more reliable than daily for divergence analysis with the MACD study. (file name=macdfast.efs) This formula plots a MACD Fast Line which is a Fast 12 period Exponential Moving Average. (file name=macdslow.efs) This formula plots a MACD Slow Line which is a 26 period Exponential Moving Average that is smoothed by a 9 period Exponential Moving Average. On Balance Volume and OBV With Reference (file names=obvwithref.efs and OBV.efs) On Balance Volume (OBV) is a cumulative total of volume. It shows if volume is flowing into or out of a security. When an issue closes higher than its previous close, esignal 21-33

34 RSI Enhanced all of the day's volume is considered to be up-volume. When the issue closes lower than the previous close, all of the day's volume is considered to be down-volume. OBV analysis assumes that OBV changes precede price changes. The theory is that a rising OBV shows that the smart money is flowing into a security. When the public then moves into the security, both the security and the OBV will continue to rise. If an issue s price movement precedes OBV movement, a "non-confirmation" has occurred. Non-confirmations can occur at bull market tops (when the security rises without, or before, the OBV) or at bear market bottoms (when the security falls without, or before, the OBV). The OBV is in a rising trend where each new peak is higher than the previous peak and each new trough is higher than the previous trough. Likewise, the OBV is in a falling trend when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough. When the OBV is moving sideways and is not making successive highs and lows, it is lacking a meaningful trend. (file name=rsienhanced.efs) The RSI Enhanced formula plots the relative strength of the average upward and downward movement for a given number of bars and intervals (14 periods is the default in this formula). The Enhanced RSI calculation is as follows: The enhanced RSI formula uses a default period of 14 days to plot the study. On day 15, the values of days 1-14 are used, on day 16 the calculation is based on the average of the first 14 days, averaged with the value of day 15, day 17 uses the new average calculated for day 15 and averages it with day 16, day 18 uses the new average esignal

35 RSI Standard from day 16 and averages it with day 17, and so on. The Enhanced RSI is usually a smoother, flatter line than the Standard RSI. (file name=rsistandard.efs) Relative strength of the average upward movement versus the average downward movement. esignal uses a default period of 14 in this formula and uses closing bar prices in the calculation. RSI Standard Calculation The standard RSI uses the number of bars picked, 14 for example, and uses each value every time for the calculation. Day 15 uses the values of days 1-14, day 16 uses the values of days 2-15, day 17 uses the values for days 3-16, and so on. esignal 21-35

36 Stochastic % D Line Stochastic Highest High (file name=stochasticd.efs) The % D line is one of the two lines used to plot the stochastic indicator. The Stochastic %D (a.k.a.slow Stochastic) applies further smoothing to the Stochastic oscillator, to reduce volatility and improve signal accuracy. Therefore it is often considered to provide a more reliable signal than the Stochastic oscillator. The %D Line is calculated by smoothing %K line. This is normally done using a further 3 period simple moving average. A moving average of the blue Stochastic %K line provides the data to calculate the red Stochastic %D line. %K values greater than 1 affect the smoothing of the %K line. The Stochastic % D line is plotted on a chart with values ranging from 0 to 100. The value can never fall below 0 or above 100. Readings above 80 are strong and indicate that price is closing near its high. Readings below 20 are strong and indicate that price is closing near its low. When the %D line changes direction prior to the %K line, a slow and steady reversal is usually indicated. A very powerful move is underway when the indicator reaches its extremes around 0 and 100. Following a pullback in price, if the indicator retests these extremes, a good entry point is indicated. Many times, when the %D line begins to flatten out, this is an indication that the trend will reverse during the next trading range. (file name=stochastichh.efs) This formula plots a Stochastic study that is calculated by using the Highest High for the specified interval esignal

37 Stochastic %K Line (file name=stochastick.efs) This formula plots a Stochastic %K Line which compares where an issue s price closed relative to its price range over a given time period. The %K line is one of the two lines that make up the Stochastic Oscillator. As closing prices reach the upper band, they tend to rise and when prices approach the lower bands they tend to fall. A moving average of the Stochastic %K line provides the data to calculate the Stochastic %D line. %K values greater than 1 affect the smoothing of the %K line. Trading Signals Stochastic Lowest Low Stochastic RSI Buy when the %K Line falls below a specific level (e.g., 20) and then rises above that level. Sell when the %K line rises above a specific level (e.g., 80) and then falls below that level. Look for divergences. For example, where prices are making a series of new highs and the %K Line is failing to surpass its previous highs. (file name=stochasticll.efs) This formula plots a Stochastic study that is calculated using the Lowest Low during for specified interval. (file name=stochasticrsi.efs) This formula plots a Stochastic study that is calculated using the lowest and highest values of RSI over the specified interval. The Stochastic RSI was developed by Wells Wilder. This formula compares the average up and down price movements of a market. By default, esignal s Stochastic RSI formula uses a 14-period RSI that is based on the closing price. So the Stochastic RSI is calculated by averaging all of the up closes esignal 21-37

