Since trading indicators can decrease latency, remove noise, and respond quickly to market moves, many traders use different technical indicators for trading purposes. Plenty of specialized tools, technical indicators, and programming languages are available, helping traders generate increasingly sophisticated visual measures to overlay their charts. However, people seem to have been affected by excess. With an overwhelming amount of indicators and drawing tools on price charts, traders are most likely to become confused. Therefore, employing only a few most valuable technical indicators can help you keep your charts as clean as possible and stay focused. This guide will detail a multi-purpose technical indicator – the Hull Moving Average (HMA).
What Is Hull Moving Average (HMA)?
The Hull Moving Average (HMA)is a technical indicator used to determine a market trend. It records the current market position and compares it to past data to ascertain a bullish or bearish outlook. Unlike EMA or the SMA (SMA), the HMA provides a quicker indication on a flat visual plane, reducing the latency usually associated with MAs.
An indicator must balance producing an accurate signal with minimal latency and offering a fast-paced, high-volume first-mover benefit to gain a competitive edge. HMA has two dimensions, including positional and directional values. While positional value is a default attribute of all moving averages used for identifying the location according to the price, directional value emerges from the present directional slope.
For instance, the HMA is the blue one sloping upwards and another one colored in orange sloping downhill. The binary represents bullishness or bearishness in the following chart.
Note: TradingView’s Hull indicator lacks color change confirmation and has reduced visual display clarity. Therefore, use a custom script instead of TradingView’s Hull indicators.
Like SMA and EMA, the length of HMA can be increased. It could result in altering the indicator’s price history analysis. Choosing short Hull results in the following:
Watch the moving average hugging price because the length is 15 (standard value ranges between 45 to 90). Due to the aggressive slope computation, a low duration causes quick signal switching.
Customize the HMA to your target market and timeline. It is not always necessary for the HMA that works on the USD/CAD (4H) time chart to work on the BTC/USD (1W) chart. To have a decent hit rate, you need to analyze the charts and refine the indicator parameters.
History of Hull Moving Average
Alan Hull developed the HMA in 2005. Being an IT expert and Mathematician, he introduced the Hull Moving Average, claiming that it reduces lag while improving smoothing. Presently, swing & long-term traders use it to corroborate trading signals based on many in-depth study methodologies.
The HMA isn’t very distinctive. It is only a variant of other MAs (SMA, for example). However, it still works well for traders since it produces a flat line that is easy to understand.
Formula to Calculate the Hull Moving Average?
Hull Moving Average (HMA) is pretty simple to calculate. What matters is you know how to employ the Weighted Moving Average (WMA). Given below are a few steps to calculate Hull Moving Average.
Step1: Use “n/2” as a period to calculate the weighted average and multiply it with 2.
Step2: Find out the weighted moving average for the period “n”, and then subtract it from the number calculated in step1.
Step3: Use the data from the second step to calculate the weighted moving average for the square root of the period “n”.
We have the following equation for the HMA formula.
HMA = WMA(2 x WMA(n/2) − WMA(n)), √(n))
How to use the Hull Moving Average?
Based on the previous data, HMA is a directional trend indicator that uses recent price activity to evaluate if the market is bullish or bearish. HMA indicator has two dimensions, such as a position and a direction. Traders utilize the former to establish pricing locations. The latter is derived from the prevailing market slope. The HMA’s smoothness and responsiveness occur due to the combination of both.
This indicator’s appearance on a chart is similar to other moving average indicators. While illustrating bullish or bearish tendencies, the HMA may employ a variety of colors on different platforms.
Before moving on how trade using the HMA indicator, let’s first discuss the optimum periods for the HMA and how they affect its look and symptoms. When using the HMA for long-term trading, the lengthier time allows you to recognize patterns more accurately. Notably, shorter periods might be more advantageous than longer durations for day traders who wish to record price swings in real-time. Entry signals from a shorter time HMA usually follow the trend.
How To Trade Using Hull Moving Average?
Hull Moving Average indicator works best for directional signals rather than crossovers since they are prone to lag distortion. Instead, seek turning points to locate entrances and exits.
You can use the HMA in the following ways.
1) Buy an underlying asset when HMA starts turning up.
2) Sell an underlying asset when HMA starts turning down.
