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6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com

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Accumulation Distribution Line
Introduction
Developed by Marc Chaikin, the Accumulation Distribution Line is a volume-based indicator designed to measure the
cumulative flow of money into and out of a security. Chaikin originally referred to the indicator as the Cumulative Money
Flow Line. As with cumulative indicators, the Accumulation Distribution Line is a running total of each period's Money Flow
Volume. First, a multiplier is calculated based on the relationship of the close to the high-low range. Second, the Money
Flow Multiplier is multiplied by the period's volume to come up with a Money Flow Volume. A running total of the Money
Flow Volume forms the Accumulation Distribution Line. Chartists can use this indicator to affirm a security's underlying
trend or anticipate reversals when the indicator diverges from the security price.

Calculation
There are three steps to calculating the Accumulation Distribution Line (ADL). First, calculate the Money Flow Multiplier.
Second, multiply this value by volume to find the Money Flow Volume. Third, create a running total of Money Flow Volume
to form the Accumulation Distribution Line (ADL).

1 MnyFo Mlile =[Coe - Lw -(ih-Coe]/Hg -Lw
. oe lw utpir (ls o) Hg ls) (ih o)

2 MnyFo Vlm =MnyFo Mlile xVlm frtePro
. oe lw oue oe lw utpir oue o h eid

3 AL=Peiu AL+CretPro' MnyFo Vlm
. D rvos D urn eids oe lw oue

The Money Flow Multiplier fluctuates between +1 and -1. As such, it holds the key to the Money Flow Volume and the
Accumulation Distribution Line. The multiplier is positive when the close is in the upper half of the high-low range and
negative when in the lower half. This makes perfect sense. Buying pressure is stronger than selling pressure when prices
close in the upper half of the period's range (and visa versa). The Accumulation Distribution Line rises when the multiplier is
positive and falls when the multiplier is negative.

stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 1/10


The multiplier adjusts the amount of volume that ends up in the Money Flow Volume. Volume is in effect reduced unless
the Money Flow Multiplier is at its extremes (+1 or -1). The multiplier is +1 when the close is on the high and -1 when the
close is on the low. All volume is positive when +1 and all volume is negative when -1. At .50, only half of the volume
translates into the period's Money Flow Volume. The table below shows the Money Flow Multipliers, Money Flow Volume
and Accumulation Distribution Line for Research-in-Motion (RIMM). Notice how the multiplier is between .50 and 1 when
the close is strong and between -.50 and -1 when the close is weak.



Click here for a calculation of the Accumulation Distribution Line in an Excel Spreadsheet.

Interpretation
The Accumulation Distribution Line is a cumulative measure of each period's volume flow, or money flow. A high positive
multiplier combined with high volume shows strong buying pressure that pushes the indicator higher. Conversely, a low
negative number combined with high volume reflects strong selling pressure that pushes the indicator lower. Money Flow
Volume accumulates to form a line that either confirms or contradicts the underlying price trend. In this regard, the
indicator is used to either reinforce the underlying trend or cast doubts on its sustainability. An uptrend in prices with a
downtrend in the Accumulation Distribution Line suggests underlying selling pressure (distribution) that could foreshadow a
bearish reversal on the price chart. A downtrend in prices with an uptrend in the Accumulation Distribution Line indicate
underlying buying pressure (accumulation) that could foreshadow a bullish reversal in prices.

ADL versus OBV
The Accumulation Distribution Line and On Balance Volume (OBV) are cumulative volume-based indicators that
sometimes move in opposite directions because their basic formulas are different. Joe Granville developed On Balance
Volume (OBV) as a cumulative measure of positive and negative volume flow. OBV adds a period's total volume when the


close is up and subtracts it when the close is down. A cumulative total of this positive and negative volume flow forms the
OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or
confirmation.

As the formula above shows, Chaikin took a different approach by completely ignoring the change from one period to the
next. Instead, the Accumulation Distribution Line focuses on the level of the close relative to the high-low range for a given
period (day, week, month). With this formula, a security could gap down and close significantly lower, but the
Accumulation Distribution Line would rise if the close were above the midpoint of the high-low range. The chart above
shows Clorox (CLX) with a big gap down and a close near the top of the day's high-low range. OBV moved sharply lower
because the close was below the prior close. The Accumulation Distribution Line moved higher because the close was
near the high of the day.

Trend Confirmation
Trend confirmation is a pretty straight-forward concept. An uptrend in the Accumulation Distribution Line reinforces and
uptrend on the price chart and visa versa. The chart below shows Freeport McMoran (FCX) and the Accumulation
Distribution Line advancing in February-March, declining from April to June and then advancing from July to January. The
Accumulation Distribution Line confirmed each of these price trends.


Divergences
Bullish and bearish divergences are where is getting interesting. A bullish divergence forms when price moves to new lows,
but the Accumulation Distribution Line does not confirm these lows and moves higher. A rising Accumulation Distribution
Line shows, well, accumulation. Think of this as basically stealth buying pressure. Based on the theory that volume
precedes price, chartists should be on alert for a bullish reversal on the price chart.

The chart above shows Nordstrom (JWN) with the Accumulation Distribution Line. Notice how it is easy to compare price
action when the indicator is placed "behind" the price plot. The indicator (pink) and the price trend moved in unison from
February to June. Signs of accumulation emerged as the indicator bottomed in early July and started moving higher. JWN
moved to a new low in late August. Even though the indicator showed signs of buying pressure, it was important to wait for
a bullish catalyst or confirmation on the price chart. This catalyst came as the stock gapped up and surged on big volume.



A bearish divergence forms when price moves to new highs, but the Accumulation Distribution Line does not confirm and
moves lower. This shows distribution or underlying selling pressure that can foreshadow a bearish reversal on the price
chart.



The chart above shows Southwest Airlines (LUV) with the Accumulation Distribution Line peaking two months ahead of
prices. The indicator not only peaked, but it also moved lower in March and April, which reflected some selling pressure.
LUV confirmed weakness with a support break on the price chart and RSI moved below 40 shortly afterwards. RSI often
trades in bull zones (40-80) and bear zones (20-60). RSI held in the bull zone until early May and then moved into a bear
zone.

Disconnect with Prices
The Accumulation Distribution Line is an indicator based on a derivative of price and volume. This makes it at least two
steps removed from the actual price of the underlying security. Moreover, the Money Flow Multiplier does not take into
account prices changes from period to period. As such, it cannot be expected to always affirm price action or successfully
predict price reversals with divergences. Sometimes there is a, gasp, disconnect between prices and the indicator.
Sometimes the Accumulation Distribution Line simply doesn't work. This is why it vitally important to use the
Accumulation Distribution Line, and all indicators for that matter, in conjunction with price/trend analysis or other
indicators.



Conclusions
The Accumulation Distribution Line can be used to gauge the general flow of volume. An uptrend indicates that buying
pressure is prevailing on a regular basis, while a downtrend indicates that selling pressure is prevailing. Bullish and bearish
divergences serve as alerts for a potential reversal on the price chart. As with all indicators, it is important to use the
Accumulation Distribution Line in conjunction with other aspects of technical analysis, such as momentum oscillators and
chart patterns. It is not a stand-alone indicator.

SharpCharts
The Accumulation Distribution Line is available in SharpCharts as an indicator. After selecting, the indicator can be
positioned above, below or behind the price of the underlying security. Positioning "behind price" makes it easy to
compare OBV with the underlying security. Chartist can also add a moving average or another indicator to OBV by
selecting "advanced options", which is to the right of the indicator position. Click here for a live chart with the
Accumulation Distribution Line.



