C HAPTER DEFINITION: momentum oscillator Noncandlestick Confi rmation A momentum oscillator is a type of price- based indicator. Momentum measures Indicators and Terms the rate of change in price; an oscillator shows how value changes in relation to a set value or values over time. accumulation/distribution (AD) a momentum oscil- the price levels and movements. A series of A/D days lator based on price trends, developed by Marc Chaikin, a expressed in a moving average and divided by volume trader who recognized the importance of whether current for the averaged period (usually 21 days) is called the DEFINITION: price movement of a stock is controlled by buyers (accu- Chaikin Money Flow (CMF), a strong technical sign The A/D indicator mulation phase) or by sellers (distribution phase). that often provides reversal signals in advance of the The A/D indicator is a momentum The A/D indicator is based on a single day’s prices turnaround and that may be confi rmed by candlestick oscillator. Its value goes beyond the initial calculation, however. The moving and it identifi es whether buyers or sellers determined signals. average of A/D serves as the basis for the more revealing signal, the Chaikin Money Flow (CMF). 246 c08.indd 246 13/12/11 9:02 AM Bloomberg Visual Guide to Candlestick Charting ■ 247 American Express (AXP) accumulation/distribution (A/D) STEP-BY-STEP DO IT YOURSELF Follow these steps to calculate A/D: 1. Subtract the session’s low from the close. A/D is calculated by fi nding the sum of differences be- 2. Subtract the session’s close from the high. tween the close/low and the close/high of a session: 3. Find the net difference between the results of steps 1 and 2. ([( close – low ) – (high – close)] ÷ (high – low)) = A/D 4. Subtract the session’s low from the session’s high. The formula produces a numerical value between +1 5. Divide the result of step 3 by the result of step 4. (maximum accumulation) and –1 (maximum distribu- 6. The answer is the A/D. If step 1 produced a negative tion). result, A/D will also be negative. c08.indd 247 13/12/11 9:02 AM 248 ■ CHAPTER 8 Noncandlestick Confi rmation Indicators and Terms Th e A/D trend is important because it reveals what Th e chart for American Express (AXP) shows both DEFINITION: may be an otherwise invisible or subtle change in mo- price movement and A/D. Note how A/D often pre- breadth indicators mentum. A focus on the breadth indicators may assume cedes changes in price. For example, at the end of the A breadth indicator measures advances that as long as prices remain within the established fi rst week in December, the price appears to be con- and declines in price to identify partici- trading range, no change is on the horizon. A/D may tinuing upward, but the A/D line begins falling, antici- pation among traders in a specifi c issue or in the market in general. demonstrate than even when prices remain below resis- pating the price decline that does not follow until one tance and above support, a developing shift in control week later. Th is indicates that the uptrend was ending. precedes a turnaround in the trend and, often, a break- A few days later, price reached the bottom of its down- out from the established trading range. When the basic trend when A/D fell below the zero line. However, A/D A/D formula is expanded into CMF and included on a began moving upward a session before price followed. DO IT YOURSELF candlestick chart, it provides a meaningful additional Once more, the reversal in A/D preceded the reversal An example of A/D calculation: One form of technical information and trend development. in price. session’s high was $38, its low was $31, and its close was $37. A/D was: ([(37 – 31) – (38 – 37)] ÷ (38 – 31)) = +0.71 DO IT YOURSELF When the net difference in the fi rst side of the A/D formula is negative, A/D is also negative. One session’s outcome was $55 high, $46 low, and $48 close. A/D was: ([(48 – 46) – (55 – 48)] ÷ (55 – 46)) = –0.56 c08.indd 248 13/12/11 9:02 AM Bloomberg Visual Guide to Candlestick Charting ■ 249 average true range (ATR) at times confused with perhaps even a 52-week range instead of only 14 days. the simpler true range, which is a form of blending Even with the longer period, the volatility during that DO IT YOURSELF between two consecutive sessions, ATR is the averag- period compared to more recent levels of volatility may To calculate ATR, the prior ATR is mul- ing of 14 periods intended to smooth out short-term also distort ATR. tiplied by 13 and added to the current trading range; the sum is then divided