MACD
The MACD measures the difference between two Exponential Moving Averages (EMAs), typically with periods of 12 and 26. A Signal Line (an EMA of the MACD) helps identify trend changes and potential buy or sell signals.
- Trend Signals:
- Buy: MACD crosses above the Signal Line (best when MACD > 0).
- Sell: MACD crosses below the Signal Line (best when MACD < 0).
- Overbought/Oversold: High MACD values indicate overbought conditions, and low values indicate oversold conditions.
- Divergence: Price and MACD divergence, especially at extremes, may signal trend reversals.
Formula:
Note: The MACD was developed by Gerald Appel. The built-in constants (0.15 and 0.075) align with approximate periods of 12.33 and 25.67. For custom periods, consider the Price Oscillator.
RSI
The Relative Strength Index (RSI) measures the strength and speed of a security’s recent price changes. It compares the average gains and losses over a specified period and ranges from 0 to 100.
- Overbought/Oversold Levels: Values above 70 suggest overbought conditions, while values below 30 indicate oversold conditions.
- Divergence: If the price makes new highs/lows but the RSI does not, it may signal a potential reversal.
Bollinger Bands
Bollinger Bands are a volatility indicator consisting of three lines:
- Middle Band: A Simple Moving Average (SMA) of the typical price (generally 20 periods).
- Upper Band: Middle Band + (F × Standard Deviation).
- Lower Band: Middle Band − (F × Standard Deviation).
Key Features:
- Bands widen during high volatility and narrow during low volatility.
- They indicate overbought/oversold conditions but do not generate direct buy or sell signals.
- Price Actions:
- When the price nears the upper or lower band, a reversal may occur.
- The middle band acts as support/resistance.
- Crossing the middle band from the lower band often targets the upper band.
Formula:
Where:
- TP=High+Low+Close/3 (Typical Price)
- n = number of periods (commonly 20)
- F = number of standard deviations (commonly 2)
- σ = standard deviation of the typical price
Volume
There are three commonly used volume indicators. These include average volume, relative volume, and volume. The Price Action Alerts algorithm uses actual daily volume (volume).
Money Flow Index
The Money Flow Index (MFI) measures money flowing into and out of a security. It ranges from 0 to 100, with values above 80 indicating potential market tops and below 20 suggesting possible bottoms. Divergence between MFI and price can signal reversals.
Formula:
Simple Moving Average (SMA)
A Simple Moving Average (SMA) smooths out data by calculating the average of the previous n values. Each value within the selected time period is given equal weight, while values outside the period are excluded. This makes the SMA slower to react to recent changes, which helps filter out short-term noise and highlight trends.
Formula:
Where:
- n = number of periods
- xi = data points
- t = current time