Suggested Scans
Bullish Divergence in OBV and ADL: This scan starts with a base of stocks that are averaging at least $10 in price and
100,000 daily volume over the last 60 days. Potential bullish divergences are found by looking for stocks where price is
BELOW the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are ABOVE the 65-day SMA
and 20-day SMA.

Bearish divergence in OBV and ADL: This scan starts with a base of stocks that are averaging at least $10 in price and
100,000 daily volume over the last 60 days. Potential bearish divergences are found by looking for stocks where price is
ABOVE the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are BELOW the 65-day SMA
and 20-day SMA.



Further Study
This book covers it all with explanations that are simple and clear. Murphy covers most the major charts patterns and
indicators. A complete chapter is devoted to understanding volume and open interest.

Technical Analysis of the Financial Markets
John J. Murphy

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6/1/12 Aroon - ChartSchool - StockCharts.com


You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Aroon

Aroon
Introduction
Developed by Tushar Chande in 1995, Aroon is an indicator system that determines whether a stock is trending or not and
how strong the trend is. "Aroon" means "Dawn's Early Light" in Sanskrit. Chande chose this name because the indicators
are designed to reveal the beginning of a new trend. The Aroon indicators measure the number of periods since price
recorded an x-day high or low. There are two separate indicators: Aroon-Up and Aroon-Down. A 25-day Aroon-Up
measures the number of days since a 25-day high. A 25-day Aroon-Down measures the number of days since a 25-day
low. In this sense, the Aroon indicators are quite different from typical momentum oscillators, which focus on price relative
to time. Aroon is unique because it focuses on time relative to price. Chartists can use the Aroon indicators to spot
emerging trends, identify consolidations, define correction periods and anticipate reversals.

Calculation
The Aroon indicators are shown in percentage terms and fluctuate between 0 and 100. Aroon-Up is based on price highs,
while Aroon-Down is based on price lows. These two indicators are plotted side-by-side for easy comparison. The default
parameter setting in Sharpcharts is 25 and the example below is based on a 25 days.

AonU =(2 -Dy Sne2-a Hg)2)x10
ro-p (5 as ic 5dy ih/5 0
AonDw =(2 -Dy Sne2-a Lw/5 x10
ro-on (5 as ic 5dy o)2) 0

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Aroon declines as the elapsed time between a new high or low increases. 50 is the cut off point. Because 12.5 days
marks the exact middle, a reading of exactly 50 is impossible on a daily chart. It is possible with other timeframes. On
daily charts, Aroon is either below 50 (48) or above 50 (52). A reading above 50 means a new high or low was recorded
within the last 12 days or less. This is the most recent half of the look-back period. A reading below 50 means a new high
or low was recorded within the last 13 days or more {(25-13)/25 x 100 = 48). This is the latter half of the look-back period.
The table below shows the range of values for 25-day Aroon-Up and 25-day Aroon-Down



Interpretation
The Aroon indicators fluctuate above/below a centerline (50) and are bound between 0 and 100. These three levels are
important to interpretation. At its most basic, the bulls have the edge when Aroon-Up is above 50 and Aroon-Down is below
50. This indicates a greater propensity for new x-day highs than lows. The converse is true for a downtrend. The bears have
the edge when Aroon-Up is below 50 and Aroon-Down is above 50.

A surge to 100 indicates that a trend may be emerging. This can be confirmed with a decline in the other Aroon indicator.
For example, a move to 100 in Aroon-Up combined with a decline below 30 in Aroon-Down shows upside strength.
Consistently high readings mean prices are regularly hitting new highs or new lows for the specified period. Prices are
moving consistently higher when Aroon-Up remains in the 70-100 range for an extended period. Conversely, consistently
low readings indicate that prices are seldom hitting new highs or lows. Prices are NOT moving lower when Aroon-Down
remains in the 0-30 range for an extended period. This does not mean prices are moving higher though. For that we need
to check Aroon-Up.

New Trend Emerging
There are three stages to an emerging trend signal. First, the Aroon lines will cross. Second, the Aroon lines will cross
above/below 50. Third, one of the Aroon lines will reach 100. For example, the first stage of an uptrend signal is when
Aroon-Up moves above Aroon-Down. This shows new highs becoming more recent than new lows. Keep in mind that
Aroon measures the time elapsed, not the price. The second stage is when Aroon-Up moves above 50 and Aroon-Down
moves below 50. The third stage is when Aroon-Up reaches 100 and Aroon-Down remains at relatively low levels. The first
and second stages do not always occur in that order. Sometimes Aroon-Up will break above 50 and then above Aroon-
Down. Reverse engineering the uptrend stages will give you the emerging downtrend signal. Aroon-Down breaks above
Aroon-Up, breaks above 50 and reaches 100.



The chart above shows CSX Corp (CSX) with weekly bars and 25-week Aroon. First, notice that the downtrend began
weakening as Aroon-Down declined below 50 at the end of 2007 (far left). The first stage of an uptrend was signaled when
Aroon-Up moved above Aroon-Down in early 2008 (first orange circle). Aroon-Up continued above 50 and hit 100 as Aroon-
Down remained at relatively low levels. Notice how Aroon-Up remained near 100 as the advance continued. This emerging
uptrend signal lasted until September 2008 when Aroon-Down broke above Aroon-Up, exceeded 50 and surged to 100
(second orange circle). Notice how Aroon-Down remained near 100 as the downtrend extended. The third trend on this
chart was signaled when Aroon-Up surged to 100 in June 2009 and remained above 50 for over a year (third orange circle).
Also notice that Aroon-Down remained below 50 for over a year.

Consolidation Period
The Aroon indicators signal a consolidation when both are below 50 and/or both are moving lower with parallel lines. It
makes sense that consistent readings below 50 are indicative of flat trading. For 25-day Aroon, readings below 50 mean a
25-day high or low has not been recorded in 13 or more days. Prices are clearly flat when not recording new highs or new
lows. Similarly, a consolidation is usually forming when both Aroon-Up and Aroon-Down move lower in parallel fashion and
the distance between the two lines is quite small. This narrow parallel decline indicates that some sort of trading range is
forming. The first Aroon indicator to break above 50 and hit 100 will trigger the next signal.



The chart below shows Omnicom (OMC) with the Aroon indicators moving below 50 in a parallel decline. The width of the
channel could be narrower, but we can see the consolidation taking shape on the price chart for confirmation. Both Aroon-
Up and Aroon-Down were below 50 in the yellow area. Aroon-Up then broke out and surged to 100, which was before the
breakout. Further confirmation came with another Aroon-Up surge at the breakout point. This surge/breakout signaled an
end of the consolidation and the beginning of the advance.



The next chart shows Lifepoint Hospitals (LPNT) with 25-day Aroon. Both lines moved lower in May with a parallel decline.
The distance between the lines was around 25 points throughout the decline. Aroon-Up and Aroon-Down flattened in June
and both remained below 50 for around two weeks as the triangle consolidation extended. Aroon-Down (red) was the first
to make its move with a break above 50 just before the triangle break on the price chart. Aroon-Down hit 100 as prices
broke triangle support to signal a continuation lower.

