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Disciplined Traders and Investors Always Respect Price and Trends

It is hard to know the outcome of next week's presidential election. It is even harder to determine when a vaccine will be available for COVID-19. However, the end of October is near, and November is the start of the seasonally bullish period. Traders and investors need to remain disciplined. Try to focus on markets and positions that are in bullish uptrends and avoid situations that are in bearish downtrends.


So, how will we know when the market or the stock's trend has changed?


Most trends tend to change slowly, lasting for several days, weeks, or even months. The key is to recognize the trend changes as early as possible so that you will have ample time to implement the appropriate trading and investment strategies.


Everyone has opinions on stocks and the stock market. Sometimes they are right, sometimes they are wrong. However, the price and its trends are always correct. Prices are the ultimate final judge and jury.


With the above thoughts in mind, we will review the following technical indicators: (1) Exponential Moving Average (EMA), (2) Moving Average Convergence Divergence (MACD), (2) the Percentage Price Oscillator (PPO), and (4) the Relative Strength Index (RSI).


What Is an Exponential Moving Average (EMA)?


An exponential moving average (EMA) is one type of moving average (MA) that places a greater emphasis on the most recent data points. The exponential moving average is also known as the exponentially weighted moving average. EMA gives higher weights to the most recent prices, while the SMA assigns equal weightings to all its values. The two moving averages have the same objectives - to smooth out price fluctuations and noise in the marketplace. However, since EMAs place a higher weighting on recent data than on older data, this moving average can be more responsive to the latest price changes than SMAs. That would explain why EMAs are a favorite of technical and professional traders.


Like all moving averages, the EMA technical buy and sell signals occur with the crossovers, divergences, and confirmations. Traders and investors typically use several different EMA periods, such as 10-day, 30-day, 50-day, and 200-day moving averages. However, the 12- and 26-day exponential moving averages (EMAs) are quite reliable for short-term trend analysis. As mentioned before, the earlier a trader can identify a trend change, the sooner the trader can act on the trade.


EMAs works best during trending markets when the market trend is in a consistent and well-defined trend. An astute trader will often pay attention to the direction of the EMA line, its relationship to the prior period, and the convergence or divergences that may develop between the price line and the EMA line. For instance, when the price of a strong uptrend begins to flatten and reverse direction, this warns that it is time to sell the position.


EMAs are often used in conjunction with other technical indicators to confirm trend changes and to validate the signals. Some of the popular technical indicators are the Moving Average Convergence Divergence (MACD) and Percentage Price Oscillator (PPO). Both are momentum-driven oscillators that measure the differences between two moving averages. Most of the signals occurred with signal line crossovers, centerline crossovers, convergences, and divergences. While MACD measures the absolute difference between the two moving averages, PPO takes it to another level by turning it into a relative value. PPO is the MACD value divided by the longer moving average, and the result is then multiplied by 100.


PPO generates the same technical signals as the MACD indicator. The only difference is that it provides an added dimension as a percentage version of MACD. The relative nature of PPO tends to be most useful when comparing over extended periods, even when the price has doubled or tripled in value. One caveat PPO can be an ineffective technical oscillator when used exclusively to identify overbought or oversold conditions because the movements are unlimited. Other Overbought/Oversold oscillators such as RSI and Stochastics are more reliable indicators to identify overbought and oversold levels.


Source: Courtesy of StockCharts.com


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