DEMAND INDEX

The Demand Index is a lesser known index. It tries to follow price and volume values of a stock. It is a momentum indicator of price and volume, The mathematical derivation of Demand Index is complicated, thus it will not be covered here, but later on at another post.

Useful values for n, i.e. the number of days for the Demand index to be calculated, seem to be in the 40- 49 days. These may give the highest profit when backtested. Backtesting is a computerized procedure to optimize indicator values and it will be discussed in a subsequent article.

The Demand Index involves the Moving Average values as well, thus usually a 40 day, or 49 day average can be used to calculate the Demand Index.

Demand index is a proprietary indicator, copywrited to its creator, James Sibbet.

During backtesting, it did provide some consistent results but not as much as other popular indicators.

The indicator showed some randomness with various values when backtested which were alarming i.e. dangerous to deal with. In other words, the drawdown was substantial. Therefore it needs to be traded with caution because it may reach to lose a significant amount of money before actually making any profit.

In general, Demand Index needs further studying and understanding to be used for trading. In a subsequent article we will deal with the calculation of Demand Index and some examples of how it performed. The way it is traded is by buying long and selling short when the signals are triggered, thus it makes money even when the stock is falling.

In overall and for time being, it may be ignored, as it is termed as one of the more complex indicators out there. Professional traders may want to study further the Demand Index indicator rather than casual traders to involve with it.

CPRs - CHART PATTERN RECOGNITION

Chart Pattern Recognition is a discipline on its own, but it falls under the broader term of Technical Analysis because CPR is in some respect a technical analysis system.

There are many CPRs that exist. Here in subsequent articles, I will be presenting a few of them.

CPR techniques signal reversal of the stock, So they are used for this reason. All other indicators of technical analysis are used for following trends, on the other hand CPR is used mostly for trend reversal.

Just because CPR techniques may be difficult to follow, there may be an inherent risk in using them for predicting stock cycles, so alongside CPR indicators, usually protective stops are used as well.

Protective stops are automated means to exit, i.e. sell a stock if some reversal of the trend appeared before the indicators themselves signaled a stock reversal. We will talk about protective stops in other article/ s.

One way to describe CPR techniques is that they may be more volatile, i.e. more erroneous than traditional technical analysis indicators. Mostly they are used by "swing" traders rather than technical analysts, i.e. the stock is kept for the very short run.

There is the common belief that by themselves CPR techniques may present with errors, rather than follow the market directly and concisely, and also without protective stops, CPRs may not be worthwhile. This is the view that technical analysts argue.

On the other hand, CPR indicators may be fun to utilize and observed them as they require only some knowledge of trading stocks. Pattern observing in the market is interesting to follow and with protective stops placed at strategic points they can be a useful tool for either novice, or advanced technical analysts. The reason that CPRs may appeal to novice traders is because they are easy to spot, or work with and require little mathematics, or no mathematics at all. But, novice investors may not have the maturity, or ability yet to discern correct stock patterns, thus they may be liable to losses. On the other hand, advanced technical analysts may also want to work with pattern recognition so that they double- check on their results from mainstream technical analysis.

Thus, as a conclusion, CPRs may be a good tool for all kinds of investors. One additional aspect of CPRs when applied to stocks, is that they tend to be outside of the market for the longest run, and they only briefly create buy signals to enter the market, i.e. to purchase the stock. Because as I wsaid previously, swing traders may benefit more from CPRs, the reason is that buy and sell signals for CPRs are brief and thus for most of the time, they signal the trader to be outside the stock market, i.e. to hold no position. That is why those who try to utilize CPRs may change to become swing traders, i.e. those who may change position of the stock very frequently.

AS a conclusion, CPR techniques may bring good results, especially if they are used as a system of various CPRs in unison, i.e. various CPR techniques to be used to verify one another. Caution is needed though, i.e. to knowing also when and where to put protective stops, For protective stocks I will write another time in a different article.

DAILY VS MONTHLY STOCK DATA

When checking stock data, it is best to look for the frequency of the observations as well, i.e. whether the data are daily, weekly, or monthly.
This depends on the time frame that the person wants to concentrate on, i.e. for how long he will be intenting to trade the stock and whether he will be keeping the stock, i.e. for few days for profit taking from stock' s daily ups and downs, or whether he eants to invest for the longer term.

If trading with daily data, then the person may be thinking more towards speculation, i.e. taking advantage of the stock' s daily ups & downs, rather than genuinely waiting for the stock to appreciate, thus giving profit in the longer run.

So, if a person is going to be keeping the stock for only a few days, the it may be useful to be checking daily stock data. If the person though may be willing to buy and keep the position for longer term, i.e. months, or even for a year, or more, then daily data may not be appropriate for him. For this strategy, i.e. the owning of the stock for a longer time, then the person may be more an investor, rather than a trader. Therefore, looking at a different frequency of stock data may be appropriate, i.e. the weekly values of the stock, or even the monthly.

Checking stocks is different than checking market indicators like the S&P 500, or Nasdaq, etc. If someone is to buy indices and be willing to keep the positions for years, let' s say, then the stock data he will be watching may not be daily data as they may be too erratic anyway, even for short- term traders who may be hoping to profit from daily values and ups & downs. Data like weekly, or monthly stock values may have more relevance and be less erratic than daily data, thus, may present a better view and better approach to investing, which means the long term keeping of the position of the stock, i.e. in general buying long as it is termed, i.e. buying for the long term.