Conclusions
Aroon-Up and Aroon-Down are complementary indicators that measure the elapsed time between new x-day highs and
lows, respectively. They are shown together so chartists can easily identify the stronger of the two and determine the trend
bias. A surge in Aroon-Up combined with a decline in Aroon-Down signals the emergence of an uptrend. Conversely, a
surge in Aroon-Down combined with a decline in Aroon-Up signals the start of a downtrend. A consolidation is present
when both move lower in parallel fashion or when both remain at low levels (below 30). Chartist can use the Aroon
indicators to determine if a security is trending or trading flat and then use other indicators to generate appropriate signals.
For example, chartists might use a momentum oscillator to identify oversold levels when 25-week Aroon indicates that the
long-term trend is up.

SharpCharts
The Aroon indicators are available on SharpCharts as an indicator. Simply choosing "Aroon" will display Aroon-Up and
Aroon-Down. These indicators can be positioned above, below or behind the price plot of the underlying security. Users
can click on the green arrow to the right of the indicator to see advanced options and add a horizontal line at 50. Users can
even apply another indicator to the Aroon indicators. Click here for live chart with the Aroon indicators.

Suggested Scans
Aroon-Up and Aroon-Down are below 20: This simple scan searches for stocks where Aroon-Up and Aroon-Down are both
below 20. A consolidation is often present when both indicators are at such low levels. The first to break above 50 triggers
next directional clue.


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6/1/12 Average Directional Index (ADX) - ChartSchool - StockCharts.com


You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Average Directional Index (ADX)

Average Directional Index (ADX)
Introduction
The Average Directional Index (ADX), Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI) represent a group
of directional movement indicators that form a trading system developed by Welles Wilder. Wilder designed ADX with
commodities and daily prices in mind, but these indicators can also be applied to stocks. The Average Directional Index
(ADX) measures trend strength without regard to trend direction. The other two indicators, Plus Directional Indicator (+DI)
and Minus Directional Indicator (-DI), complement ADX by defining trend direction. Used together, chartists can determine
both the direction and strength of the trend.

Wilder features the Directional Movement indicators in his 1978 book, New Concepts in Technical Trading Systems. This
book also includes details on Average True Range (ATR), the Parabolic SAR system and RSI. Despite being developed
before the computer age, Wilder's indicators are incredible detailed in their calculation and have stood the test of time.

Directional Movement
Plus Directional Movement (+DM) and Minus Directional Movement (-DM) form the backbone of the Average Directional
Index (ADX). Wilder determined directional movement by comparing the difference between two consecutive lows with the
difference between the highs.

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Directional movement is positive (plus) when the current high minus the prior high is greater than the prior low minus the
current low. This so-called Plus Directional Movement (+DM) then equals the current high minus the prior high, provided it
is positive. A negative value would simply be entered as zero.

Directional movement is negative (minus) when the prior low minus the current low is greater than the current high minus
the prior high. This so-called Minus Directional Movement (-DM) equals the prior low minus the current low, provided it is
positive. A negative value would simply be entered as zero.

The chart above shows four calculation examples for directional movement. The first pairing shows a big positive difference
between the highs for a strong Plus Directional Movement (+DM). The second pairing shows an outside day with Minus
Directional Movement (-DM) getting the edge. The third pairing shows a big difference between the lows for a strong Minus
Directional Movement (-DM). The final pairing shows an inside day, which amounts to no directional movement (zero). Both
Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are negative and cancel out each other. Negative
values revert to zero. All inside days will have zero directional movement.

Calculation
The calculation steps for the Average Directional Index (ADX) are detailed in each step. Average True Range (ATR) is not
detailed because there is an entire ChartSchool article for this. Basically, ATR is Wilder's version of the two period trading
range. Smoothed versions of Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are divided by a
smoothed version Average True Range (ATR) to reflect the true magnitude of a move. The example below is based on a 14-
day ADX calculation.

1. Calculate the True Range (TR), Plus Directional Movement (+DM) and Minus Directional Movement (-DM) for each
period.



2. Smooth these periodic values using the Wilder's smoothing techniques. These are explained in detail in the next
section.

3. Divide the 14-day smoothed Plus Directional Movement (+DM) by the 14-day smoothed True Range to find the 14-day
Plus Directional Indicator (+DI14). Multiply by 100 to move the decimal point two places. This +DI14 is the Plus Directional
Indicator (green line) that is plotted along with ADX.

4. Divide the 14-day smoothed Minus Directional Movement (-DM) by the 14-day smoothed True Range to find the 14-day
Minus Directional Indicator (-DI14). Multiply by 100 to move the decimal point two places. This -DI14 is the Minus
Directional Indicator (red line) that is plotted along with ADX.

5. The Directional Movement Index (DX) equals the absolute value of +DI14 less - DI14 divided by the sum of +DI14 and -
DI14.

6. After all these steps, it is time to calculate the Average Directional Index (ADX). The first ADX value is simply a 14-day
average of DX. Subsequent ADX values are smoothed by multiplying the previous 14-day ADX value by 13, adding the most
recent DX value and dividing this total by 14.

Above is a spreadsheet example with all steps involved. There is a 119 day calculation gap because around 150 periods
are required to absorb the smoothing techniques. ADX enthusiasts can click here to download this spreadsheet and see
the gory details. The chart below shows an example of ADX using the Nasdaq 100 ETF (QQQQ).



Wilder's Smoothing
As seen in the ADX calculation, there is a lot of smoothing involved and it is important to understand the effects. Because
of Wilder's smoothing techniques, it can take around 150 periods of data to get true ADX values. Wilder uses similar
smoothing techniques with his RSI and Average True Range calculations. ADX values using only 30 periods of historical
data will not match ADX values using 150 periods of historical data. ADX values with 150 days or more of data will remain
consistent.

The first technique is used to smooth each period's +DM1, -DM1 and TR1 values over 14 periods. As with an exponential
moving average, the calculation has to start somewhere so the first value is simply the sum of the first 14 periods. As
shown below, smoothing starts with the second 14-period calculation and continues throughout.

FrtT1 =Smo frt1 proso T1
is R4 u f is 4 eid f R
Scn T1 =FrtT1 -(is T1/4 +CretT1
eod R4 is R4 Frt R41) urn R
Sbeun Vle =PirT1 -(ro T1/4 +CretT1
usqet aus ro R4 Pir R41) urn R4

The second technique is used to smooth each period's DX value to finish with the Average Directional Index (ADX). First,
calculate an average for the first 14 days as a starting point. The second and subsequent calculations use the smoothing
technique below:

FrtAX4=1 pro Aeaeo D
is D1 4 eid vrg f X
Scn AX4=(is AX4x1)+CretD Vle
eod D1 Frt D1 3 urn X au
Sbeun AX4=(ro AX4x1)+CretD Vle
usqet D1 Pir D1 3 urn X au



Interpretation
The Average Directional Index (ADX) is used to measure the strength or weakness of a trend, not the actual direction.
Directional movement is defined by +DI and -DI. In general, the bulls have the edge when +DI is greater than - DI, while the
bears have the edge when - DI is greater. Crosses of these directional indicators can be combined with ADX for a complete
trading system.

Before looking at some signals with examples, keep in mind that Wilder was a commodity and currency trader. The
examples in his books are based on these instruments, not stocks. This does not mean his indicators cannot be used
with stocks. Some stocks have price characteristics similar to commodities, which tend to be more volatile with short and
strong trends. Stocks with low volatility may not generate signals based on Wilder's parameters. Chartists will likely need
to adjust the indicator settings or the signal parameters according to the characteristics of the security.