The HMA is easy to use. Its essential premise is that if the indicator rises, the trend is rising. So you can long hold your position. Alternatively, if the market becomes bearish and the signal follows suit, it may be time to sell.
Hull Moving Average (HMA) VS Other Moving Averages
Hull Moving Average (HMA) is interpreted similarly to other moving averages. But it’s meant to fix their fundamental issues, such as their inability to filter out market noise and latency avoidance. That’s why the HMA is faster than other moving averages and can assist in confirming a trend or suggesting a price shift at the proper time.
In other words, the HMA offers a quicker signal on a flat visual line. It outperforms different types of moving averages due to its low-latency trigger.
Not to mention, the HMA lets you customize the observation period like other moving averages. Also, it allows you to alter the indicator’s price history analysis.
Now let’s look at the critical distinctions between HMA and other moving averages, including Simple Moving Average (SMA), Exponential Moving Average (EMA) and Weighted Moving Average (WMA).
Simple Moving Average (SMA)
SMA stands for Simple Moving Average. It is the most straightforward moving average. Despite being a cornerstone of technical analysis, it has several flaws. That’s why there are multiple moving averages. Not to mention, all of them aim to improve the indicator’s signals, efficiency, or usability.
You can calculate a simple moving average (SMA) by averaging the price over time. It detects trend direction. If it’s increasing, it suggests a bullish trend. On the other hand, a declining indicator signals a bearish market ahead.
While long-term traders use an SMA proxy of 200-bars, a 50-bar SMA is used to comprehend intermediate-term trends.
SMA has the most significant price lag compared to other moving average indicators. Traders use longer intervals to mitigate this issue. However, latency between the source and SMA still prevails. The HMA is preferred because it outperforms the SMA.
Given below figure compares the blue-lined HMA and yellow-lined SMA. As evident, the SMA is smoother and tracks the price better.
Image Source: Finamark
Exponential Moving Average
The EMA is analogous to the SMA (SMA). Both assess trend direction over time, and their signals are interpreted similarly.
The Exponential Moving Average (EMA) was developed to address the SMA’s significant latency. While the SMA estimates average price data, the EMA gives more weight to recent data. Notably, favoring recent periods may work for specific traders but not for others.
The HMA utilizes the EMA’s principal benefit. It is quicker and more fluid than SMA. While the EMA reduces the SMA’s latency, the HMA makes it inconsequential. It also enhances line smoothing.
You can compare the blue-lined HMA and the green-lined EMA in the image below. In contrast to the SMA, which is more sensitive to market movements, the EMA is less responsive.
Image Source: Finamark
Weighted Moving Average
It is a weighted variant of the EMA. It emphasizes new data over older data. To do so, the WMA multiplies each bar’s price by its weighting factor (see below). So it’s more versatile than the EMA or SMA. But, once again, the HMA’s reactivity outshines them.
Below is a chart that compares the two indicators. The HMA (blue line) closely tracks the price more than the purple-lined WMA.
Image Source: Finamark
The WMA, like other moving averages, determines trend direction. Traders utilize it for buy and sell signals (for instance, going long when the price dips close or below the WMA and going short when the price tops above it).
Overall, the WMA is more responsive to price movements than the SMA and EMA but less sensitive than the HMA.
Pros and Cons of Using Hull Moving Average (HMA)
Using the Hull Moving Average indicator has several advantages and disadvantages listed below.
Pros
HMA is a simple indicator that is easy to understand and adapt.
Unlike other MAs, it minimizes latency.
Traders can use it while trading different financial markets, such as commodities, stocks, ETFs and equities.
Most trading platforms like MT4 and TradingView offer it by default.
Cons
Some users claim that lowering the latency renders it ineffective.
Calculating HMA might appear a little complicated to some users.
It is accused of not providing a clear indication for entry or exit.
Conclusion
HMA is a valuable day trading indicator. Traders usually prefer to use it with different indicators like the RSI (Relative Strength Indicator or ATR (Average True Range).
While the HMA is one of the most thorough, sensitive, lag and noise-resistant moving averages, it is not the silver bullet. Its responsiveness may act as a two-edged sword. It can spot trends faster than other moving averages, but it also whipsaws more frequently than other moving averages.
