Trend Indicator Mas: Chelsea Yang

Trend indicator MAs
FINANCIAL TRADING IN PYTHON
Chelsea Yang
Data Science Instructor
What are technical indicators?
Mathematical calculations based on historical market data
Assume the market is e cient and the price has incorporated all public information
Help traders to gain insight into past price pa erns

Types of indicators
Trend indicators: measure the direction or strength of a trend
Example: Moving averages (MA), Average Directional Movement Index (ADX)
Momentum indicators: measure the velocity of price movement

Example: Relative Strength Index (RSI)
Volatility indicators: measure the magnitude of price deviations

Example: Bollinger Bands

The TA-Lib package
TA-Lib : Technical Analysis Library
Includes 150+ technical indicator implementations
import talib

Moving average indicators
SMA: Simple Moving average
EMA: Exponential Moving Average
Characteristics:
Move with the price
Smooth out the data to be er indicate the price direction

Simple Moving Average (SMA)
SM A = (P1 + P2 + ... + Pn )/n
# Calculate two SMAs

stock_data['SMA_short'] = talib.SMA(stock_data['Close'], timeperiod=10)
stock_data['SMA_long'] = talib.SMA(stock_data['Close'], timeperiod=50)
# Print the last five rows
print(stock_data.tail())
Close SMA_short SMA_long

Date
2020-11-24 1768.88 1758.77 1594.74
2020-11-25 1771.43 1760.65 1599.75
2020-11-27 1793.19 1764.98 1605.70
2020-11-30 1760.74 1763.35 1611.71
2020-12-01 1798.10 1765.02 1619.05

Plotting the SMA
import matplotlib.pyplot as plt
# Plot SMA with the price

plt.plot(stock_data['SMA_short'],
label='SMA_short')
plt.plot(stock_data['SMA_long'],
label='SMA_long')
plt.plot(stock_data['Close'],
label='Close')
# Customize and show the plot

plt.legend()
plt.title('SMAs')
plt.show()

Exponential Moving Average (EMA)
EM An = Pn × multiplier + previous EMA × (1 − multiplier)
multiplier = 2/(n + 1)
# Calculate two EMAs

stock_data['EMA_short'] = talib.EMA(stock_data['Close'], timeperiod=10)
stock_data['EMA_long'] = talib.EMA(stock_data['Close'], timeperiod=50)
Close EMA_short EMA_long

Date
2020-11-24 1768.88 1748.65 1640.98
2020-11-25 1771.43 1752.79 1646.09
2020-11-27 1793.19 1760.13 1651.86
2020-11-30 1760.74 1760.24 1656.13
2020-12-01 1798.10 1767.13 1661.70

Plotting the EMA
# Plot EMA with the price
plt.plot(stock_data['EMA_short'],
label='EMA_short')
plt.plot(stock_data['EMA_long'],
label='EMA_long')
plt.plot(stock_data['Close'],
label='Close')

plt.legend()
plt.title('EMAs')
plt.show()

SMA vs. EMA
EMA is more sensitive to the most recent price movement

Let's practice!
Strength indicator:
ADX
Chelsea Yang
What is ADX?
Stands for "Average Directional Movement Measures the strength of a trend
Index" Oscillates between 0 and 100
Developed by J. Welles Wilder ADX <= 25: no trend

"New Concepts in Technical Systems"
ADX > 25: trending market
(1987)
ADX > 50: strong trending market

How is ADX calculated?
Derived from the smoothed averages of the di erence between +DI and -DI
+DI (Plus Directional Index): quantify the presence of an uptrend
-DI (Minus Directional Index): quantify the presence of a downtrend
Calculation input:
high, low, and close prices of each period

Implementing ADX in Python
# Calculate ADX
stock_data['ADX'] = talib.ADX(stock_data['High'], stock_data['Low'], stock_data['Close'],
timeperiod=14)
Open High Low Close ADX

Date
2020-11-24 540.40 559.99 526.20 555.38 21.16
2020-11-25 550.06 574.00 545.37 574.00 23.92
2020-11-27 581.16 598.78 578.45 585.76 26.82
2020-11-30 602.21 607.80 554.51 567.60 28.25
2020-12-01 597.59 597.85 572.05 584.76 29.58

Plotting ADX
# Create subplots
fig, (ax1, ax2) = plt.subplots(2)
# Plot ADX with the price

ax1.set_ylabel('Price')
ax1.plot(stock_data['Close'])
ax2.set_ylabel('ADX')
ax2.plot(stock_data['ADX'])
ax1.set_title('Price and ADX')

plt.show()

