Oscillators & Momentum Indicators

Question 1

Oscillator

Answer 1

Technical analysis indicators, calculated using mathematical formulae based on market prices, displayed on a separate axis beneath the price chart

Question 2

What do momentum oscillators indicate?

Answer 2

Speed or momentum of price movements as well as direction

Question 3

Pros of oscillators

Answer 3

• 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

Question 4

Cons of oscillators

Answer 4

• require confirmation from primary indicators

* early trading signals may not be confirmed (false signals)

Question 5

What should you look out for with oscillators

Answer 5

• overbought and oversold (OB/OS) conditions
• buy/sell trading signals
• bullish/bearish divergence
• charting the oscillator

Question 6

Equation to work out momentum

Answer 6

Momentum (10) =Ct-C(t-10)

Ct= latest close
C(t-10)= closing price ten events ago

Question 7

Equation to work out rate of change of momentum (10)

Answer 7

Momentum/ C(t-10) x100

Question 8

What is the Relative strength index (RSI)

Answer 8

Plotted on a fixed scale from 0-100%, it takes into account all of the price lives between a range of chosen events

Question 9

RSI formula

Answer 9

RSI= 100-100/(1+RS) where RS is average gain or loss

RSI= points gained on up events/ total points gained or lost x100

Question 10

When are oscillators overbought or oversold?

Answer 10

When the price moves fast in one direction

Question 11

What is likely to happen after a share quickly rises in price and becomes overbought?

Answer 11

A consolidation or a gentle correction

Question 12

Trading signals of momentum

Answer 12

• positive momentum indicates rising prices

* Negative momentum indicates falling prices

Question 13

Positives and negatives of momentum trading signals

Answer 13

+ early trading signals at the start of the new trends

-lots of false signals in sideways markets

Question 14

How can RSI trading signals be used?

Answer 14

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

Question 15

Divergence

Answer 15

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

Question 16

Describe potentially bullish divergence

Answer 16

The price trend continues downwards towards towards a low whilst the RSI increases

Question 17

In which direction should the RSI move to confirm a double top?

Answer 17

Downwards

Question 18

What data is required to calculate stochastics?

Answer 18

Current/ closing price
Recent range high
Recent range low

Question 19

What do stochastic tell us

Answer 19

Where today’s price lies within the range of the last number of days as a percentage

Question 20

What lines is a slow stochastic made up of?

Answer 20

%K
%D
%Dn

Question 21

How do you calculate the %K in a 5-3-3 slow stochastic?

Answer 21

% 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

Question 22

How do you calculate the %D in a 5-3-3 slow stochastic?

Answer 22

% definite, %D = N3/D3 x100

N3= 3 day sum of (C-L5)
D3= 3 day sum of (H5-L5)

Question 23

How do you calculate the %Dn in a 5-3-3 slow stochastic?

Answer 23

%Dn = 3 day SMA of %D

Question 24

What are the trading signals for a stochastic?

Answer 24

• buy when %D crosses above %Dn (in OS zone)

* sell when the %D crosses below %Dn (in OB zone)

Question 25

How can you trade using stochastics in a sideways market?

Answer 25

• 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

Question 26

Pros of stochastics

Answer 26

• 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

Question 27

Cons of stochastics

Answer 27

• prices rarely touch the exact high or low of the range
• sometimes overshoot
• sometimes reverse before touching support/ resistance

Question 28

What parameters can be used for stochastics?

Answer 28

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