To summarise, the HMA is an excellent indicator to add to your technical trading toolbox, provided you know how to utilize it and practice it in a trading simulator.
Furthermore, trading knowledge isn’t always the primary limitation for most traders. Instead, the lack of capital restricts them from exploring more potential. The financial stress negatively impacts their trading performance and the urge to make quick returns over a short time leads them to incur losses. If you are also finding it difficult to continue your trading journey due to funds limitations, you may check out Traders Central’s funding options and pick one that suits you best. It will relieve the strain of expecting unrealistic earnings in a short interval and allow you to focus solely on your trading expertise.
Frequently Asked Questions (FAQs)
Is Hull moving average a good analysis tool?
Yes, Hull Moving Average is a good analysis tool. Although, the SMA (Simple Moving Average) is the most simple form of moving average. It fails to compete with the Hull Moving Average (HMA), a rapid and smooth moving average invented by Alan Hull. The HMA nearly removes latency entirely and simultaneously improves smoothness.
What is Hull moving average formula?
The Hull Moving Average improves the responsiveness of a moving average while preserving the smoothness of the curve. You can use the following formula to calculate HMA:
Using a sample account to experiment with different time frames is the best way to find the one that works best for you. When trading, we recommend using the following timeframes: 15, 25, and 50.
How do I read Hull moving average?
Shorter HMAs are frequently employed to locate entry points. When the overall market trend is up, HMA suggests you buy long. Inversely, a downward trending HMA is a hint to buy short.
Is Hull Moving Average better than Exponential Moving Average?
Hull is different from typical trend indicators, such as the EMA and SMA. It reduces latency by producing quick signals on a smooth visual plane.
It is crucial to use effective chart patterns in technical analysis. Almost all levels of traders employ different chart patterns to identify market trends and anticipate market moves. Whether you trade the stock market or try your fate in forex, charting patterns have always had its place in the traders’ tool belt. This piece discusses one of the most popular charting patterns called Bull Flag in detail.
What Is Bull Flag?
A bull flag is a chart pattern that signals an entry into an uptrend. Many professionals adopt this pattern to flow with the trend. The bull flag pattern helps you participate in the present market trend. That implies you may use the data to find entry points where the risk is low compared to the potential gain. Visually, this pattern displays a solid upward movement (the pole) followed by a flag-shaped consolidation.
The flag is commonly a horizontal rectangle and is sometimes seen with a slant formation. Another variant is the bullish pennant, which involves consolidating a symmetrical triangle.
The psychology behind the pattern holds more significance than the flag’s appearance. Despite a robust vertical rebound, the stock refuses to fall much as bulls grab any available shares. That’s generally followed by a forceful upward rise, measuring the previous flag pole’s length. These chart patterns are called bear flags and pennants when used in reverse. Bull flags generally appear during a new market rally.
Flag patterns include five essential characteristics:
The preceding trend
Volume pattern
Consolidation
Breakout
Confirmation
Bullish Flag Examples
Let’s use price charts to understand the bullish flag concept and visual appearance.
Emerging Bull Flag
A breaking out flag is a good example of an emerging bullish flag. However, the overall pattern is more important than the fact that the flag doesn’t make a perfect rectangle. It rises sharply to create the flagpole, then settles firmly. Bulls don’t seem to be waiting for better pricing.
We can calculate the bull flag target by projecting the flag pole’s length from the breakout point. That’s how we get the target price of roughly $9.50.
Image Source: StockCharts.com
Rectangular Bull flag
Below is a pricing chart for America Service Group Inc. Also, the candles’ lengthy lower tails show definite purchasing every time it drops below $10. Volume has increased during the last two sessions. The volume pattern is a frequent feature of bull flags.
Volume usually spikes as the stock develops the flagpole. A pricing consolidation causes a drop in volume. Volume often increases somewhat when the bull flag is broken, but not drastically.
Image Source: StockCharts.com
Breakout Bull
The price chart of Cantel Medical Corp. looks to have broken out of a bull flag formation. CMN closed over the flag’s top near $15. While CMN may resume its parabolic advance, it is common for a stock to retest the breakout point after a few sessions, allowing for a second entrance.
Stop-loss protection for this sort of trade is flexible. For example, long-term traders frequently employ stop levels beneath the entire flag, while others use two-bar stops.
