Transcript KEY MOMENTUM INDICATORS

OSCILLATORS
Oscillators are the graphic representation of the change in prices
and determine the volatility within a market
Oscillators experience oscillations that permits to identify
the volatility in the market
Oscillators can be defined as a price derivative
3 different classes of signals
1. Overbought/oversold (when the market has gone up/down much))
2. Divergences (disconnection between prices and oscillators)
3.Chartism on oscillators
OVERBOUGHT / OVERSOLD
Oscillators with limlits
(0 à 100)
RSI
Oscillateur without limits
(-X…0….+X)
MOMENTUM
(Macd, stochastics…)
Oscillator with limits are more informative of market volatility
DIVERGENCE
•Cannot be seen on prices alone
•Indicates an exhaustive condition
•Divergence can only be considered in overbought/oversold
conditions
NEGATIVE DIVERGENCE
Sell signal ?
Alteration of
a trend
NOT A SELL SIGNAL
PROFIT TAKING OPPORTUNITY
CHARTISM ON OSCILLATORS
•Trend analysis possible on all oscillators
•A trend break on an oscillator can predict a change in trend
but does not give a buying or selling signal
•Filters on oscillators can be used only in overbought/oversold
conditions (RSI with a moving average)
MAIN OSCILLATORS
•Oscillators with limits
•Oscillators without limits
•Other oscillators
Oscillateurs without limits
•MOMENTUM
•ROC
•MACD
MOMENTUM
Ct – Ct-x
5
15
12
15
7
MOMENTUM CARACTERISTICS
•Without limit
•Trend lines
•Best time interval
Not a good OB/OS indicator
Best use for momentum
10 jours
TREND BREAK
ROC
Ct
100 * ------Ct-x
ROC CARACTERISTICS
•Very similar to momentum
•The rises are amplified compared to falls
ONE NOTE OF CAUTION :
IT IS POSSIBLE FOR ROC INDICATORS TO MOVE TO
UNUSUAL EXTREMES WELL BEYOND THE
OVERBOUGHT/OVERSOLD EXPERIENCE
DIVERGENCE
THESE LINES ARE TOO CLOSE TO THE EQUILIBRIUM
LINE.
THESE LINES ARE TOO FAR APART FROM THE
EQUILIBRIUM LINE.
THESE LINES ARE NOT PERFECT BUT THEY ARE A
REASONABLE COMPROMISE SINCE THEY ARE CLOSE
TO MOST TO MOST OF THE EXTREME POINTS.
Moving Average Convergence Divergence
•MACD is calculated by comparing 2 exponential moving averages
•D is defined as the difference between 2 moving averages
•E is defined as the moving average of D
THE ZERO LINE CORRESPONDS TO WHEN THE 2 MA ARE IDENTICAL
WHEN MACD>0
ST EMA is above LT EMA
MACD CARACTERISTICS
•Buying signal when the histogramm goes above 0
•Wise to doubledeck the linear and histogramme to get a better
view
•Super buying/selling signal whenever MACD intersects E at
equilibrium point 0
BUYING SIGNAL
Oscillators with Limits
•RSI
•Stochastics
Relative Strength Indicator
•Market oscillators between 0 (minimum) and 100 (maximum)
RSI = 100 -
100
---------------1 + RS
Average updays in X days
RS =---------------------------------------------------Average downdays in X days
RSI CARACTERISTICS
•Overbought zones ( RSI>70) et oversold zones (RSI < 30) are
not pure entry position levels but rather profit taking zones
Only when the market exits from that high volatility zone can
one initiate an entry position
•Divergences are only valid in overbougth/oversold zones.
A LOW IN THE BRITISH EQUITY MARKET OCCURED AFTER
THE RSI HAD ENTERED IN THE 30 ZONE.
NOTICE HOW THE INDEX KEPT TRADING SIDEWAYS
WITH THE RSI CONTINUING TO GO UP !
STOCHASTICS
STOCHASTICS TAKES INTO ASSUMPTIONS THAT PRICES CLOSE NEAR
THEIR HIGH DURING AN UPTREND AND CLOSE TO THEIR LOWS
DURING AN DOWNTREND
PRICES CLOSE NEAR THEIR HIGH DURING AN UPTREND…
AS THE UPTREND MATURES, PRICES CLOSE LOWER
THAN THEIR HIGH…
THE GOAL OF STOCHASTICS IS TO DETERMINE THE LEVEL AT WHICH
CLOSING PRICES START FURTHERING OUT FROM THE HIGHS IN A STILL
RISING MARKET
Stochastic indicators are composed of a first oscillator called
%K which is then filtered by a second oscillator called %D
C - Lx
%K = 100 x -----------Hx - Lx
C : Closing price
Lx : Lowest price in the last X days
Hx : Highest price in the last X days
"D" is a moving average of "K"
K..wick (gives major signal)
D..awdling….(more sensitive of the 2)
STOCHASTICS CARACETRISTICS
•Better than the RSI because it takes into consideration the
highs and lows and not only the closing prices
•Stochastics offer 3 types of levels : :
•Overbought / Oversold
•Overbought/Oversold signal with %D and slow%D crossing
•Trend indicators with divergences
HOW TO INTERPRET
STOCHASTICS
1. DIVERGENCES
2. CROSSOVERS
"K" WILL OFTEN CROSSOVER "D" BEFORE
"D" CHANGES DIRECTION
(normal as "K" is Kwicker)
THE INDICATOR IS STRONGER WHEN "K" CROSSES "D"
AFTER "D" HAS CHANGED DIRECTION.