Therefore, this is the use of monthly data values, i.e. they may be more worthwhile values to the investor rather than the trader. The monthly data may help also filter out any random prices in the stock and help to give a better view, of the longer term that the stock may be trending. The trend viewed will be a longer term view, as well as the absence of daily erratic data.

This approach, i.e. the view of longer term values for stocks, i.e. monthly values, also helps to see, or predict any recessions that may happen in the future, i.e. the person with monthly values, may be able to seeing the actual bull, or bear trends, i.e. whether there is booming market, or whether the may be a recession coming. Knowing any knowledge about bull & bear markets can make a person better fit for trading such cycles, which can be very important.

Thus, as a conclusion, we can say that the trader, or investor, may also want to see the long term ups & downs of the stock i.e. its monthly data alongside the daily data. Although daily data may be good for the short- term trader, the longer term data may be showing a better view of whether we will be living through a market boom, or market recession. Then, for example, if a recession is forecasted, even the short-term trader may want to avoid doing an purchases, if the stock may be having a longer term downward trend. In making money during a recession can be more difficult than making money during a boom so, more care may be needed, and perhaps the person to avoid completely the stock market and look to invest in mutual funds for example, or something else, like currency, or gold, etc.

BOLLINGER BANDS

Bollinger Bands takes its name from the creator of the bands, John Bollinger.

Bollinger Bands are a statistical indicator, drawing its use from Mathematics branch called Statistics. Using statistical techniques to forecast the financial markets is a popular way to build models for analysis. Being statistical indicator the Mathematics of Statistics apply and use of this indicator is derived from statistical techniques which are applicable not only for stocks but also for other applications. Therefore, it is a diverse way to follow, or predict the market.

Knowledge of statistics may make this indicator easier to follow, but just for using this indicator, no prior knowledge of Mathematics, or statistics is needed. For someone who wants to have more insight into how this indicator tracks the stock market, or why it is set up the way it is, then they can refer to Statistical analysis and mathematical books.

Bollinger Bands are drawn on the stock chart itself and set up living of how high, or low the stock may go. That is why they are called bands, because they form bands higher and lower from the stock price.

The good thing about Bollinger bands is that they use another indicator to plot the values, namely the Moving average. So a moving averate, let' s say the 30 day moving average is used first and then the Bollinger bands are drawn above and below the MA by some statistical values.

Namely, the Bollinger Bands use the Standard Deviation from Statistics theory, to draw the bands above and below the Moving Average.

It is interesting that standard deviation plotted against the stock chart itself, may be adjusted to include 90% of the data within the bands and 10% only to lie outside the bands. This is also the way the chart is predicted, i.e. if the stock appears to be outside the Bollinger bands, i.e. either the High, or low Bollinger band then it may mean reversal of the stock, or may mean that the stock may have increased a lot, or it has high speed moving in that direction.

The recommended setting for Bollinger Bands, is two Standard Deviations above and below the Moving Average.

Also, the bands tend to narrow if the stock is not showing trends, and then they may become broader when the stock show strong trends. So, a popular way to use the Bollinger Bands, is also by buying if the Bollinger Band is thin, or to sell when the Bollinger band becomes very wide.

In overall, Bollinger Bands are good statistical means of predicting the stock market.

RATE OF CHANGE (ROC)

Rate of change is a technical market indicator which is of interest to technical analysts. Mathematically it is the division of the price today with the price n days ago. Particularly we may take n to be 30 days.

Another way of calculating rate of change is by sinply findind the change in price over/ divided by the n, i.e. the number of days. For example, if the price today is $100 and the price n days ago was $80, then the indicator can be calculated as follows, i.e. (100-80) / n = 20 / n and if n is taken to be 30 days, then 20 / 30 = 0.66. If someone wants it as a percentage, then they can multiply by 100 which it will give 66%.

Trading rules for this indicator may need to see the stock how it is doing and find the trends and lowest/ highest values and note the ROC value. Then from this it may be fairly simple to find the turning points of the stock and devising a trading rule, i.e. trying to follow the natural cycles of the stock by noting down the values of the ROC when the stock is turning to go up, or down. Then we can use the values of ROC as indicators for buying/ selling, i.e. changing our positions of the stock.

ROC may be particularly interesting because it shows the velocity of the stock, i.e. how fast is changing for that particular number of days, i.e. how fast it is going up, or down. By taking the maximum values of this indicator, i.e. finding the fastest time that it goes up, or down, then we can build an indicator to buy, for example, when the stock is going up fast, or sell when the stock is falling fast.

The ROC may bring some erratic behavior to the stock, as you can see from the calculation above, it is only relying on one value from the past to calculate the ROC. Since daily stock prices may be erratic anyway, then using one single stock price value from the past to create an indicator, it may just bring some error to the calculations and exactly when the stock is turning to go up, or down.

Overall, it can be said that it is a good indicator to add to the arsenal of judging the stock and its ups and downs. This indicator my go hand in hand with the Moving Average indicator for example and help to validate the Moving Average indicator as well, before placing a trade.

In overall, it is a useful indicator.