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Review of early and late indicators
There are two types of indicators. Leading indicators and lagging indicators, which of course are also called accelerating and lagging. An advanced indicator gives us a buy or sell signal before the formation of a trend. The late indicator informs us after the process has started, that the process has started.
When you use advanced indicators, you often make mistakes. Because the advanced indicators are famous for giving fake signals.
Late indicators give good signals instead. But their problem is that they do this when the process is completely clear. And since usually the main profit of a trend is at the very beginning, you lose a lot of profit.
A leading momentum indicator precedes the price movement and gives it a predictive quality. While a lagging indicator is a stabilization or confirmation tool because it is formed after the price changes. An accelerating indicator seems to perform more strongly during horizontal or non-trending periods, while lagging indicators are useful during trending periods as well.
There are also two types of structures for indicators: ranged and unbounded. Groups that are within a limited range are called oscillators – these are the most common types of indicators. Oscillator indicators have a range, for example, between 0 and 100 and show overbought (close to 100) or oversold (close to zero) signals. Unlimited indicators also form buy or sell signals along with showing the strength or weakness of the trend, which differ only in the way of doing this.
The two main methods of using indicators in technical analysis to form buy and sell signals are through intersections and divergence. Crossovers are more common and are reflected when the price crosses the moving average or when two moving averages cross each other. Another way to use indicators is to use divergence and it happens when the direction of the price trend and the direction of the index trend are opposite to each other. This mode shows the user of the indicators that the direction of the price trend is weakening.
Indicators used in technical analysis provide a source of more and more important information. These indicators help identify trends, driving force, volatility and other aspects in a stock so that trends can be better analyzed. It is worth noting that while some traders use a single indicator for buy and sell signals, the best use of indicators is when they are used in conjunction with price trends, chart patterns and other indicators.
In order to understand better, let us have a bigger division. We divide our indicators into two categories:
Oscillators are advanced indicators.
Movement size indicators are late indicators.
While supporting each other, they can clash with each other. We do not mean that one or the other should be used exclusively. Rather, our goal is for you to get to know the pitfalls of each one.
CCI indicator training
It can be simplified by dividing the values of an oscillator by a fixed number. Donald Lambert used this technique in designing the Commodity Channel Indicator. He compared current prices to a moving average over a specified time interval (usually 20 days), then simplified the oscillator values by dividing by a number based on the deviation from the mean. This simplification caused the CCI oscillator to oscillate between +100 as the upper limit of the oscillator and -100 as the lower limit of the oscillator.
To calculate the commodity channel indicator, the low, high and last transaction prices, as well as the arithmetic moving average and mean deviation, are used. In the following relation, the 20-day period is used in the calculations of this indicator, which is also used in the calculations of the simple moving average and deviation from the average.
First, you need to subtract the average real price of the last 20 days from each of the real price values, then calculate the absolute value of these values. Next, add together the values of the absolute value, which is 20 for a period of 20 days, and divide the sum by 20.
According to equation 1, Donald Lambert has used a constant value of 0.015 in the denominator to ensure that 70-80% of the CCI indicator values fall within the range of -100 to +100. This constant value also depends on the time period in question. According to Figure 1, CCI indicator values for a shorter time period (for example, a 10-day period) are more volatile than a longer time period (for example, a 40-day period). Also, smaller values of the CCI oscillator for a shorter period are placed in the range of -100 to +100.
Identifying overbought and oversold ranges
The CCI oscillator is used to identify the trend and its strength. Unlike other oscillators, this tool has no limit and if it is in the upper areas
100+ and -100 below form peaks or valleys and change direction, indicating overbought and oversold, respectively. Therefore, values greater than +100 usually indicate overbought and values less than -100 indicate oversold. Many analysts use this indicator only to identify overbought and oversold areas.
Two strategies can be used to use the buy and sell signals of this indicator. In the first strategy (simple strategy), if the CCI oscillator crosses upwards of +100, the upward trend is considered and a buy signal is obtained. Also, if the commodity channel indicator goes below -100, a downward trend is considered and a sell signal is obtained. If the CCI oscillator breaks out of the range between -100 and +100, it indicates unusual market strength or weakness, which can foreshadow a trend move. Figure 2 shows the buy and sell signals issued by the CCI indicator in the daily time frame for the Haril symbol for the period from August to March 2017. To use this simple strategy, it is better to first check the trend of the market by using the average directional index (ADX) and use the buy and sell signals of this oscillator only if the trend of the market is determined by this indicator. Be sure, otherwise, similar to the blue area in Figure 2, this oscillator emits multiple signals that are not very valid.
In the second strategy (multi-period strategy), first, using a long-term chart (such as a monthly chart), the long-term trend of the stock is recognized, then a short-term chart (such as a daily chart) is used to identify pullbacks and entry points. to be In this strategy, when the long-term chart crosses +100 upwards, it indicates an upward trend, and this upward trend is valid until the indicator moves downwards from -100. Also, when the indicator goes down from -100, it indicates a downward trend, and this downward trend will continue until the indicator does not move up from +100. Therefore, when the indicator moves upwards from +100 in the long-term period, you can look for buy signals in the short-term chart. In the short-term chart, the passage of the indicator from +100 to the bottom is a sell signal, and its passage from -100 to the top is a buy signal. Also, when the CCI crosses below -100 on the long-term chart, only sell signals should be considered in the shorter time frame. Until the longer-term CCI chart breaks above +100, the trend should be considered bearish.
As can be seen in Figure 3, in the monthly chart of the Kohmada symbol, in September 2017, the CCI indicator is above +100, which indicates an upward trend in the medium term. This upward trend is valid as long as the indicator is above -100. Next, the entry point should be determined in the short-term chart.
Another use of the commodity channel index indicator is to detect positive and negative divergence. The divergence formed in this indicator is one of the strongest signals in indicators. Positive or bullish divergence occurs when the trend line drawn from two holes in the price chart is bearish, but the corresponding trend line in the indicator is bullish. Also, a negative or downward divergence occurs when the trend line drawn from the two peaks in the price chart is upward, but the trend line seen with it in the indicator is downward. Normally positive and negative divergences are formed at the end of the market trends and indicate that the current share trend will change soon. Therefore, according to the explanations provided, usually positive divergence at the end of the downward trend and negative divergence at the end of the upward trend cause the price to return and change the direction of the trend.
In Figure 5, the Barkat symbol shows a positive divergence, which has increased the share price from 135 Tomans to 162 Tomans (20 percent). Also, in Figure 6, a negative divergence can be seen in the Valraz symbol, which caused the share price to drop from 1,287 tomans to 548 tomans (57.5 percent).
