Technical Analysis Workshop Series Session 11–Semester · PDF fileBasic Candlesticks Oscillator and momentum ... e-cheat-sheet.html Oscillator and momentum principles Stochastics

Technical Analysis Workshop Series

Session 11– Semester 2 Week 5

Oscillators Part 2

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REVERSAL

PATTERNSINTRODUCTION PRACTICE

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SUPPORT &

RESISTANCE

TRENDLINES &

CHANNELSCHART TYPES

PIVOT

POINTS

S

REVERSAL

PATTERNS

Agenda

INTRODUCTION

• Recap

• Stochastic Oscillator

• Relative Strength Index (RSI)

• Q&A

Oscillators and Momentum

Principles(Recap)

Oscillator and momentum

principlesStochastics RSI Q & A

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: overbought and

oversold conditions

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

RSI Q & AOscillator and momentum


Oscillator – Momentum Indicator

1. Can warn of changes in momentum before such 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 trend-

reversal 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 Short-term

Weekly Intermediate

Monthly 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



1st Use

• When the %K line crosses the %D line below

the 20 level or 80 level

• Oversold or Overbought



1st Use-Closer look



http://www.babypips.com/school/stochastic.html

oversold

2nd Use-Divergence

• When there is Divergence

• What is divergence?

• Think of it as something sneaky going on…



2nd 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.



2nd 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



2nd Use-Divergence(1st)

• Regular Bullish

Divergence

• Price making

lower lows

• Oscillator

making Higher

lows



http://www.babypips.com/school/divergence-cheat-sheet.html

2nd Use-Divergence(2nd)

• Regular Bearish

Divergence

• Price making

Higher highs

• Oscillator

making Lower

highs




2nd Use-Divergence(3rd)



• Hidden Bullish

Divergence

• Price making

Higher low

• Oscillator

making Lower

low


2nd Use-Divergence(4th)

• Hidden Bearish

Divergence

• Price making

Lower high

• Oscillator

making Higher

high




2nd 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.



Relative Strength Index (RSI)-

Parameters• Time period

• Overbought-Oversold Level




Oscillator and

momentum principles

• Trading the RSI

– Divergence

– Overbought/Oversold

– Reversals

– Failure swings

– Trending Market




Divergence

Q & A

Bullish Signals:

Downtrend

Price: Lower Low

RSI: Higher Low




Divergence

Recap RSI Q & A

Bullish Signals:

Downtrend

Price: Lower Low

RSI: Higher Low




Overbought/Oversold•




Overbought/Oversold

Recap

•

Enter at support/ Resistance after a sharp move

Confirmed by RSI




Reversals

Recap RSI Q & A

Bullish signals

Price: Higher Low

RSI: Lower Low

RSI: 30-70




Reversals

Q & A

Bearish signals

Price: Lower High

RSI: Higher High

RSI: 30-70




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




Failure Swings• Independent of Price Actions

• Signal Reversals

• Movement flow:

Overbought/Oversold

�Temporary support/resistance

�Overbought/Oversold

�Break support/Resistance




Failure Swings




Failure Swings

Oversold Below 30

Temporary Support at 50

Oversold: Higher low

Break support




Trending Market




Trending Market



Limitation/Q&A

StochasticsRecap RSI Q & A

Documents

Technical Analysis Workshop Series Session 11–Semester · PDF fileBasic Candlesticks Oscillator and momentum ... e-cheat-sheet.html Oscillator and momentum principles Stochastics