38 and down closes for 14 periods. Then, the up closes are divided by the down closes. The formula then creates an index by scaling the value between 0 and 100. Signals: Ultimate Oscillator If the Stochastic RSI hovers near 100 it signals accumulation or a buy signal. Conversely a Stochastic RSI line that is near zero indicates distribution or a sell signal. (file name=ultimateoscillator.efs) Developed by Larry Williams, the "Ultimate" Oscillator combines a stock's price action during three different time frames into one bounded oscillator. Values range from 0 to 100 with 50 as the center line. Oversold territory exists below 30 and overbought territory extends from 70 to 100. Three time frames are used by the Ultimate Oscillator and can be specified by the user. esignal s Ultimate Oscillator uses typical values of 7-periods, 14-periods and 28-periods. Since these three time periods overlap, i.e. the 28-period time frame includes both the 14-period time frame and the 7-period time frame, this means that the action of the shortest time frame is included in the calculation three times and has a magnified impact on the results. The Ultimate Oscillator can be used on intraday, daily, weekly or monthly data. The time frame and number of periods used can vary according to desired sensitivity and the characteristics of the individual security. It is important to remember that overbought does not necessarily imply time to sell and oversold does not necessarily imply time to buy. A security can be in a down trend, become oversold and remain oversold as the price continues to trend lower. Once a security becomes overbought or oversold, traders should wait for a signal that a price reversal has occurred. One method might be to wait for the oscillator to cross above or below -50 for confirmation. Price reversal confirmation can also be accom esignal

39 plished by using other indicators or aspects of technical analysis in conjunction with the Ultimate Oscillator Volume Moving Average Color Study Volume Volume Moving Average Williams %R (file name-vmacolor.efs) When you apply the Volume Moving Average Color Study to an Advanced Chart, it plots a 50 day volume weighted moving average study below the chart using a colored line format. It enables you to see at a glance the bars in the chart that are trading above the 50 day volume moving average by coloring the line corresponding to these bars green, or to see the bars in the chart that are trading below the moving average by color coding the line corresponding to these bars red. (file name=volume.efs) This formula plots volume as a line study below the main Advanced Chart window. (file name=volumema.efs) This formula plots a 13 period moving average of volume. (file name=williamspercentr.efs) The Williams Percent R study was created by Larry Williams, a well-known author and trader. The formula examines a period of trading days to determine the trading esignal 21-39

40 range (highest high and lowest low) during the period. Once the trading range is found, the formula calculates where today s closing price falls within that range. The goal of the Williams % Study is to measure overbought and oversold market conditions. The %R always falls between a value of 0 and 100. Williams %R Trading Rules 1 Sell when %R reaches 10% or lower 2 Buy when it reaches 90% or higher. The %R works best in trending markets, either bull or bear trends. esignal uses a default value of 14 periods to calculate this study. Some technicians prefer to use a value that corresponds to 1/2 of the normal cycle length. If you specify a small value for the length of the trading range, the study is quite volatile. Conversely, a large value smooths the %R, and it generates fewer trading signals. Most Significant High-Most Significant Low 30 Period Most Significant High OHLC Formulas Get Previous OHLC (file name =30msh.efs) This formula plots the Most Significant High price that occurred during the past 30 periods. (file name=getprevohlc.efs) This is a combination of the PrevHigh.efs and PrevLow.efs formulas and also uses the supporting formula "getprevopen.efs". This takes yesterday's High and Low and shows them on today's chart. Some traders like to plot the previous Open, High, Low or Close on the chart. They use these points to determine where support or resistance esignal

41 Get Today s OHLC Previous Close might be located. When you plot the Get Previous OHLC study on a chart, there are always two thick black lines. The black line on top is the previous day s High; the line at the bottom is the previous day s Low. (file name=gettodayohlc.efs) This is a combination of formulas (Todays High.eps) and (Todays Low.efs) that uses the supporting formula "gettodays Open.efs". This takes today's High and Low and shows them on today's chart. Some traders like to plot the current day s Open, High, Low or Close on the chart. They use these points to determine where support or resistance might be located. When you plot this study on a chart, there are always two thick black lines. The black line on top is the current day s High and the line at the bottom is today s Low. (file name=prev Close.efs) This formula plots the previous day s closing price as a flat line directly in the main chart area. Figure 21-3 shows an intraday chart for Intel going back for a period of three days. As you can see a flat line is drawn over bars for each day. This flat line represents the previous day s closing price. Plotting the previous day s close over the esignal 21-41

42 current day s bars lets you see where an issue is trading relative to its closing price the previous day. Figure Previous Close Formula On March 12th, the previous day s closing price of is plotted as a flat line over the March 12th intraday bars. And, on March 13th, the previous day s closing price of is plotted as a flat line over the March 13th intraday bars. You can clearly see that all of the March 12th and 13th intraday bars are trading well below the previ esignal

43 Previous High ous day s and closing prices, an indication of further downward pressure. On March 14th, some of the intraday bars are above the previous day s close of 31.34, perhaps indicating some level of support. Then, on March 15th the majority of the intraday bars for Intel are trading above the previous close of 30.97, perhaps indicating that a short-term bottom is in place and some upward movement may ensue. (file name=prev High.efs) Figure Previous High Study This formula plots the previous day s high price as a flat line directly in the main chart area. Figure 21-4 shows an intraday chart for Intel going back for a period of three days. As you can see a flat line is drawn over bars for each day. This flat line represents the previous day s high price. Plotting the previous day s high over the current day s bars enables you to see where an issue is trading relative to its high price on previous days. esignal 21-43

