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Introduction to technical indicators II

Stochastic Oscillator Forex
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    Introduction to technical indicators II

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    In Introduction to technical indicators I we talked about moving averages, now lets go on with Oscillators.

    Oscillator is an indicator that is generally said to swing forward and backward within a certain area (minimum and maximum). Often the minimum value is 0 and maximum value 100. What is Oscillator meant for? It measures market momentum or the rate of price change. It helps us search for strongest trends in their strongest momentum.

    Momentum oscillators
    Momentum oscillator calculates and plots the net change which is expressed in points between the close (or open, high, low) of two periods. For example 7-day momentum would equal today’s close minus the close 7 days ago. When talking about momentums we should also talk about ROC (rate of change) which is the same as momentum, only this takes the current day’s price and divides it with the price of 7 days ago (in case of 7-day momentum). If the momentum indicator (whether momentum oscillator or ROC) is above the midpoint line and it is rising at a steep rate, it indicates a strong momentum.

    If momentum crosses the midpoint line (also called equilibrium line), this could be a buy signal. However, to actually see whether a stock is overbought or oversold one needs to take a look in the history and examining past extremes. There are levels that specify overbought or oversold areas with oscillators like RSI (short for relative strength index). Note that all this observations depend on your chart interpretation and often right conclusions can be drawn from years of experience. That, however, doesn’t mean you shouldn’t start gaining experiences already now. The longer period you study, the better results you will gain from the observations. Sometimes even a year-long study can be too short for a particular stock or currency.

    Price oscillators
    Moving-average price-oscillator substracts moving average from the previous price. The momentum oscillator, as you just read substracts the current price not prior price.

    MACD – Moving average convergence-divergence

    MACD is a variation of the price oscillator, it is calculated by taking the difference between two exponentially smoothed moving averages of 12 and 26 days. The MACD line is the differences between the two averages – longer one is subtracted from the shorter one. Then a moving average of 9 periods is calculated of this differential and this is called the signal line. If the MACD line crosses above or below the signal line, buy or sell signal is generated.

    RSI – relative strength index
    RSI is a statistical model which has a set scale that ranges between the fixed low point (0) and fixed high point (100). RSI is a ratio that compares an average of the up-closes to the down-closes within a specified period. RSI length is usually 9-14, whether the length means hours, weeks or days or 5-9 for minor trends and short term trading.

    RSI=average number of points gained on up-closes divided by average number of points lost on down-closes. RSI = 100-100/1+RS where RS is the ratio. When there’s rapid and continuous advance the RSI will reach 70 rather fast and it can stay over 70 for some time. In case of similar declines the check-number is 30. Once the RSI starts retreating in uptrend or advancing in down-trend the trend might be reversing.

    RSI is most useful when there’s a well-defined trading range. If prices are in the area of prior highs and if even one day out of 14 is above the 70 line then it’s a good sell indication. You can use different patterns such as rectangle on the RSI chart as well and if both of them seem to be giving you the came indication, it’s a good potential signal for you.

    The stochastics oscillator
    It is pretty similar to RSI indicator EXCEPT instead of using the levels 70 and 30, usually 80 and 20 is used AND it’s not composed of one line but two lines. Slower line is called %D and faster line %K. %D is the simple moving average of %K. Crossovers of these lines generate buy and sell signals. Additionally, if RSI is the ratio of average up and down-closes then stochastics oscillator takes the current price and related it to the highest high and lowest low within the specific period. %K=100-(the close minus 14-day low)] divided by (the 14-day high minus 14.day low). %D adds a simple smoothing calculation.

    Additionally, Slow Stochastic oscillator as been developed - it is similar to the usual Stochastic oscillator but in addition it tries to reduce volatility and make the signals more trustworthy.

    Money flow oscillator
    This indicator ads volume to the calculations.

    Note: I know that many people are also searching for Helene Meisler oscillator, so hopefully this link will help you a bit.

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