Technical Analysis Workshop Series Session 11 Semester 2 Week 5 Oscillators Part 2
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Agenda Recap Stochastic Oscillator Relative Strength Index (RSI) Q&A INTRODUCTION
Oscillators and Momentum Principles(Recap)
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)
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
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)
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
Stochastic Oscillator
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.
Basic Candlesticks http://www.babypips.com/school/what-is-a-japanese-candlestick.html
Introduction to Stochastics Two lines involved in the Indicator %K and the %D line
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)
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
1 st Use When the %K line crosses the %D line below the 20 level or 80 level Oversold or Overbought
1 st Use-Closer look oversold http://www.babypips.com/school/stochastic.html
2 nd Use-Divergence When there is Divergence What is divergence? Think of it as something sneaky going on
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.
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
2 nd Use-Divergence(1 st ) Regular Bullish Divergence Price making lower lows Oscillator making Higher lows http://www.babypips.com/school/divergence-cheat-sheet.html
2 nd Use-Divergence(2 nd ) Regular Bearish Divergence Price making Higher highs Oscillator making Lower highs http://www.babypips.com/school/divergence-cheat-sheet.html
2 nd Use-Divergence(3 rd ) Hidden Bullish Divergence Price making Higher low Oscillator making Lower low http://www.babypips.com/school/divergence-cheat-sheet.html
2 nd Use-Divergence(4 th ) Hidden Bearish Divergence Price making Lower high Oscillator making Higher high http://www.babypips.com/school/divergence-cheat-sheet.html
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! http://www.babypips.com/school/divergenc e-cheat-sheet.html
Application INDICATOR SIGNAL + CONTEXT(MARKET SENTIMENT) = TRUE BUY/SELL SIGNAL
Relative Strength Index (RSI)
Relative Strength Index (RSI)-Formula Explained RSI(x)= 100-100/(1 + RS*) RS= Average of x days' up closes / Average of x days' down closes.
Time period Relative Strength Index (RSI)- Overbought-Oversold Level Parameters
Relative Strength Index (RSI) Trading the RSI Divergence Overbought/Oversold Reversals Failure swings Trending Market Oscillator Oscillator and and momentum momentum
Relative Strength Index (RSI)- Divergence Bullish Signals: Downtrend Price: Lower Low RSI: Higher Low
Relative Strength Index (RSI)- Divergence Bullish Signals: Downtrend Price: Lower Low RSI: Higher Low Recap Stochastics RSI Q & A
Relative Strength Index (RSI)- Overbought/Oversold
Relative Strength Index (RSI)- Overbought/Oversold Enter at support/ Resistance after a sharp move Confirmed by RSI Recap
Relative Strength Index (RSI)- Reversals Bullish signals Price: Higher Low RSI: Lower Low RSI: 30-70 Recap Stochastics RSI Q & A
Relative Strength Index (RSI)- Reversals Bearish signals Price: Lower High RSI: Higher High RSI: 30-70
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 30-70 Bullish
Relative Strength Index (RSI) Failure Swings Independent of Price Actions Signal Reversals Movement flow: Overbought/Oversold Temporary support/resistance Overbought/Oversold Break support/resistance
Relative Strength Index (RSI) Failure Swings
Relative Strength Index (RSI) Failure Swings Oversold Below 30 Temporary Support at 50 Oversold: Higher low Break support
Relative Strength Index (RSI) Trending Market
Relative Strength Index (RSI) Trending Market
Limitation/Q&A Recap Stochastics RSI Q & A