A range indicator is a type of technical tool that measures price movement limits over a specified time frame. It is estimated that market prices are engaged in uptrends and downtrends just 15% to 20% of the time, with the balance spent within the boundaries of trading ranges that can be relatively narrow or wide. This indicator attempts to determine the characteristics of prices caught within these ranges, seeking to predict future movement and direction.
A number of range indicators tend to profit from rangebound conditions or the market slips into a trading range with a higher. The most common example where range indicators are used involves the identification of trading ranges and the evaluation of price action between highs and lows. The process involves necessary calculations for volatility and identification of transformations from low range to high range and vice-versa to generate proactive buy and sell signals.
Some of the range indicators, like Bollinger Bands, are capable of identification are capable of sophisticated calculations for the identification of new trends. Their quality of expanding or contracting when a new trend starts or there is a volatility increase is really useful for timing entry and exits into a range of securities.
Average True Range
The average true range is a type of indicator that measures volatility for a security over a period of time. The average true range is a continuously plotted line that is usually placed below the price chart window. The way to interpret the average true range is that the higher the ATR value, the higher the volatility.
ATR doesn’t give any information about the direction of the price, but rather only about volatility. for example, if security makes a move or reversal, either bullish or bearish, there usually will be an increase in volatility. Therefore, the ATR will be on the rise. This can be used to gauge the underlying strength of the move.
Differently, during `times of sustained sideline movement, the volatility drops. Therefore, the value of ATR too.
Volume Weighted Average Price
This tool is used to measure the average price weighted by volume. This tool is generally used with intraday charts to identify intraday trends. The way of interpreting VWAP is the same as that of moving averages. With the prices above the VWAP line, they are said to be rising and if they are below the VWAP line, they are said to be declining.
The indicator is a solid wafer identifying the underlying trend and the price is above the line, The trend is bullish and vice versa. But there is a downside, even though the indicator is primarily used on an intraday basis, there can still be a great deal of lag between prices and the indicator reading. The indicator begins calculating at the open and stops at the close price. Therefore, for a chart using a short timeframe (e.g. one minute), there can be several 100 periods within that single day.
Since the indicator is the average of the past data, the closer it gets to the day’s close, the more lag the indicator will have.
Pivot Point
The pivot point is a technical indicator tool that is used to determine the potential support and resistance levels for a security. The Indicator consists of three labels PP, S, and R mean pivot point, support, and resistance respectively. Calculation of the first point is done by adding the high and open to the closing price of the recent candlestick and dividing them by three. Price action when the next bar is considered bullish when above the pivot point and bearish when below the pivot point.
Those computerized levels can be used to calculate trade signals for buy and sell points, thereby making it easy to spot potential entries and exits.
