Study Concepts

As you begin using Aspen studies, there are a few concepts with which you should be familiar:

Divergence

A divergence occurs when the prices of an instrument and a study line move in opposing directions. For instance, if a stock's price has been moving lower for several days but, at the same time, its RSI has been rising, divergence has occurred:

Divergences between a stock and one of its indicators are common and often occur before a stock changes direction. People often look for divergences by comparing a stock's direction to the direction of its RSI, its MACD or its Slow Stochastic. Other indicators and oscillators are available in Aspen.

There are two kinds of divergences: positive and negative. A positive divergence occurs when the indicator moves higher as instrument prices decline. A negative divergence occurs when the indicator moves lower as instrument prices rise.

Confirmation

Confirmation is an indicator signal that validates a signal given by another indicator. Traders and investors often build analysis systems that combine indicators and rate the strength of signals based on a collective assessment of constituent indicators. For example, J. Welles Wilder designed the Average Directional Index for use with the +DI and -DI. Similarly, MACD divergence may be confirmed by a subsequent moving average crossover.

Confirmation is a key component of Candlestick analysis. Hammers, bullish engulfing and piercing patterns all require a subsequent advance to confirm reversal. Conversely, shooting stars, bearish engulfing and dark cloud cover patterns require a subsequent decline to confirm reversal.

Indicator Types

An indicator is a value, usually derived from a stock's price or volume, that an investor can use to try to anticipate future price movements. Indicators are divided into two classes: lagging and leading (sometimes referred to as "momentum" indicators).

Lagging indicators tell you what prices are doing now, or in the recent past, so they are useful when stocks are trending. A moving average is an example of a lagging indicator.

Leading indicators are designed to anticipate future price action and many come in the form of oscillators. RSI is an example of a momentum indicator.