44 Previous Low On March 13th, the previous day s high is plotted as a flat line over the March 12th intraday bar, on March 14th, the previous day s closing price of is plotted as a flat line over the March 14th intraday bars, on March 15th, the previous day s close of is plotted as a flat line over the March 15th intraday bars. You can clearly see that all of the intraday bars for the period of March are below the previous day s highs for those days. And, for each successive day, the previous day s high is at a lower price. This indicates a pattern of downward pressure that has not yet reversed itself. You can see, however, that on March 15th, the intraday bars are approaching the previous day s high, perhaps indicating that a reversal will occur and the previous day s high price may be penetrated to the up side. (file name=prev Low.efs) This formula plots the previous day s low price as a flat line directly in the main chart area. Figure 21-5 shows an intraday chart for Intel going back for a period of three days. As you can see a flat line is drawn over bars for each day. This flat line represents the previous day s low price. Plotting the previous day s low over the current day s bars enables you to see where an issue is trading relative to its low price the previous day esignal

45 On March 13th, the previous day s low price of is plotted as a flat line over the Figure Previous Low Formula Previous Open March 13th intraday bars, on March14th, the previous day s low price of is plotted as a flat line over the March 14th intraday bars, on March 15th, the previous day s close of is plotted as a flat line over the March 15th intraday bars. You can see that while all of the March 13th intraday bars traded well below the previous day s low of 32.31, the next day, March 14th, many of the intraday bars traded above or broke through the previous day s low, and on March 15th, all of the intraday bars were above the previous day s low price and appear to be trending upward. If this trend continues, the pattern of lower lows seen on March 13-15th may reverse itself, indicating a possible short-term bottom and upward price reversal. (file name=prev Open.efs) This formula plots the previous day s open price as a flat line directly in the main chart area. Figure 21-6 shows an intraday chart for Intel going back for a period of three days. As you can see a flat line is drawn over bars for each day. This flat line represents the previous day s open price. Plotting the previous day s open over the esignal 21-45

46 current day s bars enables you to see where an issue is trading relative to its open price the previous day. On March 13th, the previous day s open of is plotted as a flat line over the Figure Previous Open Formula March 12th intraday bar, on March 14th, the previous day s opening price of is plotted as a flat line over the March 14th intraday bars, on March 15th, the previous day s open of is plotted as a flat line over the March 15th intraday bars. You can see that all of the intraday bars for the March period traded the closest to the previous day s open at the open and then proceeded to decline throughout the day to close well below the previous day s open. This indicates a relatively strong down trend. Finally, on March 15th, Intel opened well below the previous day s open esignal

47 Previous Day Daily Bars Today s High but steadily climbed, and then crossed the previous day s open line and rose well above it, indicating a reversal to the upside. (file name=previous Day DailyBars.efs) This formula plots lines representing the previous day s open, high, low, and closing prices over the bars of an intraday chart. This enables you to quickly visualize where an issue is trading relative to its previous day s trading range. (file name=todays High.efs) You can apply the Today s High formula to an intraday chart to view where the issue traded throughout the day in relation to its high on the day. Looking at this chart (see Figure 21-7) helps you spot key resistance points and price congestion areas below the daily high. esignal 21-47

48 Figure Today s High Formula Today s Low (file name=todays Low.efs) You can apply the Today s Low formula to an intraday chart to view where the issue traded throughout the day in relation to its low on the day. Looking at this chart can help you spot key resistance points and areas of price congestion above the daily low. As shown in Figure 21-8, The daily low price for Intel was This low price was esignal

49 at market open and Intel quickly rose above the daily low to close at 31.61, perhaps indicating that the daily low price was an area of price support. Figure Today s Low Study Today s Open (file name=todays Open.efs) You can apply the Today s Open formula to an intraday chart to view where the issue traded throughout the day in relation to its open on the day. Looking at this chart can help you spot key resistance points and areas of price congestion around the daily esignal 21-49

50 open. As shown in Figure 21-9, the daily open price for Intel was This open price occurred shortly after the market open and Intel quickly rose above the daily open to close at 31.61, exhibiting decent upward price movement. Figure Today s Open Formula esignal

51 Today s Daily Bars (file name=todaysdailybars.efs) This formula plots lines representing today s open, high, low, and closing prices over the bars of an intraday chart. This enables you to quickly visualize where an issue is trading in relation to the current day s trading range. Figure Today s Daily Bars Study esignal 21-51

52 Other Formulas Expired Formula Global Value Test (file name=expiredformula.efs) Run this formula to delete any expired studies and save disk space. Pivots (file name=globalvaluetest.efs) Shows you how to set up a global variable that applies across all formulas. A pivot is a proprietary indicator that shows turning points in an issue s price performance. Pivot points are useful as starting or ending points when drawing GANN boxes, Regression Trend Channels, Fibonacci Time and other studies and tools. The esignal Formula Library includes 5 separate pivot formulas: Pivot Point Formula (file name-pivotpoint.efs) This formula plots pivot points which can be considered as a test price for a shortterm trend. A pivot point represents a weighted average of the previous day's session since it is the average of the high, low and close. If an issue rallies above a pivot point, this may be an indication of price strength in the issue. Conversely, a price move below a pivot point would suggest weakness in the issue. Pivot points are used primarily as support/resistance numbers. Of the first pivot values, the pivot point itself is the best support/resistance level. The 1st and 2nd sup esignal

