Discover and understand the theory behind stock index, commodity and currency market algorithmic trading indicators.
Phase Lag Indicator Theory
The most common category of publicly available indicators. Designed to respond to price changes after they have happened. Thus, an indicator may turn typically 1-5 bars after the market does. Example.
Small market oscillations are usually ironed out for "look back" over 10 bars.
Useful for historical analysis.
Poor entry/exit price. The market can move a long way in 1-5 bars.
Increased trade risk due to late entry.
Backward looking - confirming past action rather than alluding to future changes in market direction.
Indicator typically suffers from whipsaw.
Unsmoothed indicators can be overly choppy and hard to read.
Unsmoothed indicators can give several premature indications that the market has turned.
Certain old-school smoothing formulae can increase phase lag.
An indicator category designed to respond to price changes with minimal delay. Thus, if an indicator mostly turns the same day as the market does it would be considered to have zero phase delay. Example.
Responsive - allows the participant to enter or exit a market at a price relatively close to tops and bottoms.
Better entry/exit price *.
Reduced trade risk * due to prompt entry.
Can be smoothed to eliminate much choppiness/over-responsiveness.
Works well in combination with Phase Lead Indicators to confirm an imminent change in market direction.
Unsmoothed indicators can be overly choppy.
Unsmoothed indicators can give several premature indications that the market has turned.
Certain old-school smoothing formulae can cause the indicator to respond slower and thus no longer have zero phase delay.
An indicator category designed to give an early warning signal that the market direction is about to change. Thus, an indicator may typically turn prior to or at the same time as the market actually does. Example.
Forward Looking.
Responsive - allows the participant to enter or exit a market at a price relatively close to tops and bottoms.
Typically less choppy than other indicator categories.
Ideal for profit taking.
Better entry/exit price *.
Taking a position against a trend can leave you on the wrong side of the market until the market direction changes.
In a very strong prolonged trend a phase lead indicator may repeatedly give false signals.
An indicator category designed to indicate bullish and bearish sentiment. The old adage is "the trend is your friend". Being aware of trend is a significant advantage to the trader. Example.
Can give an indication of which side of the market to be on
Contra-trend indicators can help identify when a trend may be about to change
Problems with old-school trend identification techniques tend to:
Be backward looking and refer to what has happened not what is about to happen
Suffer serious phase lag
Become unclear and unreadable during sideways or choppy markets
Often can't tell you any more than what has happened already
This type of indicator uses astronomical angles and events to help predict the effects on market action. The subject of astrological analysis is extremely complex and often misunderstood. Example.
Can be a very powerful technique to help indicate trader psyche
Can give an indication of when a change in market direction could happen
Can give an indication of when market sentiment is likely to very low or very high
Forward looking and predictive
Certain combinations of astronomical angles and events may have no effect in a different market
Some events can be interpreted in more than one way which can be contradictory
Some analysts oversimplify analysis which reduces accuracy and so gives the whole subject a bad name
Compounding rounding errors in home computers can dramatically reduce accuracy
The principle of a channel is to show a range within which we can expect price to be contained. Price outside the channel is meant to represent an extreme condition. Example.
Small market oscillations are usually ironed out for "look back" over 10 bars.
Useful for determining trend
Tend to use a long "look back" period so causing phase delay
