What is the Tarzan Indicator?
Tarzan is a technical indicator developed by J. Welles Wilder Jr., the creator of the Average True Range (ATR) and the Relative Strength Index (RSI). The Tarzan indicator is a momentum oscillator that is used to identify trend direction and to measure the strength of a trend.
The Tarzan indicator is calculated by first subtracting the long-term exponential moving average (EMA) from the short-term EMA. This difference, or “divergence,” is then multiplied by a smoothing factor and added to the previous value of the Tarzan indicator. The smoothing factor is used to smooth out the fluctuations in the indicator and to make it more responsive to changes in the market.
The Tarzan indicator is typically plotted as a line on a chart along with the price of the asset being analyzed. When the Tarzan indicator is above zero, it indicates that the short-term trend is bullish, while a Tarzan indicator below zero indicates a bearish trend. The strength of the trend is determined by the distance of the Tarzan indicator from zero. The farther the Tarzan indicator is from zero, the stronger the trend is considered to be.
The Tarzan indicator can be used in conjunction with other technical analysis tools, such as trend lines and chart patterns, to identify potential trading opportunities and to help confirm the strength of a trend. It is important to note, however, that the Tarzan indicator is a lagging indicator and should not be used as a sole basis for trading decisions.
Tarzan Indicator Strategy
There are several strategies that can be used when trading with the Tarzan indicator. One such strategy is to look for divergences between the Tarzan indicator and the price of the asset being analyzed. A bullish divergence occurs when the Tarzan indicator is making higher lows while the price is making lower lows, which can be a sign of an impending uptrend. Similarly, a bearish divergence occurs when the Tarzan indicator is making lower highs while the price is making higher highs, which can be a sign of an impending downtrend.
Another strategy is to use the Tarzan indicator to confirm trends. When the Tarzan indicator is above zero and rising, it can be a sign of a strong uptrend. Similarly, when the Tarzan indicator is below zero and falling, it can be a sign of a strong downtrend.
It is important to note that the Tarzan indicator is a lagging indicator and should not be used as a sole basis for trading decisions. It is best to use the Tarzan indicator in conjunction with other technical analysis tools, such as trend lines and chart patterns, to get a more complete picture of the market and to increase the chances of making informed and good trades.
Buy Signal
There are a few different ways that traders can use the Tarzan indicator to generate buy signals:
- Bullish divergence: A bullish divergence occurs when the Tarzan indicator is making higher lows while the price of the asset is making lower lows. This can be a sign that the trend is about to reverse and that a buy opportunity may be present.
- Breakout above zero line: When the Tarzan indicator breaks above the zero line and begins to rise, it can be a sign of a bullish trend. Traders may consider this a buy signal, particularly if it is accompanied by other bullish technical indicators or chart patterns.
- Trend confirmation: The Tarzan indicator can also be used to confirm an uptrend. If the Tarzan indicator is above zero and rising, it can be a sign of a strong uptrend and a potential buy opportunity.
Sell Signal
There are a few different ways that traders can use the Tarzan indicator to generate sell signals:
- Bearish divergence: A bearish divergence occurs when the Tarzan indicator is making lower highs while the price of the asset is making higher highs. This can be a sign that the trend is about to reverse and that a sell opportunity may be present.
- Breakout below zero line: When the Tarzan indicator breaks below the zero line and begins to fall, it can be a sign of a bearish trend. Traders may consider this a sell signal, particularly if it is accompanied by other bearish technical indicators or chart patterns.
- Trend confirmation: The Tarzan indicator can also be used to confirm a downtrend. If the Tarzan indicator is below zero and falling, it can be a sign of a strong downtrend and a potential sell opportunity.
Tarzan Indicator Pros & Cons
Pros
There are several potential benefits to using the Tarzan indicator in technical analysis:
- Trend identification: The Tarzan indicator can help traders identify the direction and strength of a trend. This can be useful for traders who are looking to enter or exit positions based on the direction of the trend.
- Confirmation of trends: The Tarzan indicator can help confirm the strength of a trend. When the Tarzan indicator is above zero and rising, it can be a sign of a strong uptrend. Similarly, when the Tarzan indicator is below zero and falling, it can be a sign of a strong downtrend.
- Divergence identification: The Tarzan indicator can help traders identify divergences between the indicator and the price of the asset being analyzed. This can be a useful signal for traders looking for potential trend reversals.
- Smoothness: The smoothing factor used in the calculation of the Tarzan indicator can help smooth out fluctuations in the indicator, making it more responsive to changes in the market.
Cons
There are several potential drawbacks to using the Tarzan indicator in technical analysis:
- Lagging nature: The Tarzan indicator is a lagging indicator, which means it is based on past price data and may not always accurately predict future price movements. This can make it less reliable for identifying potential trading opportunities in real-time.
- False signals: The Tarzan indicator can sometimes produce false signals, particularly during ranging or choppy market conditions. This can lead to trades that are not based on a strong trend and can result in losses.
- Dependence on other indicators: The Tarzan indicator is best used in conjunction with other technical analysis tools, such as trend lines and chart patterns. This can make it less useful as a standalone tool for identifying trading opportunities.
- Limited use in certain market conditions: The Tarzan indicator may be less effective in certain market conditions, such as during strong uptrends or downtrends, when the indicator may be near the zero line and not provide as clear a signal.
Conclusion
In conclusion, the Tarzan indicator is a technical analysis tool that is used to identify trend direction and measure the strength of a trend. It is calculated by subtracting the long-term exponential moving average from the short-term exponential moving average and then multiplying the difference by a smoothing factor. The Tarzan indicator is typically plotted as a line on a chart and is considered bullish when it is above zero and bearish when it is below zero. The strength of the trend is determined by the distance of the Tarzan indicator from zero.
There are several strategies that can be used when trading with the Tarzan indicator, such as looking for divergences between the indicator and the price of the asset being analyzed and using the indicator to confirm trends. However, it is important to note that the Tarzan indicator is a lagging indicator and should not be used as a sole basis for trading decisions. It is best to use the Tarzan indicator in conjunction with other technical analysis tools to get a more complete picture of the market and to increase the chances of making informed and profitable trades.
It is important to carefully consider the potential drawbacks of using the Tarzan indicator before incorporating it into your trading strategy. It is always a good idea to back test any trading strategy on historical data to see how it would have performed in different market conditions before applying it in live trading.
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