Image Source: StockCharts.com
Tight Bull Flag
The price chart of CF International Inc. shows a very tight bull flag. The tighter flags often perform better and have more manageable stop-loss levels.
Bull flags usually clear out in three weeks. More extended periods form a triangle or rectangle.
Following a consolidation week, ICFI pushes over the resistance region at $24.50, fitting the usual trend and pointing to a possible rally.
Image Source: StockCharts.com
Difference between Flag & Pennant
Flag chart designs resemble pennant patterns at first glance. Both flag patterns occur after a substantial price movement followed by a horizontal price movement. They usually last 1-3 weeks. However, there are various discrepancies among the similarities.
Pennants are usually triangular. Converging trend lines form them by successive highs and lows. It’s consolidated in a pennant shape, with sinking resistance & rising support. Generally, it would help be best to utilize pennants as part of confirmation along with other technical indications. Using the RSI (Relative Strength Index) to moderate during consolidation and attain oversold levels can be viable.
A flag pattern occurs when a substantial spike (or decline) is followed by a tight price range (or fall). A flag usually helps a candle close above a support or resistance level.
To trade successfully with flags or pennants, you should always use volume to determine your entry and exit locations. It will help you confirm breakouts and allow you to speculate on the following momentum.
Finally, there is no time lined defined for the pattern formation. Hence, waiting for the right time is all you can do.
How to Identify a Bull Flag Chart
The flag pattern looks rectangular; hence it might be difficult for new traders to spot it. Therefore, the need to be careful while identifying the bull flag pattern. Below are some tips to help you Identify the bull flag pattern quickly.
Step 1: The bull flag should have an uptrend since it’s a continuation pattern and isn’t a reversal.
Step 2: When the correction begins and the price drops. You may say it’s a bull flag.
Step 3:The retracement should not be less than 38%, and it’s not a bull flag even if it is below 50%.
Step 4: Draw lines parallel to the pattern.
Step 5: The underlying security price should surpass the pattern’s upper border.
How to Trade The Bull Flag?
After identifying the flag pattern, you should enter a position when the downtrend loses momentum.
A Long Entry
In this case, the long entry is at the flag’s break, while the stop level is below the flag’s consolidation. Keep previous swing high as your primary objective. A strong market trend would make the price continue moving in the same direction.
Trade management differs. It depends on each trader’s style. Still, closing a position around the previous swing high could be a sensible move. You can then define a trailing stop based on trend line or moving average.
Below is an example of a BTCUSD weekly chart showing how to detect and trade a bull flag.
1) As stated previously, the dominant trend must be positive. This momentum is frequently framed by a series of bullish bars with slight correction.
The picture below shows significant directional movement with just minor retracements.
2) We must await consolidation. In this situation, a downtrend channel may be created once a lower high is reached, and we can prepare for a flag break.
The price breaks the flag, triggering the long entry. You may set a stop loss on the other side of the flag’s pattern.
The red region shows the possible risk (loss), while the green area reflects the potential reward (gain).
Activating the entry is followed by a waiting period. In this case, the price jumps to the last swing high.
Trade Management
Traders need to manage their trades based on their risk appetite. You can close a portion of your position near the target region and keep the rest open.
You can also project the price range of the flagpole upwards and close the entire trade. The price may continue rising to new highs.
Pros and Cons of Bull Flag
The bull flag has the following pros and cons.
Pros
Traders may find it while trading any market, including forex, stocks, indices, cryptocurrencies, etc.
There is no specific timeframe to spot the bull flag. Instead, you may find it on any period, such as M1, H1, W1, and MN.
It helps clients find an optimal entry-level
It provides uptrend continuation signals to clients.
Cons
Newbies might find it challenging to interpret.
It doesn’t frequently appear on charts.
It might become difficult for traders to distinguish between Bull flags and rectangular patterns.
It may produce false signals sometimes.
Conclusion
No chart pattern or indicator can offer absolute assurance concerning whether a trend will reverse or continue. Therefore, it’s best to use this if it fits your strategy, then follow your trading plan and let probability play out. If you’re looking to learn more about indicators, candlestick patterns, etc. do check out the Traders Central Academy.
If you’re looking to get funded with a large capital, do check the funding options available at Traders Central. You can get funded with the instant funding plan or go through a challenge and get funded depending on your preference.