3. WHEN THE "K-LINE" REACHES NEAR 100
WITH OVERBOUGHT READINGS IN OTHER INDICATORS
AN EXTREMELY HIGH "K-LINE" WARNS YOU OF FURTHER
STRENGTH ONCE THE INITIAL OVERBOUGHT
LEVELS HAVE NEUTRALIZED.
THAT' S IT FOR TODAY !!!!!
ONE NOTE OF CAUTION :
IT IS POSSIBLE FOR ROC INDICATORS TO MOVE TO
UNUSUAL EXTREMES WELL BEYOND THE
OVERBOUGHT/OVERSOLD EXPERIENCE
RARE !
THE ADVANTAGE OF ROC IS THAT IT EASILY
LENDS ITSELF TO PRICE PATTERN CONSTRUCTION
THE ROC PRICE PATTERN FORMATION WORKS
BETTER AT AN AVERSOLD LEVEL IN RISING MARKETS
AND AT OVERBOUGHT LEVELS IN DECLINING MKTS.
RELATIVE STRENGTH
INDICATOR
THE RSI IS A FRONT- WEIGHTED PRICE VELOCITY RATIO
FOR A SPECIFIC SECURITY Y RELATIVE TO ITSELF AND IS
THEREFORE RELATIVE TO ITS PAST PERFORMANCE ONLY
ONE OF THE PROBLEMS WITH THE ROC INDICATOR, IS THAT IT IS POSSIBLE
FOR THEM TO MOVE TO UNREASONABLE EXTREMES. THE RSI DOES NOT SUFFER
FROM THIS DRAWBACK.
RSI MEASURES GO FROM 0 TO
THEY ARE RARELY OBTAINED.
100 ALTHOUGH IN PRACTICE
RSI MEASURES MOVE INVERSELY TO OTHER MOMENTUM
INDICATORS
VERY OFTEN EXCEEDED
UPPER AND LOWER LIMITS RARELY ATTAINED
YOU SHOULD THEREFORE NARROW THE TIME BAND
6 PRINCIPLES OF RSI INTERPRETATION
1.
70/30 overbought/oversold levels
(for 14 days) (narrow bands for >14)
2.
LENDS ITSELF TO PRICE PATTERN
FORMATIONS, BUT NOT AS MUCH AS ROC
3.
FAILURE SWINGS OCCUR WHEN THE RSI TENDS
TOWARDS THE EQUILIBRIUM LEVEL IN A RISING MARKET
4. DIVERGENCES
A LOW IN THE BRITISH EQUITY MARKET OCCURED AFTER
THE RSI HAD ENTERED IN THE 30 ZONE.
NOTICE HOW THE INDEX KEPT TRADING SIDEWAYS
WITH THE RSI CONTINUING TO GO UP !
5. TRENDLINES
DON'T EXPECT MUCH CORRECTION DOWNMOVES IN A BULL MARKET WHEN
THE RSI IS AT OVERBOUGT LEVELS
SIMILARLY FOR BEAR MARKETS.
MACD
MOVING AVERAGE CONVERGENCE DIVERGENCE METHOD
•MACD IS CALCULATED BY COMPARING 2 MOVING AVERAGES
USE 12 DAYS FOR THE SHORT TERM MA.
USE 26 DAYS FOR THE LONG TERM MA.
THE ZERO LINE CORRESPONDS TO WHEN THE 2 MA ARE IDENTICAL
WHEN MACD>0
ST EMA is above LT EMA
TOO MANY WHIPSAWS USING SIGNAL LINE …
HOW DO YOU CHOOSE YOUR TIME SPAN DATA ?
THE RECOMMENDED COMBINATIONS ARE :
•8-17 AND 9 DAYS EMA
• 12-25 AND 9 DAYS EMA (BETTER FOR SALES)
MARKETS SPEND MORE TIME IN A RISING THAN IN A FALLING MODE
•MACDs CAN ALSO BE PLOTTED USING HISTOGRAMS
•GOOD FOR PEAK AND TROUGHS
•DIFFICULT TO IDENTIFY PATTERN FORMATION
STOCHASTICS ALWAYS FALL IN
THE RANGE OF 0 TO 100
READINGS CLOSE TO 80 INDICATE THAT PRICES ARE
CLOSING NEAR THEIR HIGHS AND VICE VERSA.