Oscillators & Momentum Indicators Flashcards
Oscillator
Technical analysis indicators, calculated using mathematical formulae based on market prices, displayed on a separate axis beneath the price chart
What do momentum oscillators indicate?
Speed or momentum of price movements as well as direction
Pros of oscillators
- leading indicators- provide advanced warning of potential price moves
- give a value to the momentum of price movements
- can be used in both trending and sideways markets
- provide objective buy and sell signals
Cons of oscillators
- require confirmation from primary indicators
* early trading signals may not be confirmed (false signals)
What should you look out for with oscillators
- overbought and oversold (OB/OS) conditions
- buy/sell trading signals
- bullish/bearish divergence
- charting the oscillator
Equation to work out momentum
Momentum (10) =Ct-C(t-10)
Ct= latest close C(t-10)= closing price ten events ago
Equation to work out rate of change of momentum (10)
Momentum/ C(t-10) x100
What is the Relative strength index (RSI)
Plotted on a fixed scale from 0-100%, it takes into account all of the price lives between a range of chosen events
RSI formula
RSI= 100-100/(1+RS) where RS is average gain or loss
RSI= points gained on up events/ total points gained or lost x100
When are oscillators overbought or oversold?
When the price moves fast in one direction
What is likely to happen after a share quickly rises in price and becomes overbought?
A consolidation or a gentle correction
Trading signals of momentum
- positive momentum indicates rising prices
* Negative momentum indicates falling prices
Positives and negatives of momentum trading signals
+ early trading signals at the start of the new trends
-lots of false signals in sideways markets
How can RSI trading signals be used?
They are given earlier than momentum signals. Buy when RSI rises out of oversold zone, sell when RSI falls out of overbought zone. Be aware of the longer term trend and wait for confirmation from primary indicators
Divergence
Gives advanced warning of potential trend reversals, but make sure to wait for confirmation before trading i.e the price makes a new high (or low) but the momentum doesn’t
Describe potentially bullish divergence
The price trend continues downwards towards towards a low whilst the RSI increases
In which direction should the RSI move to confirm a double top?
Downwards
What data is required to calculate stochastics?
Current/ closing price
Recent range high
Recent range low
What do stochastic tell us
Where today’s price lies within the range of the last number of days as a percentage
What lines is a slow stochastic made up of?
%K
%D
%Dn
How do you calculate the %K in a 5-3-3 slow stochastic?
% alert, %K= (C-L5)/(H5-L5) x100
C= current price L5= lowest low of the last 5 days H5= highest high of the last 5 days
How do you calculate the %D in a 5-3-3 slow stochastic?
% definite, %D = N3/D3 x100
N3= 3 day sum of (C-L5) D3= 3 day sum of (H5-L5)
How do you calculate the %Dn in a 5-3-3 slow stochastic?
%Dn = 3 day SMA of %D
What are the trading signals for a stochastic?
- buy when %D crosses above %Dn (in OS zone)
* sell when the %D crosses below %Dn (in OB zone)
How can you trade using stochastics in a sideways market?
- buy near bottom of range when %D crosses above %Dn in OS zone
- sell near top of range when %D crosses below %Dn in OB zone
Pros of stochastics
- Advanced warning of potential reversals within a trading range
- profits can be made when the price is not trending
- divergence may strength stochastic buy/sell signals
Cons of stochastics
- prices rarely touch the exact high or low of the range
- sometimes overshoot
- sometimes reverse before touching support/ resistance
What parameters can be used for stochastics?
Any multiple of 5-3-3 e.g 10-6-6
The smaller the third parameter (%Dn) the earlier trading signals, %D and %Dn would be closer together and would cross over earlier