Trend Strength
At its most basic the Average Directional Index (ADX) can be used to determine if a security is trending or not. This
determination helps traders choose between a trend following system or a non-trend following system. Wilder suggests
that a strong trend is present when ADX is above 25 and no trend is present when below 20. There appears to be a gray
zone between 20 and 25. As noted above, chartists may need to adjust the settings to increase sensitivity and signals.
ADX also has a fair amount of lag because of all the smoothing techniques. Many technical analysts use 20 as the key
level for ADX.

The chart above shows Nordstrom (JWN) with the 50-day SMA and 14-day Average Directional Index (ADX). The stock



moved from a strong uptrend to a strong downtrend in April-May, but ADX remained above 20 because the strong uptrend
quickly changed into a strong downtrend. There were two non-trending periods as the stock formed a bottom in February
and August. A strong trend emerged after the August bottom as ADX moved above 20 and remained above 20.

DI Crossover System
Wilder put forth a simple system for trading with these directional movement indicators. The first requirement is for ADX to
be trading above 25. This insures that prices are trending. A buy signal occurs when +DI crosses above - DI. Wilder based
the initial stop on the low of the signal day. The signal remains in force as long as this low holds, even if +DI crosses back
below - DI. Wait for this low to be penetrated before abandoning the signal. This bullish signal is reinforced if/when ADX
turns up and the trend strengthens. Once the trend develops and becomes profitable, traders will have to incorporate a
stop-loss and trailing stop should the trend continue. A sell signal triggers when - DI crosses above +DI. The high on the
day of the sell signal becomes the initial stop-loss.

The chart above shows Medco Health Solutions with the three directional movement indicators. The green dotted lines
show the buy signals and the red dotted lines shows the sell signals. Wilders initial stops were not incorporated in order to
focus on the indicator signals. As the chart clearly shows, there are plenty of +DI and - DI crosses. Some occur with ADX
above 20 validate signals. Others occur to invalidate signals signals. As with most such systems, there will be whipsaws,
great signals and bad signals. The key, as always, is to incorporate other aspects of technical analysis. For example, the
first group of whipsaws in September 2009 occurred during a consolidation. Moreover, this consolidation looked like a flag,
which is a bullish consolidation that forms after an advance. It would have been prudent to ignore bearish signals with a
bullish continuation pattern taking shape. The June 2010 buy signal occurred near a resistance zone marked by broken
support and the 50-62% retracement zone. It would have been prudent to ignore a buy signal so close to this resistance
zone.



The chart above shows AT&T (T) with three signals over a 12 month period. These three signals were pretty good, provided
profits were taken and trailing stops were used. Wilders Parabolic SAR could have been used to set a trailing stop-loss.
Notice that there was no sell signal between the March and July buy signals. This is because ADX never moved below 20
to make the signals possible.

Conclusions
The directional movement indicator calculations are complex, interpretation is straight-forward and successful
implementation takes practice. +DI and - DI crossovers are quite frequent and chartists need to filter these signals with
complementary analysis. Setting an ADX requirement will reduce signals, but this uber-smoothed indicator tends to filter
as many good signals as bad. In other words, chartists might consider moving ADX to the back burner and focusing on the
Directional Indicators to generate signals. These crossover signals will be similar to those generated using momentum
oscillators. Therefore, chartists need to look elsewhere for confirmation help. Volume-based indicators, basic trend
analysis and chart patterns can help distinguish strong crossover signals from weak crossover signals. For example,
chartists can focus on +DI buy signals when the bigger trend is up and - DI sell signals when the bigger trend is down.

SharpCharts
SharpCharts users can plot the directional movement indicators by selecting Average Directional Index (ADX) from the
indicator drop-down list. By default, ADX will be in black, the Plus Directional Indicator (+DI) in green and the Minus
Directional Indicator (-DI) in red. This makes it easy to identify directional indicator crosses. While ADX can be plotted
above, below or behind the main price plot, it is recommended to plot above or below because there are three lines
involved. A horizontal line can be added to help indentify ADX moves. The chart example below also shows the 50-day
SMA and Parabolic SAR plotted behind the price plot. The moving average is used to filter signals. Only buy signals are



used when trading above the 50-day moving average. Once initiated, the Parabolic SAR can be used to set stops. Click
here for a live example of ADX.

Suggested Scans
Overall Uptrend with +DI Crossing above -DI: This scan starts with stocks that average 100,000 shares daily volume and
have an average closing price above 10. An uptrend is present when trading above the 50-day SMA. A buy signal is
possible when ADX is above 20. This signal materializes when +DI moves above - DI.

Overall Downtrend with - DI Crossing above +DI: This scan starts with stocks that average 100,000 shares daily volume


and have an average closing price above 10. An downtrend is present when trading below the 50-day SMA. A sell signal is
possible when ADX is above 20. This signal materializes when -DI moves above +DI.

Further Study

New Concepts in Technical Trading Systems ADXcellence
Welles Wilder Charles Schaap

Send us your feedback!

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6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com


You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Average True Range (ATR)

Average True Range (ATR)
Introduction
Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. As with most of his
indicators, Wilder designed ATR with commodities and daily prices in mind. Commodities are frequently more volatile than
stocks. They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its
maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility
from gap or limit moves. Wilder created Average True Range to capture this "missing" volatility. It is important to remember
that ATR does not provide an indication of price direction, just volatility.

Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic
SAR, RSI and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder's
indicators have stood the test of time and remain extremely popular.

True Range
Wilder started with a concept called True Range (TR), which is defined as the greatest of the following:

Method 1: Current High less the current Low
Method 2: Current High less the previous Close (absolute value)
Method 3: Current Low less the previous Close (absolute value)

Absolute values are used to insure positive numbers. After all, Wilder was interested in measuring the distance between
two points, not the direction. If the current period's high is above the prior period's high and the low is below the prior
period's low, then the current period's high-low range will be used as the True Range. This is an outside day that would use
Method 1 to calculate the TR. This is pretty straight forward. Methods 2 and 3 are used when there is a gap or an inside
day. A gap occurs when the previous close is greater than the current high (signaling a potential gap down or limit move) or
the previous close is lower than the current low (signaling a potential gap up or limit move). The image below shows
examples when methods 2 and 3 are appropriate.

stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 1/7


Example A: A small high/low range formed after a gap up. The TR equals the absolute value of the difference between the
current high and the previous close.

Example B: A small high/low range formed after a gap down. The TR equals the absolute value of the difference between
the current low and the previous close.

Example C: Even though the current close is within the previous high/low range, the current high/low range is quite small.
In fact, it is smaller than the absolute value of the difference between the current high and the previous close, which is
used to value the TR.

Calculation
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 be based on daily data. Because there must be a beginning, the first TR
value is simply the High minus the Low, and the first 14-day ATR is the average of the daily TR values for the last 14 days.
After that, Wilder sought to smooth the data by incorporating the previous period's ATR value.

CretAR=[PirARx1)+CretT]/1
urn T (ro T 3 urn R 4

-Mlil tepeiu 1-a ARb 1.
utpy h rvos 4dy T y 3
-Adtems rcn dysT vle
d h ot eet a' R au.
-Dvd tettlb 1
iie h oa y 4



Click here for an Excel Spreadsheet showing the start of an ATR calculation for QQQQ.

In the Spreadsheet example, the first True Range value (.91) equals the High minus the Low (yellow cells). The first 14-day
ATR value (.56)) was calculated by finding the average of the first 14 True Range values (blue cell). Subsequent ATR values
were smoothed using the formula above. The spreadsheet values correspond with the yellow area on the chart below.
Notice how ATR surged as QQQQ plunged in May with many long candlesticks.



