VWAP (Volume Weighted Average Price)
VWAP stands for "Volume-Weighted Average Price," and assesses the average price of a security relative to the volume that went into determining that price. This is helpful because rather than just looking at the price, this calibrates the price in a way that allows one to account for the volume (short term interest) that went into generating that price.
VWAP acts as a meaningful indicator for retail & institutional traders. For institutional traders, it’s often the line that determines whether they buy/sell above/below that line to determine whether they made a quality trade. Because of this, surpassing the VWAP (or not) become significant moments in the event of a trade.
As you can see in the TSLA 11/7 trade above, the VWAP (red line) acted as a way to test whether this stock was going to continue becoming bearish. It touched it once before the arrow, then a few times at the arrow — this is implying the bears and bulls are using this as a battleground. Once the bulls won that battle, the bears tried to take over where it tested the VWAP again (a few times) before the bulls showed strong enough force to let the stock skyrocket. VWAP is the best indicator to determine whether a trade is truly bearish or bullish, can become a support or resistance zone, and can be the location for breakouts.
RSI (Relative Strength Index)
RSI stands for the "Relative Strength Index," and it is a momentum oscillator used to assess the strength of potentially overbought or oversold stocks. It ranges on a scale from 0 to 100 and everyone has their definition for what is “overbought” and “oversold”. Mine are:
- Overbought → Over 70
- Oversold → Under 30
The RSI is calculated as follows:
As you can see from the example above, traversing beyond the 70 and 30 marks show a clear signal prior to a sharp spike or dip. This indicator isn’t perfect but it does give you an indication of when the price deviates too far away from the center of gravity.
Average True Range (ATR)
Helps determine volatility and good use for setting exit levels for your trade. At the point of trade, do either 1x, 2x, or 3x the ATR and set that as your stop loss and limit levels. Because it expresses the magnitude of the changes, it will help you determine how much the price can be expected to move in the period you are trading in — not any signal on which direction it will go in. If a price exceeds the ATR from the open by a lot and you expect to make a certain trade, it could be indicative that it won’t work as the trend may not have much more gas to continue.
Strategy: Look for an entry point that has low volatility and that starts to increase the ATR, in the direction you are heading as it will show it’s picking up speed.
Average True Range (ATR) is the average of true ranges over the specified period. ATR measures volatility, taking into account any gaps in the price movement. Typically, the ATR calculation is based on 14 periods, which can be intraday, daily, weekly, or monthly. To measure recent volatility, use a shorter average, such as 2 to 10 periods. For longer-term volatility, use 20 to 50 periods.
An expanding ATR indicates increased volatility in the market, with the range of each bar getting larger. A reversal in price with an increase in ATR would indicate strength behind that move. ATR is not directional so an expanding ATR can indicate selling pressure or buying pressure. High ATR values usually result from a sharp advance or decline and are unlikely to be sustained for extended periods.
A low ATR value indicates a series of periods with small ranges (quiet days). These low ATR values are found during extended sideways price action, thus the lower volatility. A prolonged period of low ATR values may indicate a consolidation area and the possibility of a continuation move or reversal.
ATR is very useful for stops or entry triggers, signaling changes in volatility. Whereas fixed dollar- point or percentage stops will not allow for volatility, the ATR stop will adapt to sharp price moves or consolidation areas, which can trigger an abnormal price movement in either direction. Use a multiple of ATR, such as 1.5 x ATR, to catch these abnormal price moves.
Resources: Charles Schwab video, the secret mindset video
Ichimoku Cloud
The Ichimoku Cloud is composed of five lines or calculations, two of which comprise a cloud where the difference between the two lines is shaded in. The overall trend is up when the price is above the cloud, down when the price is below the cloud, and trendless or transitioning when the price is in the cloud. The trend signals are strengthened if the cloud is moving in the same direction as the price. The lines also include a nine-period average, a 26-period average, an average of those two averages, a 52-period average, and a lagging closing price line.
The following is the formulas for deriving the Ichimoku Cloud, with the following variables:
- PH = Previous High
- PL = Previous Low
- CL = Conversion Line
Hurst Exponent
The Hurst exponent is the closest analog we have for stock indicators to the Hamiltonian measure of a particle’s trajectory. As pulled from Macrosynergy:
The Hurst exponent is a single scalar value that indicates if a time series is purely random, trending, or rather mean reverting. Thus, it can validate either momentum or mean-reverting strategies. The Hurst exponent uses the variance of a log price series to assess the rate of diffusive behavior. If a time series follows a random walk, its variance simply increases linearly with time elapsed. If instead variance increases with time to the power of an exponent, then a low (Hurst) exponent would indicate mean reversion and a high exponent trending behavior. The Hurst exponent depends on the period used for return calculation. For example, monthly returns can display a memory that is different from daily returns.
The Hurst exponent is calculated using a method called rescaled range analysis. The basic idea behind rescaled range analysis is to calculate the range of the cumulative sum of a time series, and compare it to the standard deviation of the series.
You can interpret the indicator as follows:
- H < 0.5 → Indicates anti-persistent behavior. The time series tends to reverse direction.
- H = 0.5 → Suggests a random walk or a series with no persistent trend.
- H > 0.5 → Signifies persistent behavior. The time series tends to continue in its current direction.
Bollinger Bands
A Bollinger band consists of a middle band (moving average) with an upper and lower band that are set by a certain number of standard deviations of price. The wider the bands, the greater the volatility.
At the top of the bollinger band where a dip behavior forms is a good signal to go short. At the bottom of the bollinger band where a spike behavior forms is a good signal to go long.
Bollinger bands are calculated in the following manner:
- Middle band →
- Upper band →
- Lower band →
Example: We’ll look at NVDA’s 20 day closing price performance (20 explicit days, skipping the holiday with no data), to arrive at our 20 SMA of $477.59.
Date | Price |
12/15 | $488.90 |
12/14 | $483.50 |
12/13 | $480.88 |
12/12 | $476.57 |
12/11 | $466.27 |
12/8 | $475.06 |
12/7 | $465.96 |
12/6 | $455.03 |
12/5 | $465.66 |
12/4 | $455.10 |
12/1 | $467.65 |
11/30 | $467.70 |
11/29 | $481.40 |
11/28 | $478.21 |
11/27 | $482.42 |
11/24 | $477.76 |
11/23 | |
11/22 | $487.16 |
11/21 | $499.44 |
11/20 | $504.09 |
11/17 | $492.98 |
11/16 | $494.80 |
To calculate the standard deviation, we will
Keltner Channel
Pitchfork
When drawing a pitchfork, you have a median line with two equidistant lines above and below the median line, that act as support and resistance levels for pricing.