Technical Analysis Workshop Series. Session 11 Semester 2 Week 5 Oscillators Part 2

Transcription

1 Technical Analysis Workshop Series Session 11 Semester 2 Week 5 Oscillators Part 2

2 DISCLOSURES & DISCLAIMERS This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest. The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material. INTRODUCTION REVERSAL PATTERNS PRACTICE

3 DISCLOSURES & DISCLAIMERS Nothing in this research material constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice. CHART TYPES REVERSAL SUPPORT & PATTERNS RESISTANCE TRENDLINES & CHANNELS PIVOT POINTS S

4 Agenda Recap Stochastic Oscillator Relative Strength Index (RSI) Q&A INTRODUCTION

5 Oscillators and Momentum Principles(Recap)

6 Oscillator Characteristics Useful in non-trending markets where prices fluctuate in a horizontal price band (i.e. sideways consolidation/trading range) Enables trader to profit from periodic sideways and trendless market environments which occur 70% of the time Example of a sideways trend with horizontal peaks and troughs: A trendless market (no up or down trend present)

7 Oscillator Characteristics Oscillators are used in conjunction with price charts during trending phases as well Alerts trader to short term market extremes: overboughtand oversoldconditions Overbought: A time to think about selling (liquidating a long position or shorting) market participants overly exuberant Oversold: A time to think about buying market participants overly negative

8 Oscillator Momentum Indicator 1. Can warn of changes in momentum beforesuch change is reflected in the price action (i.e. before turning points/reversals) 2. Signal that a trend is nearing completion by displaying divergences Upward/Downward Momentum: The ball possesses strong momentum at the beginning before its speed starts to diminish before coming to a standstill The ball analogy is similar to the uptrend and downtrend situations in the market both trends cannot continue indefinitely and will eventually lose steam (change in momentum)

9 Momentum Principle Important to use momentum analysis together with trendreversal signals (recall lesson 3) in the price action itself as confirmation Oscillators depends upon the time span which it has been calculated daily, weekly or monthly data Time period Type of trend Daily Weekly Monthly Short-term Intermediate Primary

10 Stochastic Oscillator

11 Background Based on the observation that as prices increase (UPTREND), closing prices tend to close in the upper end of the price range, Conversely when prices decrease(downtrend), closing price tends to be in the lower end of the range.

12 Basic Candlesticks

13

14 Introduction to Stochastics Two lines involved in the Indicator %K and the %D line

15 Introduction to Stochastics %K=100 ( ) ( ) Measures the on a percentage basis where the closing price is in relation to the total price range High reading means it closes close to the top of the range, low reading means it closes near to the bottom of the range The second line %D is the 3 period moving average of the %K line. ( Basically a slower line)

16 Hard to understand? Fortunately We don t really have to understand all that mojo UNDERSTAND USES: 1. When the %K line crosses the %D line below the 20 level or 80 level 2. When there is divergence (BABYPIPS) 4 Cases

17 1 st Use When the %K line crosses the %D line below the 20 level or 80 level Oversold or Overbought

18 1 st Use-Closer look oversold

19 2 nd Use-Divergence When there is Divergence What is divergence? Think of it as something sneaky going on

20 2 nd Use-Divergence USUALLY If price action is making higher highs, the oscillator should also be making higher highs. Basically if you were to draw a line connecting the Highs or Lows of both the oscillator & price action, they should be roughly be in the same direction.

21 2 nd Use-Divergence However, there are times where the converse is true and we should be aware to such occurrences-when price action & the oscillator are diverging from each other. It signals a weakening trend or reversal in momentum Two Categories/ 4 Types

22 2 nd Use-Divergence(1 st ) Regular Bullish Divergence Price making lower lows Oscillator making Higher lows

23 2 nd Use-Divergence(2 nd ) Regular Bearish Divergence Price making Higher highs Oscillator making Lower highs

24 2 nd Use-Divergence(3 rd ) Hidden Bullish Divergence Price making Higher low Oscillator making Lower low

25 2 nd Use-Divergence(4 th ) Hidden Bearish Divergence Price making Lower high Oscillator making Higher high

26 2 nd Use-Divergence Confusing? Don t have to remember all 4! Just bookmark the page! When you see that lines connecting the Tops or Bottoms of the price and oscillator are not in sync, check the Cheat sheet! e-cheat-sheet.html

27 Application INDICATOR SIGNAL + CONTEXT(MARKET SENTIMENT) = TRUE BUY/SELL SIGNAL

28 Relative Strength Index (RSI)

29 Relative Strength Index (RSI)-Formula Explained RSI(x)= /(1 + RS*) RS= Average of x days' up closes / Average of x days' down closes.

30 Time period Relative Strength Index (RSI)- Overbought-Oversold Level Parameters

31 Relative Strength Index (RSI) Trading the RSI Divergence Overbought/Oversold Reversals Failure swings Trending Market Oscillator Oscillator and and momentum momentum

32 Relative Strength Index (RSI)- Divergence Bullish Signals: Downtrend Price: Lower Low RSI: Higher Low

33 Relative Strength Index (RSI)- Divergence Bullish Signals: Downtrend Price: Lower Low RSI: Higher Low Recap Stochastics RSI Q & A

34 Relative Strength Index (RSI)- Overbought/Oversold

35 Relative Strength Index (RSI)- Overbought/Oversold Enter at support/ Resistance after a sharp move Confirmed by RSI Recap

36 Relative Strength Index (RSI)- Reversals Bullish signals Price: Higher Low RSI: Lower Low RSI: Recap Stochastics RSI Q & A

37 Relative Strength Index (RSI)- Reversals Bearish signals Price: Lower High RSI: Higher High RSI: 30-70

38 Relative Strength Index (RSI)- Comparison Divergence (Uptrend) Price forms higher high RSI forms lower high RSI<30 Bearish Reversal (Up trend) Price forms higher low RSI forms lower low RSI at Bullish

39 Relative Strength Index (RSI) Failure Swings Independent of Price Actions Signal Reversals Movement flow: Overbought/Oversold Temporary support/resistance Overbought/Oversold Break support/resistance

40 Relative Strength Index (RSI) Failure Swings

41 Relative Strength Index (RSI) Failure Swings Oversold Below 30 Temporary Support at 50 Oversold: Higher low Break support

42 Relative Strength Index (RSI) Trending Market

43 Relative Strength Index (RSI) Trending Market

44 Limitation/Q&A Recap Stochastics RSI Q & A