Indicator Formula

Understanding the formulas behind the different Indicators

Formulas of Indicators can be a very tedious and daunting task to understand. All one needs to understand is the meaning of the indicators and what does it indicates. Indicators are calculations based on price and volume history of a ticker. There are many different indicators, each with a unique formula used to measure such things as volatility,momentum, trend and money flow. Indicators can be displayed in separate panels above or below the main price panel, or in some case right on the chart behind price. To add an indicator, simply select it in the drop down list, modify any of the default parameters if so desired, and select the position where it should appear (Below, Above or Behind Price). Many of the indicators have complicated formulas, and entire books can and have been written on several of them. As such, below is a list of each indicator with only a quick description of each.

Deriving Technical Analysis Indicators

• A technical indicator is a result of mathematical calculations based on indications of combinations of price, time and volume. The values obtained are used to forecast probable price changes. It is a series of data points that are derived by applying a formula to the price data of a security. This price data applies to any combination of the open, high, low, or close over a period of time. The price data is entered into the formula and a data point is produced.

• Technical analysis indicators are derived from technical charts – which can be graphical or pictorial representations of the market activity in terms of upward or downward movements in stock prices over a period of time. However, some technical chart formations may also take into account trading volumes in the calculations.

• Mathematically, a technical chart is a plot of a set of price data (on the vertical axis) and a function of time (on the horizontal axis). This price data can include a stock’s opening price, closing price, the day’s high or low price, average price, or a combination of these. The plotted data points on the chart can show as individual points or as small bars.

• When all the data points on the chart are joined, a wave-like pattern is obtained. This pattern is then subjected to technical analysis by experts, who apply standard mathematical formulae to these price movements in order to arrive at technical indicators, from which they can predict the future market price of a stock or its market trend (upward/downward movement).

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