Traders employ different technical indicators to assess supply and demand mechanisms and understand the market psychology. Since indicators can generate reliable trading signals, they help investors to find profitable trading opportunities. However, technical indicators don’t guarantee market success. Therefore, traders must also learn effective risk management strategies. In this piece, we discuss the OBV indicator in detail.
What Is OBV Indicator?
On balance volume (OBV) is a technical indicator used to link price and volume while trading stocks. The indicator measures selling and buying pressure utilizing volume and help clients to predict the price movements of the underlying security. No doubt that volume has a vital influence on the stock market, and it represents the attention of market players and aids in price speculation. That’s why people prefer using the OBV indicator.
History of OBV Indicator
Understanding the need for comprehensive volume structure research that gives more trading buffer, especially in turbulent markets, Joshep Granville invented the OBV in 1963. He believed volume has a more substantial influence on markets than price change.
Granville further explained that if volume grew or fell drastically without affecting the price of the issue, the cost would eventually go higher or lower.
What Does OBV Indicator Tell You?
The OBV hypothesis distinguishes between savvy institutional investors and less skilled retail traders. The volume appears to increase as institutions, including investment funds and trading houses, start buying the stake of ordinary investors available for sale. Over time, volume tends to drive the prices upward. On the other hand, the reverse occurs as institutions sell their positions and ordinary investors re-accumulate.
Despite being drawn on the price chart and quantified statistically, OBV is irrelevant. Although the indication is cumulative, the time interval remains fixed. Therefore the actual numerical value of OBV is dependent on the start date. So instead, traders and analysts focus on the OBV line’s slope over time.
Analysts typically track institutional investors using the OBV Indicator. To illustrate purchasing opportunities against prevalent trends, they use volume and price divergences as a metaphor for connecting smart money and the diverse masses. For example, institutional investors may bid up an asset’s price before selling it.
Formula to calculate OBV
OBV calculation becomes pretty simple after understanding the relation between two recurring trading days’ closing prices.
Please note that today’s price may be lower, greater, or the same as yesterday’s volume depending on the price connection. We have the following three equations for the OBV in all three cases:
1)OBV = Yesterday’s OBV – Today’s volume
2) OBV = Yesterday’s OBV + Today’s volume
3) OBV = Yesterday’s OBV = Today’s volume
Example of OBV Indicator
Consider a hypothetical daily share price and volume. Let’s understand it using the following numbers. We’ll convert them to OBV changes.
First Day = $10.00 per share; 10,000 shares
Second Day = $10.10; volume = 12,000
Third Day = $10.05; volume = 14,000
Fourth Day = $10.15; volume = 8,000
Fifth Day = $10.12; volume = 9,000
Since the first and the second day are days with price spikes, we add these traded volumes to the OBV. On the other hand, the prices fell down on the third and fifth days, so the volume is subtracted from the cumulative OBV figure. The OBV on the fifth day may look like this;
First Day’s OBV equals to 0.
Second’s Day OBV = 12,000 (0 + 12,000)
Third’s Day OBV = -2,000 (12,000 – 14,000)
Fourth’s Day OBV = 6,000 (-2,000 + 8,000)
Fifth’s Day OBV = -3,000 (6,000 – 9,000)
This calculation shows that OBV can be negative or positive. The premise is that as the share price rises, OBV rises proportionally. OBV falls by the share volume each day when the share price falls.
Difference between OBV and Distribution/Accumulation line
Being momentum indicators, both OBV and the accumulation line rely on volume to forecast the smart money movement. However, the similarities cease there. It is computed by adding up the volume on each up day and subtracting it on the down days.
Not to mention, the accumulation/distribution line is calculated differently from the OBV. The Acc/Dist is calculated by taking the current price’s position relative to its previous trading range and multiplying it by the volume of that time.
How to set up an OBV Chart?
The OBV is a volume-momentum indicator that requires no changes. The OBV automatically modifies its values depending on automated calculations.
You may adjust the indication line’s color or thickness to improve the user experience. For instance, if the default color of the line is green and you like simple candlestick charts, you can modify the line’s color.
You may also move the OBV’s box on your chart to better organize your workspace for trading.
When putting up the OBV on your chart, avoid using time frames less than 4 hrs because they have significant volatility and might create extra noise.