53 port/resistance levels have less reliability. Pivot numbers are very popular on the exchange floors and are used by a significant number of traders. Since pivot points are based on daily data, you don t want to plot pivot points on a daily chart. Figure shows the Pivot Point formula plotted on an intraday chart for INTC. Figure Pivot Point Study esignal 21-53

54 Pivot Point Resistance Level 1 (file name=pivotpointr1.efs) This formula plots the price points that show the first level of price resistance for an issue. Figure Pivot Point Resistance Level 1 Study esignal

55 Pivot Point Resistance Level 2 (file name=pivotpointr2.efs) This formula plots the price points that show the second level of price resistance for an issue. In Figure 21-13, the dark line represents the Pivot Point Resistance Level 2 Study while the dotted line represents the Pivot Point Resistance Level 1 study. Figure Pivot Point Resistance Level 2 Study esignal 21-55

56 Pivot Point Support Level 1 Pivot Point Support Level 2 (file name=pivotpoints1.efs) This formula plots the price points that show the first level of price support for an issue. (file name=pivotpoints2.efs) This formula plots the price points that show the second level of price support for an issue. As you can see in Figure 21-14, the Pivot Point Support Level 2 Line is plotted as a solid line while the Pivot Point Support Level 1 line is plotted as a dotted line. Figure Pivot Point Support Level 1 and 2 Studies esignal

57 RSI Plot Types Figure The 7 RSI Plot Types esignal 21-57

58 RSI Dot Plot RSI Flat Line Plot RSI Histogram Plot RSI Histogram Base Plot RSI Line Plot RSI Line &Histogram Plot You can apply any of the following RSI Plot Type formulas to an Advanced Chart Window. All seven different plot styles are shown in Figure (file name=rsi PlotDot.efs) Plots a Standard RSI formula using a dotted line style (file name=rsiplotflatlines.efs) Plots a Standard RSI formula using a flat line style. (file name=rsiplothistogram.efs) Plots a Standard RSI study as a histogram. (file name=rsiplothistogrambase.efs) Plots a Standard RSI study using a histogram with a base line at 50%. (file name=rsi PlotLine.efs) Plots a Standard RSI study as a line. (file name=rsiplotlineandhistogram.efs) esignal

59 RSI Square Wave Plot Plots a Standard RSI study line and histogram (file name =PlotSquareWave.efs) Plots a Standard RSI study using a square wave plot. esignal Advanced Charting Studies esignal Price Studies Bollinger Bands In addition to the over 50 customizable formulas that come with esignal, esignal also includes more than 20 Advanced Charting Studies. The following section details the studies and outlines customization options for each. All of the follopwing esignal price studies plot on the price panel. Created by John Bollinger, Bollinger Bands are used to show when prices are consolidating and about to break out. They work by calculating a moving average that is above and below a standard exponential moving average by a fixed number of standard deviations (usually 2). These bands indicate overbought and oversold levels relative to a moving average. A standard deviation is a measure of volatility, and volatility is a measure of price swings. Large changes in volatility are shown as wide bands, while lower volatility causes the bands to narrow. Trading Signals Contracting bands are a sign that the market is about to trend. Often the bands converge into a narrow neck, then exhibit sharp price movements. The first breakout is often a false move, preceding a strong trend in the opposite direction. A move that starts at one band normally carries through to the other, in a ranging esignal 21-59

60 market. A move outside the band indicates a strong trend that is likely to continue - unless there is a quick price reversal. A trend that hugs one band signals that the trend is strong and likely to continue. Donchian Channel To help spot the end of a trend, look for divergence on a Momentum Indicator. Channels are lines that surround price movements of a stock, which help in projecting future price action. The Donchian Channel indicator was created by Richard Donchian.While the Donchian family carefully guards the details of the exact formulas, generally it uses the highest high and the lowest low of a period of time to plot the channel. The Donchian Channels study requires a look back period or length. The default length for esignal s Donchian Channels study is 20 periods. Trading Signals Donchian Channels give signals as follows. If you are in an uptrend then the bottom line is the important line. When the bottom line turns down and the price action of the next bar goes lower, then the trend is down. These channels are sometimes used as a guide to setting trailing stops. Properties You can change defaults for this study by right clicking on it, selecting Edit Study from the right-click menu, and selecting Donchian Channels from the pull-down list in the Edit Study dialog box. The Study Properties dialog box appears as displayed esignal

61 below. You can change the length in bars used to calculate the study, add an offset value, and customize channel display options. Figure Specifying Donchian Channel Properties Envelope An envelope is two moving averages that are offset by a fixed moving average. They are placed above and below a middle or base line moving average. Price envelopes (or percentage bands) are plotted at a set percentage above and below a moving aver- esignal 21-61