For those trying this at home, a few caveats apply. First, ATR values depend on where you begin. The first True Range
value is simply the current High minus the current Low and the first ATR is an average of the first 14 True Range values.
The real ATR formula does not kick in until day 15. Even so, the remnants of these first two calculations linger to slightly
affect ATR values. Spreadsheet values for a small subset of data may not match exactly with what is seen on the price
chart. Decimal rounding can also slightly affect ATR values.

Absolute ATR
ATR is based on the True Range, which uses absolute price changes. As such, ATR reflects volatility as absolute level. In
other words, ATR is not shown as a percentage of the current close. This means low priced stocks will have lower ATR
values than high price stocks. For example, a $20-30 security will have much lower ATR values than a $200-300 security.
Because of this, ATR values are not comparable. Even large price movements for a single security, such as a decline from
70 to 20, can make long-term ATR comparisons impractical. Chart 4 shows Google with double digit ATR values and chart
5 shows Microsoft with ATR values below 1. Despite different values, their ATR lines have similar shapes.



Conclusions
ATR is not a directional indicator, such as MACD or RSI. Instead, ATR is a unique volatility indicator that reflects the
degree of interest or disinterest in a move. Strong moves, in either direction, are often accompanied by large ranges, or


large True Ranges. This is especially true at the beginning of a move. Uninspiring moves can be accompanied by relatively
narrow ranges. As such, ATR can be used to validate the enthusiasm behind a move or breakout. A bullish reversal with an
increase in ATR would show strong buying pressure and reinforce the reversal. A bearish support break with an increase in
ATR would show strong selling pressure and reinforce the support break.

SharpCharts
Listed as "Average True Range", ATR is on the Indicators drop-down menu. The "parameters" box to the right of the
indicator contains the default value, 14, for the number of periods used to smooth the data. To adjust the period setting,
highlight the default value and enter a new setting. Wilder often used 8 period ATR. SharpCharts also allows users to
position the indicator above, below, or behind the price plot. A moving average can be added to identify upturns or
downturns in ATR. Click "advanced options" to add a moving average as an indicator overlay. Click here for a live example
of ATR.

Further Study

New Concepts in Technical Trading Systems
Welles Wilder

Send us your feedback!

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6/1/12 Bollinger Band %B - ChartSchool - StockCharts.com


You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Bollinger Band %B

Bollinger Band %B
Introduction
%B is an indicator derived from Bollinger Bands. In his book, Bollinger on Bollinger Bands, John Bollinger refers to %B as
one of two indicators that can be derived from Bollinger Bands. The other indicator is Bollinger Band width.

%B quantifies a security's price relative to the upper and lower Bollinger Band. There are six basic relationship levels:

%B equals 1 when price is at the upper band
%B equals 0 when price is at the lower band
%B is above 1 when price is above the upper band
%B is below 0 when price is below the lower band
%B is above .50 when price is above the middle band (20-day SMA)
%B is below .50 when price is below the middle band (20-day SMA)

Calculation

% =(rc -LwrBn)(pe Bn -LwrBn)
B Pie oe ad/Upr ad oe ad

The default setting for %B is based on the default setting for Bollinger Bands (20,2). The bands are set 2 standard
deviations above and below the 20-day simple moving average, which is also the middle band. Security price is the close
or the last trade.

Signals: Overbought/Oversold
%B can be used to identify overbought and oversold situations. However, it is important to know when to look for
overbought readings and when to look for oversold readings. As with most momentum oscillators, it is best to look for
short-term oversold situations when the medium-term trend is up and short-term overbought situations when the medium-
term trend is down. In other words, look for opportunities in the direction of the bigger trend, such as a pullback within a
bigger uptrend. Define the bigger trend before looking for overbought or oversold readings.

Chart 1 shows Apple (AAPL) within a strong uptrend. Notice how %B moved above 1 several times, but did not even come
close to 0. Even though %B moved above 1 numerous times, these "overbought" readings did not produce good sell
signals. Pullbacks were shallow as Apple reversed well above the lower band and resumed its uptrend. John Bollinger
refers to "walking the band" during strong trends. In a strong uptrend, prices can walk up the upper band and rarely touch
the lower band. Conversely, prices can walk down the lower band and rarely touch the upper band in a strong downtrend.

stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_perce 1/5


After identifying a bigger up trend, %B can be considered oversold when it moves to zero or below. Remember, %B moves
to zero when price hits the lower band and below zero when price moves below the lower band. This represents a move
that is 2 standard deviations below the 20-day moving average. Chart 2 shows the Nasdaq 100 ETF (QQQQ) within an
uptrend that began in March 2009. %B moved below zero three times during this uptrend. The oversold readings in early
July and early November provided good entry points to partake in the bigger uptrend (green arrows).



Signals: Trend Identification
John Bollinger's book also featured a trend-following system using %B with the Money Force Index, also known as the
Money Flow Index (MFI). An uptrend begins when %B is above .80 and MFI is above 80. MFI is bound between zero and
one hundred. A move above 80 places MFI in the upper 20% of its range, which is a strong reading. Bollinger suggested
setting MFI periods at 1/2 the number of Bollinger Band periods, which would be 10. Downtrends are identified when %B is
below .20 and MFI is below 20.

Chart 3 shows FedEx (FDX) with Bollinger Bands (20,2), %B and MFI (10). An uptrend started in late July when %B was
above .80 and MFI was above 80. This uptrend was subsequently affirmed with two more signals in early September and
mid November. While these signals were good for trend identification, traders would likely have had issues with the risk-
reward ratio after such big moves. It takes a substantial price surge to push %B above .80 and MFI above 80 at the same
time. Traders might consider using this method to identify the trend and then look for appropriate overbought or oversold
levels for better entry points.

Conclusions
%B quantifies the relationship between price and Bollinger Bands. Readings above .80 indicate that price is near the upper
band. Readings below .20 indicate that price is near the lower band. Surges towards the upper band show strength, but
can sometimes be interpreted as overbought. Plunges to the lower band show weakness, but can sometimes be
interpreted as oversold. A lot depends on the underlying trend and other indicators. While %B can have some value on its
own, it is best when used in conjunction with other indicators or price analysis. Click here for a live chart with Bollinger
Bands.


%B and SharpCharts
%B can be found in the indicator list on SharpCharts. The default parameters (20,2) are based on the default parameters
for Bollinger Bands. These can be changed accordingly. 20 represents the simple moving average. 2 represents the
number of standard deviations for the upper and lower band. %B can be positioned above, below or behind the price plot.
Click here to see a live example of %B.

Suggested Scans
%B Uptrend Scan: This scan filters out stocks where %B is above .80 and MFI just crossed above 80. According to
Bollinger, these stocks could be starting new up swings. This scan is just a starting point. Further refinement and analysis
are required.

%B Downtrend Scan: This scan filters out stocks where %B is below .20 and MFI just crossed below 20. According to
Bollinger, these stocks could be starting new down swings. This scan is just a starting point. Further refinement and
analysis are required.

Further Study

Bollinger on Bollinger Bands
John Bollinger

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6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com


You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Bollinger BandWidth

Bollinger BandWidth
Introduction
Bollinger BandWidth is an indicator derived from Bollinger Bands. In his book, Bollinger on Bollinger Bands, John Bollinger
refers to Bollinger BandWidth as one of two indicators that can be derived from Bollinger Bands. The other indicator is %B.