How to trade using the OBV indicator?
Clients can use the On Balance Volume (OBV) indicator in three ways.
Method 1: To validate a trend continuance, traders can employ the OBV indicator.
Method 2: When the OBV and price trend are in opposition, clients can use the OBV indicator anticipating a price reversal.
Method 3: The OBV indicator can indicate the early breakout, precisely if the price moves in a range.
On Balance Volume (OBV) Confirmation
OBV confirmation enables you to discover a price trend. For example, when changes in volume and price are positively correlated, it can signal a high probability confirmation of a trend. In this circumstance, the rise in volume would lead the price to surge, while a volume decrease may result in price decline.
Confirmation of OBV on Stock Charts
The OBV indicator confirms that a rising trend will continue in the price of an asset class like stock. In this case, the OBV indicator validates the uptrend by increasing.
Confirmation of OBV in Crypto charts
In this case, OBV corroborated the bitcoin price trend. As evident, the bitcoin price reached a new ATH (all-time high) due to incremental volume flow.
Divergence of On Balance Volume (OBV) Indicator
The divergence occurs in an uptrend when the price prints a higher high (H-H) but OBV prints a lower high (LH). On the other hand, a downtrend involves price printing a lower-low (LL) and OBV printing a higher-low (HL).
Divergence of OBV indicator in Stock Charts
When looking at the share price of Apple, it appears that the price has made a new high, and the trend is upward. On the other hand, the OBV indicator shows a lower high, which implies bulls have lost power and selling pressure has started building up.
Divergence of OBV indicator in Crypto Charts
When a price approaches its support/resistance levels, it responds violently. In such a scenario, bitcoin’s price rose, OBV volume decreased. In actuality, OBV revealed bitcoin’s price reversal before it dropped. In other words, when the price rose, bulls lost power, and bears seized control.
OBV breakout
Breakout trading is no longer as simple, and many traders fall into bull/bear traps. OBV can assist traders in differentiating a messy breakthrough from a real one. Just remember, If the price breaks a resistance level, the volume should increase.
On the other hand, If the price breaks a support level, it should lose volume.
Breakout of OBV indicator in Stock Charts
In this case, Tesla shares range on a certain price level with firm support. Observing the volume movement in this area, the OBV verified the price breakout to the downside before the price plummeted. It can also predict a price breakthrough before it occurs. In this situation, bears control the cost and escalate selling pressure, causing it to crash.
Breakout of OBV Indicator in Crypto Charts
Not to mention, the price swings of cryptocurrencies are unique. The bitcoin price fluctuates too much, causing traders to lose focus.
OBV suggested a price break out just ahead of the price surged in this case. In other words, holding a position for an extended period at this price level would be beneficial with a close stop loss.
Limitations of OBV Indicator
Like all other indicators, OBV can lead you to false interpretation. Therefore, you should have realistic expectations while using it. Do not forget to take precautions before employing it.
In extremely liquid markets like Forex (e.g. EUR/USD), the OBV might be useless in determining whether a signal is correct or incorrect. Essentially, there are numerous buyers and sellers for each price when there is enough market liquidity. So, more volume doesn’t always mean more money. OBV indicator is more useful in other markets such as stock or crypto.
Market volatility can also significantly impact the performance of the OBV indicator. It might mislead you after price breakouts. Since the OBV indicator cumulates volume, even a single candlestick volume may significantly impact.
In such a scenario, it becomes difficult to ascertain If buyers/sellers can manage price after hitting new levels or they’ve lost control. In other words, you may use the OBV indicator to validate price movement before a breakout. However, making a move based on the OBV indicator after the breakout wouldn’t be wise. Instead, it would help if you use other technical indicators combined with the OBV to confirm the price action.
Notably, low volatility always makes lower periods noisier. But again, OBV can produce false indications in smaller time frames. So avoid using OBV as a sole indicator while trading lower time scales.
Pros and Cons of OBV Indicator
Like other indicators, the OBV indicator also comes with some pros and cons listed below.
Pros
OBV is one of the leading indicators that reasonably predict significant market changes
Clients can learn the computation, plotting, and interpreting signals in a few trading sessions. Of course, you’ll need to practice identifying institutional from retail volume. Not to mention, some indications and order flow can be fraudulent. Overall, the OBV is one of the most user-friendly indicators.
