Bollinger Bands: Moving averages can be expanded to create trading envelopes called "bands." Typically, the average is shifted up by a percentage of the moving average value to create the upper band and shifted down by the same percentage to create the lower band. These "percent bands" have been in use for many years. The theory is that prices in any market are somewhat inelastic, meaning that they cannot stray too far, too fast from current levels before supply and demand effects force prices to halt the move, at least temporarily. Bands try to quantify just how much "too far" really is.
Bollinger Bands, also known as standard deviation envelopes, were developed by John Bollinger in 1982. Bollinger theorized that the band width of an envelope should be determined by the market rather than by the assumptions of the analyst, as done with percent envelopes. His theory states that a trading envelope's distance from the mean is a function of the market's volatility. This makes sense because a volatile market does have wider swings from its average, even though a distinct trend may be in effect. The bands should expand to account for this, rather than be subject to giving false reversal signals. Conversely, when a market is flat, the bands should tighten so that a breakout can be signaled early.
To construct Bollinger Bands, a central moving average must be selected. For most markets, especially equities, Bollinger recommends a 20 day average for medium term analysis. The length of the moving average can be adjusted but only when the particular market presents a reason to do so. It is important to note that the average used for the bands is not the same one used for moving average crossover signals.
The best way to select an average is to find one that provides support or resistance for the first correction after a market high or low, respectively.
MACD: Technician Gerald Appel took a simple departure (oscillator) chart, which measures the distance between two moving averages, and overlaid a moving average of the result. This study was named Moving Average Convergence-Divergence (MACD) as it measures how two moving averages (the departure chart) move together and apart over time. The underlying theory is that as a market moves higher, the shorter of two moving averages is above the longer average. This is because the shorter average reacts faster to price movements. The longer average will always lag behind. When the shorter average crosses the longer, it is a signal that the trend may be reversing.
MACD shows the difference between a fast and slow exponential moving average (ema) of closing prices. Fast means a short-period average, and slow means a long period one, the standard periods are 12 and 26 days, a signal or trigger line is then formed by smoothing this with a further EMA. The standard period for signal line is 9 days. The signal line crossing is the usually forms trading rule.
Buy Signal: When the MACD crosses up through the signal line
Sell Signal: When MACD crosses down through the signal line.
These crossings may occur too frequently, and other tests may be needed to be applied.
A crossing of the MACD line up through zero is interpreted as bullish, or down through zero as bearish. These crossings are of course simply the original EMA (12) line crossing up or down through the slower EMA (26) line.
Positive divergence between MACD and price arises when price makes a new selloff low, but the MACD doesn't make a new low, i.e. It remains above where it fell to on that previous price low. This is interpreted as bullish, suggesting the downtrend may be nearly over. Negative divergence is the same thing when rising, i.e. Price makes a new rally high, but MACD doesn't rise as high as it did before; this is interpreted as bearish.