Let's practice!
Momentum
indicator: RSI
Chelsea Yang
What is RSI?
Stands for "Relative Strength Index" Measures the momentum of a trend
Oscillates between 0 and 100
Developed by J. Welles Wilder
"New Concepts in Technical Systems" RSI > 70: Overbought
(1987)
RSI < 30: Oversold

How is RSI calculated?
RSI = 100 − 100/(1 + RS)
Where:
RS: relative strength
RS = average of upward price changes / average of downward price changes

Implementing RSI in Python
# Calculate RSI
stock_data['RSI'] = talib.RSI(stock_data['Close'], timeperiod=14)
Open High Low Close RSI

Date
2020-11-24 1730.50 1771.60 1727.69 1768.88 62.78
2020-11-25 1772.89 1778.54 1756.54 1771.43 63.10
2020-11-27 1773.09 1804.00 1772.44 1793.19 65.81
2020-11-30 1781.18 1788.06 1755.00 1760.74 58.87
2020-12-01 1774.37 1824.83 1769.37 1798.10 63.63

Plotting RSI
# Create subplots
fig, (ax1, ax2) = plt.subplots(2)
# Plot RSI with the price

ax1.set_ylabel('Price')
ax1.plot(stock_data['Close'])
ax2.set_ylabel('RSI')
ax2.plot(stock_data['RSI'])
ax1.set_title('Price and RSI')

plt.show()

Let's practice!
Volatility indicator:
Bollinger Bands
Chelsea Yang
What are Bollinger Bands?
Developed by John Bollinger Measure price volatility
"Bollinger on Bollinger Bands"
Composed of three lines:
Middle band: n-period simple moving
average
Upper band: k-standard deviations above

the middle band
Lower band: k-standard deviations below

the middle band

Bollinger Bands implications
The wider the bands, the more volatile the asset prices.
Measure whether a price is too high or too low on a relative basis:

Relatively high: price close to the upper band
Relatively low: price close to the lower band

Implementing Bollinger Bands in Python
# Define the Bollinger Bands
upper, mid, lower = talib.BBANDS(stock_data['Close'],
nbdevup=2,
nbdevdn=2,
timeperiod=20)

Plotting Bollinger Bands
# Plot the Bollinger Bands

plt.plot(stock_data['Close'], label='Price')
plt.plot(upper, label="Upper band")
plt.plot(mid, label='Middle band')
plt.plot(lower, label='Lower band')

plt.title('Bollinger Bands')
plt.legend()
plt.show()

Let's practice!

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Trend indicator MAs

FINANCIAL TRADING IN PYTHON

Help traders to gain insight into past price pa erns

FINANCIAL TRADING IN PYTHON

Momentum indicators: measure the velocity of price movement

Volatility indicators: measure the magnitude of price deviations

FINANCIAL TRADING IN PYTHON

Includes 150+ technical indicator implementations

FINANCIAL TRADING IN PYTHON

EMA: Exponential Moving Average

Smooth out the data to be er indicate the price direction

FINANCIAL TRADING IN PYTHON

# Calculate two SMAs

Close SMA_short SMA_long

FINANCIAL TRADING IN PYTHON

# Plot SMA with the price

# Customize and show the plot

FINANCIAL TRADING IN PYTHON

# Calculate two EMAs

Close EMA_short EMA_long

FINANCIAL TRADING IN PYTHON

# Customize and show the plot

FINANCIAL TRADING IN PYTHON

FINANCIAL TRADING IN PYTHON

Developed by J. Welles Wilder ADX <= 25: no trend

FINANCIAL TRADING IN PYTHON

-DI (Minus Directional Index): quantify the presence of a downtrend

FINANCIAL TRADING IN PYTHON

Open High Low Close ADX

FINANCIAL TRADING IN PYTHON

# Plot ADX with the price

ax1.set_title('Price and ADX')

FINANCIAL TRADING IN PYTHON

FINANCIAL TRADING IN PYTHON

RS: relative strength

RS = average of upward price changes / average of downward price changes

FINANCIAL TRADING IN PYTHON

Open High Low Close RSI

FINANCIAL TRADING IN PYTHON

# Plot RSI with the price

ax1.set_title('Price and RSI')

FINANCIAL TRADING IN PYTHON

Upper band: k-standard deviations above

Lower band: k-standard deviations below

FINANCIAL TRADING IN PYTHON

Measure whether a price is too high or too low on a relative basis:

Relatively low: price close to the lower band

FINANCIAL TRADING IN PYTHON

FINANCIAL TRADING IN PYTHON

# Plot the Bollinger Bands

# Customize and show the plot

FINANCIAL TRADING IN PYTHON

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