The OBV indicator works in all types of markets, including stocks, bonds, futures, forex, and cryptocurrencies. However, the market must have related exchange volume and evaluate more extended time-frames.
Among all volume indicators, traders use the OBV the most. The indicator is generally found to be preferred among day traders due to being a real-time momentum indicator. Experts who wish to add insights based on volumes to their analyses also find it pretty useful.
Cons
Dealing desk brokers can increase volume by issuing bogus orders and canceling them before their execution. A surge in trade volume might throw off the indicator. Due to a fake trend, it may fool you into hurrying your trading choice.
It generates signals but doesn’t tell much details. The trader can’t study the reasons that led to a specific indication. Irrespective of bucks or pennies, the OBV indicator adds or subtracts/eliminates the same volume independent of price. As a result, we deem the indicator unconvincing for price analysis. So each produced signal requires a trader to incur risk.
While this is true for most indicators, it is especially true for the OBV. Because volume analysis is not definitive, traders typically use additional indicators to seek breakouts, such as adding Moving Average lines (MA) to the OBV.
Conclusion
In the present times, with the increase in accessibility of trading tools to almost everyone with a device and internet connection, more and more participants are involving in the market. Therefore, both the volatility and volume keep increasing day by day. Although the OBV works in small and large volume markets, the indicator might not cater to turbulent market conditions. Price surges or downfalls, flash crashes, and transaction cancellations destabilize prices and impact the trading volume. It can push the OBV beyond boundaries and promote false signal production. The OBV indicator might be helpful when combined with other indications. So, it can assist you in spotting trend reversals, divergences, or confirmations, enhancing your trading techniques. However, in today’s economy, it isn’t worth utilizing alone. Undoubtedly, employing OBV as your only signal could end up as a catastrophe. If you really find an edge with this indicator alone, well done. If not, it’s generally best to use it as a confirmation and create your own strategy, backtest and then live test to validate the statistics you have collected in your backtesting.
If you want to learn more about forex trading indicators, do check out Traders Central Academy. We fund good traders who can prove their capability as well as multiple other services catering to traders including but not limited to Cryptocurrency exchange services, liquidity services and trading tools.
Frequently Asked Questions (FAQs)
What does a negative OBV suggest?
A negative OBV suggests two things; the price is low today than yesterday, and the traded volume is more significant today than yesterday. It generally indicates tremendous selling pressure followed by a probable bearish pattern.
How accurately does the OBV Indicator work?
The OBV indicator works accurately in a steady market, specifically when you apply OBV to larger time frames, and there is low market volatility. However, it is better to avoid depending solely on its indications. The OBV works best when combined with other indicators.
When the market appears strongly bullish, a segment of traders may anticipate a trend reversal, and choose to sell. On the other hand, some may prefer to watch the market during an indecision phase and forecast market developments based on technical analysis. Primarily, it is through specific candlestick patterns formed on charts, that technical traders base their decisions off of. Doji candlesticks is one such candlestick pattern. While there are different types of Doji candlestick patterns, we’ll discuss the Doji Star in detail in this article.
What Is Doji Star?
A Doji Star is a three-column candlestick pattern that indicates a possible market trend reversal. Usually, traders find it in bullish and bearish variants depending upon the prevailing trend. To comprehend the Doji Star pattern, one must first understand the Doji candlestick pattern.
A Doji appears when a candle’s starting and closing prices are almost identical. Doji has a body that resembles a cross or a plus sign. In auction theory, Doji signifies buying and selling uncertainty. Some technical analysts interpret Doji as a retracement. However, this is when buyers and sellers acquire momentum for future trends. When they arise during the integration phase, Dojis can assist analysts in spotting price breakouts.
Technical Analysis – Doji Star
Technical analysis is the study of chart patterns & price movements to predict future price changes. While analyzing Doji candles, traders seek answers to the following questions:
What is the current situation on the price chart before the appearance of Dojis?
Is the price trending upward or reversing in an uptrend (a pullback)?
They may also try to figure out if the price is going in a triangle or sideways? Lastly, technical analysts might wish to confirm a support or resistance level near the Doji pattern?