62 age. They are used to indicate overbought and oversold levels and can be traded on their own or in conjunction with a momentum indicator. While envelopes use percent instead of standard deviation for setting the band's off set, they are similar to Bollinger Bands in this way: the edges of the envelope represent buyers or sellers who have pushed prices to extremes. When price hits an extreme it usually turns around and finds a new stability point. So these bands basically set upper and lower boundaries of a price movement. For example, if the price hits the upper band, a sell signal would be initiated, and if the price hits the lower band a buy signal would be created. Deciding on the percentage shift is trickier and depends on the overall volatility of the stock for the period you are examining. If the volatility were high you would move the bands apart more, and if it were low you would move them closer in. Trading Signals In a Ranging Market (one where price moves back and forth across the moving average), movement that starts at one price band often carries through to the other band. If you act on this signal, you should place a stop loss order below the most recent low when you go long or above the latest high if you go short. Close your position if price turns up near the lower band or crosses back above the moving average (from below). In a Trending Market (one where the price stays above (up-trend) or below the moving average(down-trend)): Go long when price goes down but stays above the moving average and then moves higher. Close your long position when price returns to the upper band or crosses below the moving average. Go Short when price moves up from the lower band but stays below the moving average. Cover your short position when the price returns to the lower band or crosses above the moving average. Properties You can right click, select Edit Study, select Envelope from the pull-down study menu and then view or change the normal parameters for these moving averages, esignal

63 such as Length, Offset, and Source, along with the color and thickness of the line. In addition you can set the Percent for the envelope which is simply how much to offset the MA. In the figure below the Percent is set to 10%, and the top and bottom moving averages (blue lines) are 10% above and below the price of the basis moving average (the red line). The Percentage should be set so that about 90% of price activity is contained within the bands. So you may need to adjust band width to accommodate periods of higher volatility. Table Specifying Envelope Study Properties esignal 21-63

64 Linear Regression Linear regression is a statistical tool that is used to predict future values from past values. In the case of security prices, it is commonly used to determine when prices are overextended. A linear regression trend line uses the least squares method to plot a straight line through prices so as to minimize the distances between the prices and resulting trend line. A linear regression trend line is simply a trend line drawn between two points using the least squares fit method. The trend line is displayed in the exact middle of the prices. If you think of this trend line as the "equilibrium" price, any move above or below the trend line indicates overzealous buyers or sellers. You can view and change the following linear regression study settings: source (Close is the default), number of bars (0 or all bars is the default), number of standard deviations (1 is the default value), and specify other channel color and line options. To specify study settings, right click on the study, select Edit Study, select Linear esignal

65 Regression from the pull-down study list, make your changes and then specify how to apply them. Figure Specifying Linear Regression Properties esignal 21-65

66 Moving Average A Moving Average indicator shows the average value of a security s price over a period of time. When calculating a moving average, a mathematical analysis of the security s average value over a predetermined time period is made. As the security s price changes, its average price moves up or down. There are five types of moving averages: simple (also referred to as arithmetic), exponential, triangular, variable, and weighted. Moving averages can be calculated on any data series, including a security s open, high, low, close, volume, or another indicator. A moving average of another moving average is also common. The only significant difference between the various types of moving averages is the weight assigned to the most recent data. Simple moving averages apply equal weight to the prices. Exponential and weighted averages apply more weight to recent prices esignal

67 Triangular averages apply more weight to prices in the middle of the time period. And variable moving averages change the weighting based on the volatility of prices. When you apply a Moving Average to an esignal Advanced Chart, by default it is a 10 period simple moving average. You can right click, select Edit Study, select Moving Average from the drop-down study menu. Figure Specifying Moving Average Properties esignal 21-67

68 Parabolic SAR To change the type of moving average: 1 Select Simple to display a Simple moving average that takes the sum of the last n periods and divides by that number. 2 Select Exponential to display an Exponential Moving Average. 3 Select Weighted to display a Weighted moving average that attaches greater weight to the most recent data. 4 Select Volume Weighted to display a Volume Weighted moving average that attaches greater weight to days having greater trading volume. Change the Interval value number to adjust the number of intervals used to calculate the moving average. Change the Offset number to shift the plot of the moving average left (negative offset) or right (positive offset) by the offset number of price intervals. Change the Source field to indicate the data you want to use (choices are open, high, low, close) to calculate the moving average. The Parabolic Time/Price System, developed by Welles Wilder, is used to set trailing price stops and is usually referred to as the "SAR" (stop-and-reversal). The Parabolic SAR can provide excellent exit points. Signals You should close long positions when the price falls below the SAR and close short positions when the price rises above the SAR. If you are long (i.e., the price is above the SAR), the SAR will move up every day, regardless of the direction the price is esignal

69 moving. The amount the SAR moves up depends on the amount that prices move. You should be long when the SAR is below prices and short when it is above prices. Additional Studies Accumulation/Distribution Average True Range All of the additional studies described in the following section plot in their own panel in the Advanced Chart window. The Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume accompanying a price move, the more significant the price move. When the Accumulation/Distribution moves up, it shows that the security is being accumulated (bought), as most of the volume is associated with upward price movement. When the indicator moves down, it shows that the security is being distributed (sold), as most of the volume is associated with downward price movement. The Average True Range (ATR) is a measure of volatility. It was introduced by Welles Wilder in his book New Concepts in Technical Trading Systems and has since been used as a component of many indicators and trading systems. Trading Signals High ATR values often occur just before market tops and bottoms. Low ATR values are often found during extended sideways periods, such as those found at tops and after consolidation periods. esignal 21-69

