When it comes to the analysis of price action and movement of the markets, there is a few basic indicators that traders use to gauge the strength and movement of the price of stocks and other assets.
Most often, the indicators on price chart display how the price of the stock has moved over time, and thus how it will move with the future. However, there are also indicators that allow you to see how the market is reacting to the direction of events. These include:
Directional Moving Averages (DMA), or The Directional Movement of Price;
Trendlines, which are a series of points (called trend lines) on a chart indicating the direction the price is moving in;
Price Charts, which are graphs showing the price movements of many stocks in one day.
These indicators are used in combination with others to create the price moving average (PMA). The PMA is the most commonly used indicator of market action in the markets and represents a common trend of the market over a short period of time, as shown in the following figure:
Chart Source: Numeris.
To determine which of the indicators that we want to study, we will determine the price moving average, that is the trend-line, as well as the price movements (and reversals) of two significant moving averages, the SMA and the MACD.
SMA & MACD
The SMA is the most widely used moving average indicator that traders use to keep track of the price trends. A moving average is a line running from one end to the other, with each end representing the change in price, or the direction of the movement. By contrast, the MACD is a point on a chart that represents the difference in price on the two axis. In essence, it marks the direction in which the price move is trending, which is also known as the divergence. The SMA is measured in points, with each one representing one day, while the MACD is measured in periods ending with an X in between the two points.
In order to determine how to calculate this type of indicator, we will first determine the volume of trades between two high or low prices in an exchange. Then we will determine the volume between a high or low price in the market. After combining these two levels, we will find the direction on the price chart of the stocks that trade between them, as shown below:
Directional Moving Averages
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