These scenarios help analysts predict an instrument’s price movement after a Doji. In addition, technical analysis help traders to identify trade opportunities in Doji candlestick patterns. Let’s look at different types of Doji Star and discuss some trading ideas.
Types of Star Doji Candlestick Patterns
There are two Doji Star candlestick patterns, including bullish Doji Star and bearish Doji Star.
Bullish Doji Star candlestick pattern
Bullish Star Doji comprises a three-bar downtrend formation pattern. The first bar is long and dark, while the second is relatively shorter, replicating a Doji with a narrow trading range. Its third bar closes above the middle.
Bullish Star Doji candlesticks indicate a market reversal from the present downturn and are considered purchase indications. Traders use them to track the time to hold their positions. It typically forms at a chart’s bottom, signalling the end of a protracted bearish period.
Bearish Doji Star candlestick pattern
Bearish Star Doji candlestick appears during an upswing. It’s a bearish reversal pattern, and two candles depict it. The first candle’s body is lengthy because of the rise during an uptrend. Doji opening and closing above the first candle appears afterwards.
How to spot a bullish Doji Star?
Look for a standard red candlestick at the chart’s bottom on the first day. It verifies the general downward trend and shows that the price closed below the opening price. A little Doji on the following day means there is little or no gap between the price where the candle opened and closed. Next, look for a gap-up on the third candlestick.
Example
The chart below for Brent Crude Oil (WTI) shows two bullish stars forming following a price dip. The price gap is narrow, creating a star before rising again, confirming a bearish price reversal.
How to spot a bearish Doji Star?
Identifying a bearish Star Doji isn’t tricky. The first candle should have a lengthy white line and a Doji above it. Remember, Doji’s shadow won’t have excessive length, and the line’s shadow does not overlap.
Example
Following a price gain, a bearish star Doji signalled the commencement of a short-term downslide in the given below chart for the U.S SPX 500 index.
How to trade a bullish Doji Star?
Consider entering a long trade with a stop loss to protect yourself if prices start moving in the opposite direction. You may also examine the 5 and 15 minute time frames to study the trend and adjust your protection. Prices begin to rise when the bullish Doji Star pattern forms. So, if you trade after this pattern is confirmed, you can make some potential profit.
How to trade a bearish Doji Star?
A bearish Doji Star signals the conclusion of an uptrend and the beginning of a downtrend. Therefore, when you spot a bearish Doji Star pattern, it is better to shorten your position right away.
Limitations of Doji
The Doji candle is a non-directional indicator that gives minimal data. Since Dojis are rare, they can’t reliably identify price reversals. After the candle is validated, the price may not move in the predicted direction.
Dojis tail or wick combined with the confirmation candle’s magnitude might indicate a trade entry location distant from the stop loss. Traders must locate another stop-loss position or exit the trade if the stop-loss is too far.
Calculating prospective Doji trading gains also becomes challenging since candlestick patterns seldom indicate price goals. Therefore other candlestick patterns, technical indicators, or tactics in conjunction with Doji can help you exit the trade profitably.
Conclusion
Assuming you have learned how to read market trends, structure, technical and fundamental data; using Doji star candlesticks patterns will be a nice addition to your toolbelt. First, however, do not forget to employ Doji Star candlestick patterns with other indicators. Relying solely on Doji star candles might not be a great idea. It’s always best to develop a strategy with a positive edge in the markets and use these patterns or indicators as confirmations for entry. Backtesting on past data is always the best way to do it and later on you can also try your strategy in live markets to validate it.
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Frequently Asked Questions (FAQs)?
What does a Doji tell you?
A Doji candlestick emerges when an underlying security’s opening and closing prices are almost equal and often signifies a reversal pattern. Doji means error or mistake in Japanese and refers to the rarity of the open and closing price being the same.
How to read Doji?
Doji patterns have two lines, one vertical and one horizontal. Length of wick might vary depending on price action. The body indicates the difference between the closing and opening prices.
What does a bullish Doji Star mean?
The Doji Star Bullish Candlestick Pattern is employed in technical analysis to determine when a protracted decline will reverse. It refers to the unusual phenomenon of a security’s opening and closing prices being almost identical.
What does a bearish Doji Star mean?
A Bearish Doji Star candlestick pattern implies that buyers are losing power, and the market is in a bind in an upswing.
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