Page 193 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes
Major Uses of Moving Averages
Did u know?
1. Moving averages are used to identify current trends and trend reversals as well as to
set up support and resistance levels.
2. Moving averages can be used to quickly identify whether a security is moving in an
uptrend or a downtrend depending on the direction of the moving average.

6.8.4 Indicators and Oscillators

Indicators are calculations based on the price and the volume of a security that measure such
things as money flow, trends, volatility and momentum. Indicators are used as a secondary
measure to the actual price movements and add additional information to the analysis of securities.
Indicators are used in two main ways: to confirm price movement and the quality of chart
patterns, and to form buy and sell signals.
There are two main types of indicators: leading and lagging. A leading indicator precedes price
movements, giving them a predictive quality, while a lagging indicator is a confirmation tool
because it follows price movement. A leading indicator is thought to be the strongest during
periods of sideways or non-trending trading ranges, while the lagging indicators are still useful
during trending periods.

Aroon Oscillator

An expansion of the Aroon is the Aroon oscillator, which simply plots the difference between
the Aroon up and down lines by subtracting the two lines. This line is then plotted between a
range of -100 and 100. The centreline at zero in the oscillator is considered to be a major signal
line determining the trend. The higher the value of the oscillator from the centreline point, the
more upward strength there is in the security; the lower the oscillator's value is from the
centreline, the more downward the pressure.

Relative Strength Index

The relative strength index (RSI) is another one of the most used and well-known momentum
indicators in technical analysis. RSI helps to signal overbought and oversold conditions in a
security. The indicator is plotted in a range between zero and 100. A reading above 70 is used to
suggest that a security is overbought, while a reading below 30 is used to suggest that it is
oversold. This indicator helps traders to identify whether a security's price has been unreasonably
pushed to current levels and whether a reversal may be on the way.

Figure 6.17

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