Mathematical tools for the technical analysis

 (Technical indicators) | part 1

The quantitative or mathematical tools for the technical analysis called the technical indicators are being obtained as a result of the mathematical processing of prices averaged in time as well as other characteristics of market movements. They are applied to get signals for an additional evaluation of trade channels and patterns analysis by means of the indicators charts. The main groups of technical indicators are moving averages and oscillators.

Moving Averages. A moving average is an average price of a certain currency over a certain time interval (in days, hours, minutes etc) during an observation period divided by these time intervals.

This averaged price is being determined for each regular interval beginning from the first. A moving average has a smoother line than the underlying currency because statistical ‘noises’ are excluded to provide more convenient visualization of the currency activity. A moving average may be used as a special indicator or to create an oscillator. The moving average may be based on the midrange level or on a daily average of the high, low, and closing prices. The charts of moving averages are being plotted within same coordinates with an underlying price chart (See Figures 4.53 – 4.56). Technical analysis uses the next three types of moving averages:

1. The simple moving average or arithmetic mean (SMA).

2. The linearly weighted moving average (LMA). This type of average assigns more weight to the more recent closings. This is achieved by multiplying the last day's price by one, and each closer day by an increasing consecutive number. In our previous example, the fourth day's price is multiplied by 1, the third by 2, the second by 3, and the last one by 4; then the fourth day's price is deducted. The new sum is divided by 9, which is the sum of its multipliers.

3. The exponentially smoothed moving average (EMA) which provides the best smoothing of data averaged taking into account the previous price information of the underlying currency.

In Figure 4.53 is shown the difference in reading of different types of moving averages