Non-normalized BandWidth measures the distance, or difference, between the upper band and the lower band. BandWidth
decreases as Bollinger Bands narrow and increases as Bollinger Bands widen. Because Bollinger Bands are based on the
standard deviation, falling BandWidth reflects decreasing volatility and rising BandWidth reflects increasing volatility.

SharpCharts Calculation

(pe Bn -LwrBn)
Upr ad oe ad

Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average usually set at
20 periods. The outer bands are usually set 2 standard deviations above and below the middle band. Settings can be
adjusted to suit the characteristics of particular securities or trading styles. BandWidth is simply the difference between the
upper band and the lower band.

stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 1/8


The chart above shows the S&P 500 ETF (SPY) with Bollinger Bands, BandWidth and the Standard Deviation. Notice how
BandWidth tracks the Standard Deviation (volatility). The image below shows a spreadsheet with the calculations for June
2009.



Defining Narrowness
It is important to remember that non-normalized BandWidth varies according to security's volatility and price. A BandWidth
value of 5 would be considered narrow for $100 a stock, but wide for a $30 stock. Five is 5% of 100, but 16.6% of 30.
Usually, Bandwith is considered low (narrow) when it is 5-10% of a security's price. Low BandWidth for a $50 stock would
range from 2.5 to 5, while low BandWidth for a $20 stock would range from .50 to 1. Depending on underlying volatility, the
definition of narrowness varies from stock to stock.

Narrow BandWidth can also be gauged relative to prior BandWidth values over a period of time. It is important to get a good
look-back period to define BandWidth range. For example, a one year chart will show BandWidth highs and lows over a
significant timeframe. BandWidth is considered narrow as it approaches it the lows of its one year range and high as it
approaches the highs of its range.

Signal: The Squeeze
Bollinger BandWidth is best for identifying The Squeeze. This occurs when volatility falls to a very low level, as evidenced by
the narrowing bands. The upper and lower bands are based on the standard deviation, which is a measure of volatility.
Therefore, volatility contracts as the bands narrow. The bands narrow as price flattens or moves within a relatively narrow
range. The theory is that periods of low volatility are followed by periods of high volatility. Relatively narrow BandWidth (a.k.a.
the Squeeze) can foreshadow a significant advance or decline. After a Squeeze, a price surge and subsequent band break
signal the start of a new move. A new advance starts with a Squeeze and subsequent break above the upper band. A new
decline starts with a Squeeze and subsequent break below the lower band.

Chart 2 shows Alaska Airlines (ALK) with a squeeze in mid June. After declining in April-May, ALK stabilized in early June
as Bollinger Bands narrowed. BandWidth dipped to around 1.5 to put the Squeeze play on in mid June. With the stock
around 15-16, BandWidth was less than 10% of the stock price. With the subsequent surge above the upper band, the stock
broke out to trigger an extended advance.



Chart 3 shows Aeropostale (ARO) with a couple of Squeezes. The second Squeeze occurred in October as ARO
consolidated around 43 and BandWidth dipped below 3. Aeropostale is priced higher than Alaska Airlines and this means its
non-normalized BandWidth will be relatively higher. Low Bandwith for ARO is below 4. Relatively low BandWidth in ARO
alerted traders to be ready for a move in mid August. ARO subsequently broke the lower band with a move below 40 and this
triggered an extended decline. The advance stalled in late September and BandWidth narrowed in October. Notice how
BandWidth declined back to its August lows in early October and then flattened out. The subsequent break below the lower
Bollinger Band triggered a bearish signal in late October.



The Squeeze can also be applied to weekly charts or longer timeframes. Volatility and BandWidth on weekly charts is higher
than on the daily chart. This makes sense because larger price movements can be expected over longer timeframes. Chart 4
shows Barrick Gold (ABX) consolidating throughout 2006 and into 2007. As the consolidation narrowed and a triangle
formed, Bollinger Bands contracted and BandWidth dipped below 5. Notice how BandWidth remained at low levels as the
consolidation extended. A bullish signal triggered with the breakout in July 2007. BandWidth also rose as prices moved
sharply in one direction and Bollinger Bands widened.



Chart 5 shows Honeywell (HON) with an extended trading range around 55. There was a move to the upper band in May, but
no breakout for a signal. Instead, HON clearly broke below the lower band to trigger a bearish signal.

Conclusions
The BandWidth indicator can be used to identify the Bollinger Band Squeeze. This alerts chartists to prepare for a move, but
direction depends on the subsequent band break. A Squeeze and break above the upper band is bullish, while a Squeeze
and break below the lower band is bearish. Be careful for head-fakes though. Sometimes the first break fails to hold as
prices reverse the other way. Strong breaks hold and seldom look back. An upside breakout followed by an immediately
pullback should serve as a warning.

BandWidth and SharpCharts
Bollinger BandWidth can be found in the indicator list on SharpCharts. The default parameters (20,2) are based on the
default parameters for Bollinger Bands. These can be changed accordingly. 20 represents the simple moving average. 2
represents the number of standard deviations for the upper and lower band. BandWidth can be positioned above, below or
behind the price plot. Click here to see a live example of BandWidth.

BandWidth and Market Carpets
Normalized Bollinger BandWidth is shown in the Market Carpet. This allows users to compare BandWidth for a number of
securities. Bollinger BandWidth is normalized by divided the width by the middle band. Using the Sector Market Carpet as
an example, choose Bollinger BandWidth and then click the delta icon (little triangle) to view absolute levels. A shaded delta



icon shows percentage change. A white delta icon shows absolute levels. Green boxes show stocks with relatively wide
BandWidth. Light boxes show stocks with relatively narrow BandWidth. A list of the stocks with the narrowest BandWidth is
shown at the bottom right of the Market Carpet (Bottom 5). Click the names to see a small chart above. Users can dive into
the sectors by clicking on the sector heading (e.g. Technology). With nine sectors and the Bottom 5 stocks listed for each
sector, users can quickly view 45 stocks with relatively narrow BandWidth.

Further Study

Bollinger on Bollinger Bands
John Bollinger

—-




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6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com


You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Commodity Channel Index (CCI)

Commodity Channel Index (CCI)
Introduction
Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a
versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI
to identify cyclical turns in commodities, but the indicator can successfully applied to indices, ETFs, stocks and other
securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI
is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In
this manner, CCI can be used to identify overbought and oversold levels.

Calculation
The example below is based on a 20-period Commodity Channel Index (CCI) calculation. The number of CCI periods is
also used for the calculations of the simple moving average and Mean Deviation.

CI=(yia Pie - 2-eidSAo T)/(05xMa Dvain
C Tpcl rc 0pro M f P .1 en eito)

TpclPie(P =(ih+Lw+Coe/
yia rc T) Hg o ls)3

Cntn =.1
osat 05

Teeaefu sest cluaigteMa Dvain Frt sbrc
hr r or tp o acltn h en eito. is, utat
tems rcn 2-eidaeaeo tetpclpiefo ec pro'
h ot eet 0pro vrg f h yia rc rm ah eids
tpclpie Scn,tk teaslt vle o teenmes Tid
yia rc. eod ae h boue aus f hs ubr. hr,
smteaslt vle.Fut,dvd b tettlnme o pros(0.
u h boue aus orh iie y h oa ubr f eid 2)

Lambert set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and
+100. This percentage also depends on the look-back period. A shorter CCI (10 periods) will be more volatile with a smaller
percentage of values between +100 and -100. Conversely, a longer CCI (40 periods) will have a higher percentage of values
between +100 and -100.

stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 1/8


Click here for a CCI calculation in an Excel Spreadsheet.