70 Choppiness Choppiness is a function of market direction. A market that is trending has a low choppiness number while a trend less market has a high choppiness number.the Choppiness Index ranges between 0 and 100, the higher the index the choppier the price action is and the lower the index the more trending the price action. Since Choppiness is a trending indicator it has a length, which sets the look back period (in esignal the default length is14 periods). There are two bands in the Choppiness indicator: Upper Band and Lower Band. To Edit parameters for the Choppiness Study: 1 Right click on the study and select Edit Study from the menu. 2 In the Study Properties dialog box that appears, you may change: -Length -Upper Band -Lower Band -Display Color and Line Properties -Upper Band (default value=61.8) - You may toggle the Upper Band line on or off and specify its color and line properties. -Lower Band - (default value = 38.2) You may toggle the Lower Band line on or off and specify its color and line properties. 3 When you are finished making changes, click the Apply This button, followed by the OK button to apply your changes to the current Advanced Chart window. Click Apply This to make the changes to the current study while the Properties window is open. Click Apply All if you made property changes to several studies and want them all to change while the window is still open. If you would like to have specific settings apply to all future uses of the study, you need to use the "Save As Default" at the top of the window esignal

71 Some traders interpret low Choppiness Index readings to indicate the end of Figure Setting Choppiness Study Properties strong impulsive movements either up or down, while high readings occur after significant price consolidations. Using the Choppiness Index The Choppiness indicator (CI) has an inverse relationship to price and a trend is considered broken when the CI is below the lower line and reverses. Again this does not tell you the direction of the market it just gives a fundamental different perspective on the general change of a trend. If other signals confirm that this is a turning point, it esignal 21-71

72 Commodity Channel Index could be likely that we are headed towards a new trend direction down and it might be a good time to sell, or go short. The Commodity Channel Index (CCI) is a price momentum indicator that measures price excursions from the mean price as a statistical variation. It is used to detect the beginnings and endings of trends. The CCI works best during strongly up trending or down trending markets. The CCI can be used in two different ways: Normal CCI Method - If you are not looking at the CCI as a histogram, then a buy signal is generated when the CCI crosses the 100 value while moving up. When the CCI crosses the +100 value while moving down, a sell signal is generated. Zero CCI Method - If you are looking at the CCI as a histogram, then a buy signal is generated when the CCI crosses the 0 value while moving up. When the CCI crosses the 0 value while moving down, a sell signal is generated. To change any of the properties of the CCI study: 1 Right click on the study and select Edit Study from the menu. 2 In the Study Properties dialog box that appears, you may change: Length - sets the number of intervals used to calculate the CCI Source - sets the data source (Open, High, Low, or Close) used to calculate the CCI. Upper Band - Sets the value of the Upper band. Lower Band - Sets the value of the Lower Band. Display - Sets the color and line properties for displaying the CCI. Upper Band - You can toggle it on of off and set its color and line properties. Lower Band -You can toggle it on of off and set its color and line properties. When you are finished making changes, click the Apply This button, followed by the OK button to apply your changes to the current Advanced Chart window. Click Apply This to make the changes to the current study while the Properties esignal

73 . window is open. Click Apply All if you made property changes to several studies and want them all to change while the window is still open. If you would like to have specific settings apply to all future uses of the study, you need to use the "Save As Default" at the top of the window. Figure Specifying Commodity Channel Index Properties esignal 21-73

74 Directional Movement (ADX/DMI) The ADX-DMI is actually three separate indicators: 1. The ADX indicates the trend of the market and is usually used as an exit signal. 2. The +DMI measures the strength of upward pressure. 3. The DMI measures the strength of downward pressure. These are based in how far a market has moved outside the previous day s range. Directional Movement Interpretation - When the ADX line reaches or exceeds the value of 40 and then makes a turn to the downside, this is generally accepted as a signal to take profits. This signal does not mean that the market will move in the opposite trend direction. The ADX signal indicates that the current strong trend is over, and you should consider taking profits. The ADX works on all time frames, but seems to give the best signals on a Weekly or Monthly chart and works best in strong, trending markets. IF the +DMI is above the -DMI, the market is in an uptrend. When the +DMI crosses above the DMI, this can be used as a buy signal. If the +DMI is below the -DMI, the market is in down trend. When the +DMI crosses below the -DMI, this can be used as a sell signal. Welles Wilder, the developer of the DMI, suggests what he calls the extreme point rule. This rule states, "On the day the +DMI crosses above or below the -DMI, don t take the trade. Just take note of the high or the low of the day. Take the trade if the price breaks either the high or low the next day (depending on the direction of the market)." To change any of the parameters of the ADX-DMI: 1 Right click on the study and select Edit Study from the right-click menu. 2 Select the Directional Movement study from the pull-down study list that appears in the Study Properties dialog box esignal

