Indicators

Learn the underlying math of every indicator.

It is basically averaging or differences (distances) and slopes.

• lagging or leading
• trend following or oscillators
• sentiments or simple stats

Everything is socially constructed, like religious rituals based on shared beliefs. Self-reinforcement systems - the more of them act (perform the rituals),the more they are sure.

All indicators must measure other people’s sentiments (fear, greed, excitement, depression, intensity of feelings).

FOMO-ing in is the strongest sentiment.

Indicators have patterns of their own, and other people watch for and follow these patterns (like they follow patterns of the main chart).

Several indicators of different kind must confirm each other (on a larger timeframe).

Stohastics are using just last two candles (to get the differences and momentum).

EMAs are also basically the same.

If I squinting at a chart while trying to understand its signals, I flip the page and move to the next stock. (this! - stay aside and just trade more than one ticker.)

If you look at a familiar indicator but can’t understand its message, it is most likely because the stock you’re trying to analyze is in a chaotic stage (no pattern emerged from the chaos yet).

An average is a smoothing function. Averages lose information, precision.

The most important information is the direction (the sign) and the slope (angle) for the resulting curve (when MA points are connected).

EMAs should be used instead of simple MAs

MA is an average price for past \(n\) days interval (or a window). Connecting individual MA points yields a curve. The larger \(n\) - the smoother the curve. Every MA is thus lagging. Shorter \(n\) curves are “faster”.

It is said that this technique separates a signal from the noise.

A slope of a MA curve is acceleration.

This is how divergences occur - new lows but in a less steep slope. yay!

All MAs are lagging - they turns after the price.

Oscillators coincide, because they use only last two candles.

Averages and slopes MA Lines

MACD-Histogram = MACD line − Signal line MACD-Histogram measures the difference between the MACD-line and the Signal Line (MACD-line is itself the difference between \(12\) and \(26\) EMAs).

Since each \(\delta x\) can be considered as a unit (set to \(1\)) the Histogram shows the abstract second /derivative or “acceleration” (spread).

The slope is thus just the \(\delta y\). (the difference between open and close). This is change within a candle.

The slope between any two adjacent candles (closing prices) is the change within a single step (so, again, \(\delta x=1\)).

Price change (the length of a candle) is the “speed”.

Keep in mind that these moving averages are pure abstractions - derived metrics, and their further manipulations (subtractions) are even more abstract.

The only “real” ones are the changes (differences) in price and volume (and numbers of trades, bucked-sorted by position sizes).

Know the math - what kind of a function it is.

• Open Intgerest
• Long/Short ratio
• Leverage ratio (risk)
• Calls/Puts
• Liquidations