Interpretation
CCI measures the difference between a security's price change and its average price change. High positive readings
indicate that prices are well above their average, which is a show of strength. Low negative readings indicate that prices
are well below their average, which is a show of weakness.

The Commodity Channel Index (CCI) can be used as either a coincident or leading indicator. As a coincident indicator,
surges above +100 reflect strong price action that can signal the start of an uptrend. Plunges below -100 reflect weak price
action that can signal the start of a downtrend.

As a leading indicator, chartists can look for overbought or oversold conditions that may foreshadow a mean reversion.
Similarly, bullish and bearish divergences can be use to detect early momentum shifts and anticipate trend reversals.

New Trend Emerging
As noted above, the majority of CCI movement occurs between -100 and +100. A move that exceeds this range shows
unusual strength or weakness that can foreshadow an extended move. Think of these levels as bullish or bearish filters.
Technically, CCI favors the bulls when positive and the bears when negative. However, using a simple zero line crossovers
can result in many whipsaws. Although entry points will lag more, requiring a move above +100 for a bullish signal and a
move below -100 for a bearish signal reduces whipsaws.

The chart below shows Caterpillar (CAT) with 20-day CCI. There were four trend signals within a seven month period.
Obviously, a 20-day CCI is not suited for long-term signals. Chartists need to use weekly or monthly charts for long-term
signals. The stock peaked on 11-Jan and turned down. CCI moved below -100 on 22-January (8 days later) to signal the
start of an extended move. Similarly, the stock bottomed on 8-February and CCI moved above +100 on 17-February (6


days later) to signal the start of an extended advance. CCI does not catch the exact top or bottom, but it can help filter out
insignificant moves and focus on the larger trend.

CCI triggered a bullish signal when CAT surged above 60 in June. Some traders may have considered the stock overbought
and the reward-to-risk ratio unfavorable at these levels. With the bullish signal in force, focus would have been on bullish
setups with a good reward-to-risk ratio. Notice that the stock retraced around 62% of the prior advance and formed a falling
flag by the end of June. The subsequent surge above the flag trendline provided another bullish signal with CCI still in bull
mode.

Overbought/Oversold
Identifying overbought and oversold levels can be tricky with the Commodity Channel Index (CCI), or any other momentum
oscillator for that matter. First, CCI is an unbound oscillator. Theoretically, there are no upside or downside limits. This
makes an overbought or oversold assessment subjective. Second, securities can continue moving higher after an indicator
becomes overbought. Likewise, securities can continue moving lower after an indicator becomes oversold.

The definition of overbought or oversold varies for the Commodity Channel Index (CCI). ±100 may work in a trading range,
but more extreme levels are needed for other situations. ±200 is a much harder level to reach and more representative of a
true extreme. Selection of overbought/oversold levels also depends on the volatility of the underlying security. The CCI
range for an index ETF, such as SPY, will be usually be smaller than for a most stocks, such as Google.



The chart above shows Google (GOOG) with CCI(20). Horizontal lines at ±200 were added using the advanced indicators
options. From early February to early October (2010), Google exceeded ±200 at least five times. The red dotted lines show
when CCI moved back below +200 and the green dotted lines show when CCI moved back above -200. It is important to
wait for these crosses to reduce whipsaws should the trend extend. Such a system is not fool proof though. Notice how
Google kept on moving higher even after CCI became overbought in mid September and moved below -200.

Bullish Bearish Divergences
Divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence
occurs when the underlying security makes a lower low and CCI forms a higher low, which shows less downside
momentum. A bearish divergence forms when the security records a higher high and CCI forms a lower high, which shows
less upside momentum. Before getting too excited about divergences as great reversal indicators, note that divergences
can be misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually
materializes. Conversely, bullish divergences often after appear in extended downtrends.

Confirmation holds the key to divergences. While divergences reflect a change in momentum that can foreshadow a trend
reversal, chartists should set a confirmation point for CCI or the price chart. A bearish divergence can be confirmed with a
break below zero in CCI or a support break on the price chart. Conversely, a bullish divergence can be confirmed with a
break above zero in CCI or a resistance break on the price chart.



The chart above shows United Parcel Service (UPS) with 40-day CCI. A longer timeframe, 40 versus 20, was used to
reduce volatility. There are three sizable divergences over a seven month period, which is actually quite a few for just seven
months. First, UPS raced to new highs in early May, but CCI failed to exceed its March high and formed a bearish
divergence. A support break on the price chart and CCI move into negative territory to0 confirm this divergence a few days
later. Second, a bullish divergence formed in early July as the stock moved to a lower low, but CCI formed a higher low.
This divergence was confirmed with a CCI break into positive territory. Also notice that UPS filled the late June gap with a
surge in early July. Third, a bearish divergence formed in early September and this was confirmed when CCI dipped into
negative territory. Despite a CCI confirmation, price never broke support and the divergence did not result in a trend
reversal. Not all divergences produce good signals.

Conclusions
CCI is a versatile momentum oscillator that can be used to identify overbought/oversold levels or trend reversals. The
indicator becomes overbought or oversold when it reaches a relative extreme. That extreme depends on the characteristics
of the underlying security and the historical range for CCI. Volatile securities are likely to require greater extremes than
docile securities. Trend changes can be identified when CCI crosses a specific threshold between zero and 100.
Regardless of how CCI is used, chartists should use CCI in conjunction with other indicators or price analysis. Another
momentum oscillator would be redundant, but On Balance Volume (OBV) or the Accumulation Distribution Line can add
value to CCI signals.

Using with SharpCharts
CCI is available as a SharpCharts indicator that can be placed above, below or behind the price plot of the underlying
security. Placing CCI directly behind the price makes it easy to compare indicator movements with price movements. The



default setting is 20-periods, but this can be adjusted to suit analysis needs. A shorter timeframe makes the indicator
more sensitive. A longer timeframe makes it less sensitive. Members can click the green arrow next to "advanced options"
to add horizontal lines to mark overbought or oversold levels. Two lines can be added by separating the numbers with a
comma (200,-200).

Suggested Scans
CCI Oversold in Uptrend: This scan reveals stocks that are in an uptrend with oversold CCI turning up. First, stocks must
be above their 200-day moving average to be in an overall uptrend. Second, CCI must cross below -200 to show the
indicator rising from oversold levels.

CCI Overbought in Downtrend: This scan reveals stocks that are in a downtrend with overbought CCI turning down. First,



stocks must be below their 200-day moving average to be in an overall downtrend. Second, CCI must cross above +200 to
show the indicator falling from overbought levels.

Further Study
Murphy has a chapter devoted to momentum oscillators and their various uses. Murphy covers the pros and cons as well
as some examples specific to the Commodity Channel Index.

Pring shows the basics of momentum indicators by covering divergences, crossovers and other signals. There are two
more chapters covering specific momentum indicators with plenty of examples.

Technical Analysis of the Financial Markets Technical Analysis Explained by Martin Pring
John J. Murphy Martin Pring


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6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com


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Chaikin Money Flow
Introduction
Developed by Marc Chaikin, Chaikin Money Flow measures the amount of Money Flow Volume over a specific period.
Money Flow Volume forms the basis for the Accumulation Distribution Line. Instead of a cumulative total of Money Flow
Volume, Chaikin Money Flow simply sums Money Flow Volume for a specific look-back period, typically 20 or 21 days.
The resulting indicator fluctuates above/below the zero line just like an oscillator. Chartists weigh the balance of buying or
selling pressure with the absolute level of Chaikin Money Flow. Chartists can also look for crosses above or below the zero
line to identify changes on money flow.