75 3 The parameters for the Directional Movement study appear in the Study Properties dialog box. Figure Specifying Directional Movement Study Properties 4 You can adjust the length of the +DMI and - DMI lines, change the colors and line styles, and adjust smoothing period and display options. 5 When you are done making changes click Apply This to make the changes to the current study while the Properties window is open. Click Apply All if you made property changes to several studies and want them all to change while the window is still open. If you would like to have specific settings apply to all future uses of the study, you need to use the "Save As Default" at the top of the window. esignal 21-75

76 MACD The MACD (Moving Average Convergence/Divergence) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line, is plotted on top of the MACD to show buy/sell opportunities. MACD Interpretation - The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD: 1 Crossover: When the MACD falls below its signal line, this is taken as a sell signal. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. 2 Overbought/Oversold Conditions:. When the shorter moving average pulls away dramatically from the longer moving average (the MACD rises), it is likely that the security price is overextending (i.e. it is overbought) and will soon return to more realistic levels. MACD overbought and oversold conditions vary from security to security. 3 Divergences: An indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels. To change the properties of a MACD study: 1 Right click on the study and select Edit Study from the right-click menu. 2 Select the MACD study from the pull-down study list that appears in the Study Properties dialog box. 3 The parameters for the Directional Movement study appear in the Study Properties dialog box esignal

77 4 You can adjust the length of the MACD Fast and Slow Lines, change the data Figure Specifying MACD Study Properties source, signal smoothing period and adjust colors and line types for the MACD Drop, Signal, Center and Histogram lines. When you are done making changes click Apply This to make the changes to the current study while the Properties window is open. Click Apply All if you made property changes to several studies and want them all to change while the window is still open. If you would like to apply specific settings to all future uses of the study, you need to use the "Save As Default" at the top of the window. esignal 21-77

78 Momentum (MOM) The Momentum study is calculated by subtracting the price for a given interval in the past from the current price. You determine how many intervals to go back for the price that is subtracted. The momentum study is an indication of overbuying or overselling. A positive value indicates overbuying, while a negative value indicates overselling. To change the properties of the Momentum study: 1 Right click on the study and select Edit Study from the right-click menu. 2 The parameters for the Momentum study appear in the Study Properties dialog box as displayed below Length - specify the number of intervals to go back to calculate the study Source - specify the data source (open, high, low, or close) Display - Specify color and line properties for the Momentum indicator. Center Line - Toggle the Center line on and off and specify its color and line properties 3 When you are done making changes click Apply This to make the changes to the current study while the Properties window is open. Click Apply All if you made property changes to several studies and want them all to change while the window is still open. If you would like to apply specific settings to all future uses of the study, you need to use the "Save As Default" at the top of the window esignal

79 Figure Specifying Momentum Properties Money Flow The Money Flow Index (MFI) is a momentum indicator that measures the strength of money flowing in and out of a security. It is related to the Relative Strength Index (RSI) but whereas the RSI incorporates only prices, the MFI also accounts for volume. Instead of using "up closes" versus "down closes," money flow compares the current interval's average price to the previous interval's average price and then weighs the average price by volume to calculate money flow. The ratio of the esignal 21-79

80 summed positive and negative money flows is then normalized to a scale of 0 to 100. You choose how many intervals to go back for the previous price. To change the properties of the Money Flow study: 1 Right click on the study and select Edit Study from the right-click menu. 2 The parameters for the Money Flow study appear in the Study Properties dialog box as displayed below Length - specify the number of intervals to go back to calculate the study Upper Band - specify the Upper Band percentage. Lower Band - specify the Lower Band percentage Display - specify color line and thickness styles Upper Band Display - display or hide the Upper Band and specify line and thickness styles. Lower Band Display - display or hide the Lower Band and specify line and thickness styles. When you are done making changes click Apply This to make the changes to the current study while the Properties window is open. Click Apply All if you made property changes to several studies and want them all to change while the window is still open. If you would like to apply specific settings to all future uses of the study, you need to use the "Save As Default" at the top of the window esignal

81 Figure Specifying Money Flow Study Properties On Balance Volume (OBV) On Balance Volume (OBV) is a momentum indicator that relates volume to price change. It was developed by Joe Granville and was originally presented in his book New Strategy of Daily Stock Market Timing for Maximum Profits. On Balance Volume is a running total of volume. It indicates whether volume is flowing into or out of a security. When the security closes higher than the previous esignal 21-81