volatility. Originally developed by J. Welles Wilder and A second problem grows from the fact that lower- by 14. featured in his 1978 book, New Concepts in Technical priced securities tend to move in a narrower range than × + ÷ = [(ATRp 13) TR] 14 ATR n = Trading Systems (Trend Research), the indicator recog- higher-priced securities. As a result, lower-priced secu- where: ATRp Prior ATR nizes that volatility may prevent traders from recogniz- rities tend to have lower ATR and higher-priced securi- TR = current period’s trading range = ing the real trend underway and becoming too focused ties tend to have higher ATR, because the calculation is ATR n new ATR on the short-term price volatility instead. based on the point range. An alternative may be to use Th e outcome of ATR relies on the starting point. Be- percentage changes over the period being averaged. cause the calculation of current and all future ATR lev- However, the combination of trading price levels of dif- els is going to be aff ected by the level of volatility in the ferent securities, with the issue of the starting point for KEY POINT: initial 14 periods, the outcome is also going to be aff ect- the calculation, make ATR a diffi cult indicator to rely There are two problems with ATR. ed by whether those periods are quite volatile, or very upon for timing of decisions. Th e study of candlestick First, the outcome varies depending on the volatility of the starting point. smooth. With this in mind, accuracy may be improved patterns to confi rm price patterns and volume is a more Second, calculation is based on point by calculating ATR based on an initial longer period, accurate method for measuring price volatility. range, so lower-priced securities tend to have lower ATR than higher-priced ones with larger point spreads in their range. c08.indd 249 13/12/11 9:02 AM 250 ■ CHAPTER 8 Noncandlestick Confi rmation Indicators and Terms blending candles (bear) candlestick indicators Calculate the following: KEY POINT created by combining several sessions into a single in- a. Th e three days’ candlesticks, showing the direction, Blending combines a consecutive set of dicator pointing to the downside. Blending may lead to high, low, open, and close of each. sessions into a single candlestick. This trouble if not used sparingly; any series of candlesticks b. A blending candlestick combining all of the price fea- can clarify the picture, or it can obscure it. may be blended to create an eff ect. Blending is best tures into a single session. used when a reversal trend is uncertain and blending Th e answers are shown as: can clarify the picture. It may apply in blending several days into a single indicator; it may also be used to sum- blending (bear) marize shorter trade intervals during one session into a 55 blended version of the trend. Th e illustration of a bearish 54 blending demonstrates how black crows can be restated 53 to a blended long black candle. 52 - - - - - - - - - - - - - - - - - - - - - - 51 A true blend extends from the open to the close of all 50 of the candlesticks within the blended range, from the 49 open of the fi rst session to the close of the last, and should 48 also refl ect the high and low shadows of the entire range. 47 46 - - - - - - - - - - - - - - - - - - - - - - Blending may become quite complex and involve a 45 number of sessions. Th e chart for Wal-Mart (WMT) pro- 44 vides an example of this blending process. Th e long black 43 blend is a summary of 10 sessions. Th e blend clearly re- 42 41 fl ects the bearish reversal. However, the 10 sessions col- 40 lectively are less clear in their signifi cance. As long as the 39 - - - - - - - - - - - - - - - - - - - - - - blending clarifi es or simplifi es the trend, it is a useful tool. 38 37 To create a blended chart, combine several consecu- 36 tive sessions. Th e following three sessions were found on 35 the accompanying chart: 34 - - - - - - - - - - - - - - - - - - - - - - 33 open close high low 32 Day 1 46 39 52 37 Day 2 43 41 49 36 Day 3 42 39 44 34 c08.indd 250 13/12/11 9:02 AM Bloomberg Visual Guide to Candlestick Charting ■ 251 Wal-Mart (WMT) blending (bear) blending (bear) blend black crows = longblack c08.indd 251 13/12/11 9:02 AM 252 ■ CHAPTER 8 Noncandlestick Confi rmation Indicators and Terms blending candles (bull) blending can also be done open close high low KEY POINT: on the bullish side. Any series of candlestick can be sum- Day 1 46 48 52 37 At fi rst glance, the belt hold does not marized in a blend to improve understanding of what a seem especially important.