Calculation
There are four steps to calculating Chaikin Money Flow (CMF). The example below is based on 20-periods. First, calculate
the Money Flow Multiplier for each period. Second, multiply this value by the period's volume to find Money Flow Volume.
Third, sum Money Flow Volume for the 20 periods and divide by the 20 period sum of volume.

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. oe lw utpir (ls o) Hg ls) (ih o)

2 MnyFo Vlm =MnyFo Mlile xVlm frtePro
. oe lw oue oe lw utpir oue o h eid

3 2-eidCF=2-eidSmo MnyFo Vlm /2 pro Smo Vlm
. 0pro M 0pro u f oe lw oue 0 eid u f oue

Each period's Money Flow Volume depends on the Money Flow Multiplier. This multiplier is positive when the close is in
the upper a half of the period's high-low range and negative when the close is in the lower half. The multiplier equals 1 when
the close equals the high and -1 when the close equals the low. In this way the multiplier adjusts the amount of volume
that ends up in Money Flow Volume. Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1
or -1).

stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 1/10


The table above shows some examples using daily data for Research in Motion (RIMM). Notice how the multiplier was
near +1 on 5-Jan when the stock closed near its high. The multiplier dipped to -.97 on 18-Jan when the stock closed near
its low. The multiplier finished near zero (-.07) when the stock closed near the mid point of its high-low range on 29-Dec.
Click here for a calculation example of Chaikin Money Flow in an Excel Spreadsheet.

Interpretation
Chaikin Money Flow (CMF) is an oscillator that fluctuates between -1 and +1. Rarely, if ever, will the indicator reach these
extremes. It would take 20 consecutive closes on the high (low) for 20-day Chaikin Money Flow to reach +1 (-1). Typically,
this oscillator fluctuates between -.50 and +.50 with zero as the centerline.



Chaikin Money Flow measures buying and selling pressure for a given period of time. A move into positive territory
indicates buying pressure, while a move into negative territory indicates selling pressure. Chartists can use the absolute
value of Chaikin Money Flow to confirm or question the price action of the underlying. Positive CMF would confirm an
uptrend, but negative CMF would call into question the strength behind an uptrend. The reverse holds true for downtrends.

Buying/Selling Pressure
Chaikin Money Flow can be used to define a general buying or selling bias simply with positive or negative values. The
indicator oscillates above/below the zero line. Generally, buying pressure is stronger when the indicator is positive and
selling pressure is stronger when the indicator is negative.

While this zero line cross seems simple enough, the reality is much choppier. Chaikin Money Flow sometimes only briefly
crosses the zero line with a move that turns the indicator barely positive or negative. There is no follow through and this
zero line cross ends up becoming a whipsaw (bad signal). Chartists can filter these signals with buffers by setting the
bullish threshold a little above zero (+.05) and the bearish threshold a little below zero (-.05). These thresholds will not
entirely eliminate bad signals, but can help reduce whipsaws and filter out weaker signals.



The chart above shows Freeport McMoran (FCX) with 20-day Chaikin Money Flow in the indicator window. There were at
least 10 crosses of the zero line between February and December 2010. Adding a small buffer greatly reduced the number
of bullish and bearish signals. A move above +.50 was considered bullish, while a move below -.50 was considered
bearish. There were only three signals. While these signals will come a little later, it may be worth it to reduce whipsaw.



The chart for Harley Davidson (HOG) shows a few good signals and a whipsaw with the May bounce. CMF moved above
.50 for a few days, but this move failed to hold and the indicator broke back below -.50 in early June. Whipsaws are going
to happen, especially during volatile periods or when the trend flattens. CMF turned bullish in July and stayed bullish the
rest of the year. Notice that HOG formed a falling wedge that retraced just over 62% in August, when CMF was still in bull
mode. This pullback offered a second chance to partake in the CMF signal.



Chaikin Money Flow is not suited for all securities. The chart above shows P.F. Chang (PFCB) with some 18 crosses
above +.50 or below -.50. Basing CMF signals on these crosses resulted in one whipsaw after another. It is important to
analyze the basic price trend and the characteristics of an indicator with a particular security. PFCB exhibits some trend,
but price action within this trend is choppy and money flow cannot maintain a positive or negative bias. It would be better
to find a different indicator for this stocks.

Calculation Quirk
The Money Flow Multiplier in Chaikin Money Flow focuses on the level of the close relative to the high-low range for a given
period (day, week, month). With this formula, a security could gap down and close significantly lower, but the Money Flow
Multiplier would rise if the close were above the midpoint of the high-low range. The chart below shows Clorox (CLX) with a
big gap down and a close near the top of the day's high-low range. Even though the stock closed sharply lower on high
volume, Chaikin Money Flow rose because the Money Flow Multiplier was positive and volume was well above average.
Ignoring the change from close-to-close means that Chaikin Money Flow can sometimes disconnect with price.



The opposite can happen when a security gaps up and closesnear the low for the day. The chart below shows Travellers
(TRV) gapping up and closing over 1% higher on the day. Despite this jump, the close was near the low for the day, which
insured a Money Flow Multiplier near -1. As a result, almost all of the day's volume was counted as negative money flow
and the Chaikin Money Flow fell.



Conclusions
Chaikin Money Flow is an oscillator that measures buying and selling pressure over a set period of time. At its most basic,
money flow favors the bulls when CMF is positive and the bears when negative. Chartists looking for quicker money flow
shifts can look for bullish and bearish divergences. Be careful though. Selling pressure still has the edge in negative
territory, even when there is a bullish divergence. This bullish divergence simply shows less selling pressure. It takes a
move into positive territory to indicate actual buying pressure. As an money flow oscillator, CMF can be used in
conjunction with pure price oscillators, such as MACD or RSI. As with all indicators, Chaikin Money Flow should not be
used as a stand-alone indicator. Marc Chaikin also developed the Accumulation Distribution Line and the Chaikin
Oscillator.

SharpCharts
Chaikin Money Flow can be set as an indicator above or below the main window. Because it is shown in area format, it is
not really suited for placement behind the security's price plot. Once the indicator is chosen from the drop down list, the
default parameter appears (20). These parameters can be adjusted to increase or decrease sensitivity. Users can click on
"advanced options" to add horizontal lines, moving averages or other overlays. Chartists can even plot a second and longer


Chaikin Money Flow indicator on top of the other. Period's of overlap show when money flow is strong for two different
periods. Click here for a live example.

Suggested Scans
Chaikin Money Flow Turns Positive and RSI Moves Above 50: This scan starts with a base of stocks that are averaging at
least $10 in price and 100,000 in daily volume over the last 60 days. Accumulation and buying pressure is identified when
Chaikin Money Flow moves into positive territory. Price momentum confirms when RSI moves above 50, its centerline. This
scan is meant as a starting point for further analysis and due diligence.

Chaikin Money Flow Turns Negative and RSI Moves Below 45: This scan starts with a base of stocks that are averaging at
least $10 in price and 100,000 in daily volume over the last 60 days. Distribution and selling pressure are identified when
Chaikin Money Flow moves into negative territory. Price momentum confirms when RSI moves below 50, its centerline.
This scan is meant as a starting point for further analysis and due diligence.


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