82 Williams %R close, all of the day s volume is considered up-volume. When the security closes lower than the previous close, all of the day s volume is considered down-volume. You can customize your OBV study line, style and color options by right clicking on the study, selecting Edit Study, and entering your preferences. Click Apply This to make the changes to the current study while the Properties window is open. Click Apply All if you made property changes to several studies and want them all to change while the window is still open. If you would like to apply specific settings to all future uses of the study, you need to use the "Save As Default" at the top of the window. Williams %R (pronounced "percent R") is a momentum indicator that measures overbought/oversold levels. It was developed by Larry Williams. The interpretation of Williams %R is very similar to that of the Stochastic Oscillator, except that %R is plotted upside-down and the Stochastic Oscillator has internal smoothing. To display the Williams %R indicator on an upside-down scale, it is usually plotted using negative values (for example, -20 percent). (For the purpose of analysis and discussion, simply ignore the negative symbols.) Readings in the range of 80 to 100 percent indicate that the security is oversold, while readings in the 0 to 20 percent range suggest that it is overbought. As with all overbought/oversold indicators, it is best to wait for the security s price to change direction before placing your trades. For example, if an overbought/oversold indicator (such as the Stochastic Oscillator or Williams %R) is showing an overbought condition, it is wise to wait for the security s price to turn down before selling the security. (The MACD is a good indicator to monitor change in a security s price.) It is not unusual for overbought/oversold indicators to remain in an overbought/oversold condition for a long time period as the security s price continues to climb/fall. Selling simply because the security appears overbought may take you out of the security long before its price shows signs of deterioration esignal

83 Rate of Change (ROC) Price Oscillator The Price Rate-of-Change (ROC) indicator displays the difference between the current price and the price x time periods ago. The difference can be displayed either in points or as a percentage. The momentum indicator displays the same information but expresses it as a ratio. The Price Oscillator displays the difference between two moving averages of a security s price. The difference between the moving averages can be expressed in either points or percentages. The Price Oscillator is almost identical to the MACD, except that the Price Oscillator can use any two user-specified moving averages. (The MACD always uses 12 and 26 day moving averages, and always expresses the difference in points.) RSI Moving average analysis typically generates buy signals when a short-term moving average (or the security s price) rises above a longer-term moving average. Conversely, sell signals are generated when a shorter-term moving average (or the security s price) falls below a longer-term moving average. The Price Oscillator illustrates the cyclical and often profitable signals generated by these one- or twomoving-average systems. The Relative Strength Index (RSI) is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a esignal 21-83

84 "failure swing." The failure swing is considered a confirmation of the impending reversal. RSI can be used to identify the following significant chart patterns: Tops and Bottoms. The RSI usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart. Chart Formations. The RSI often forms chart patterns such as head-and-shoulders or triangles that may or may not be visible on the price chart. Failure Swings (also known as support or resistance penetrations or breakouts). This is where the RSI surpasses a previous high (peak) or falls below a recent low (trough). Support and Resistance. The RSI shows, sometimes more clearly than prices themselves, levels of support and resistance. Divergences. As discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the RSI. Prices usually correct and move in the direction of the RSI esignal

85 Figure Specifying RSI Study Properties esignal 21-85

86 Stochastic The Stochastic oscillator compares where a security's price closed relative to its price range over a given time period and is designed to indicate when the market is overbought or oversold. It is based on the premise that when a market s price increases, the closing prices tend to move toward the daily highs and, conversely, when a market s price decreases, the closing prices move toward the daily lows. A Stochastic displays two lines, %K and %D. The %K line is calculated by finding the highest and lowest points in a trading period and then finding where the current close is in relation to that trading range. The %K line is then smoothed with a moving average. The %D line is a moving average of %K. Stochastic Signals Sell Signal - The Stochastic generates a sell signal when there is a crossover of the %K and the % D lines and both are above the band set at 75. Buy Signal -The Stochastic generates a buy signal when there is a crossover of the %K and the %D lines and both are below the band set at 25. Aggressive Use of Stochastics Sometimes Stochastics is used more aggressively by using a pyramid system of adding to positions during a strong trend. As a major trend continues, you could use all of the crossing the the %K and %D lines regardless of where the Stochastics lines cross. If you were to do this in an up trending market, you would look at all Stochastics upturns as additional buy signals and would add to your position, regardless of whether %K or %D reached the oversold zone. In an up trending market, Stochastics esignal

87 sell signals would be ignored, except to take short-term profits. The reverse would be true in a down trending market. To change Stochastics properties: 1 Right click on the Advanced Chart window and select Edit Study 2 %K Length-specify the number of bars used to find the Stochastic. Figure Specifying Stochastics Properties 3 %K Smoothing -specify the period of the moving average that is used to smooth %K. 4 %D Smoothing number box contains the period of the moving average that is applied to %K to find %D. 5 The %K Display selection list allows you to change %K color and line properties. esignal 21-87

88 Volume 6 The %D Display selection list allows you to change %D color and line properties. 7 The Upper and Lower Bands number boxes indicate at what level the bands will be drawn, enable you to change band colors, and let you toggle the upper and lower bands on and off. When you are finished making your change, click Apply This to make the changes to the current study while the Properties window is open. Click Apply All if you made property changes to several studies and want them all to change while the window is still open. If you would like to apply specific settings to all future uses of the study, you need to use the "Save As Default" at the top of the window. Volume is the number of trades in a given security, for a specified time (interval) and date To adjust Volume Study parameters: 1 Right click on the Advanced Chart window and select Edit Study 2 Select Volume from the pull-down study list. The dialog box appears as pictured in Figure esignal

89 Figure Setting Volume Study Properties Using the Advanced Line Toolbar esignal also includes an Advanced Line Toolbar. The Advanced Line Toolbar enables you to draw more advanced studies and is pictured in Figure Figure Advanced Line Toolbar esignal 21-89