Stochastic Oscillator

Chart 1.

stochastics oscillator is a momentum indicator that uses support and resistance levels

You have the option to change the %K and %D periods of the Slow Stochastic above. The default %K and %D periods are set to 15 and 5, respectively.

Question? What are the parameters should set for stochastics oscillators?

The default settings (14,3,3) is fast enough to use in 30-minute and 1-hour charts.Well, that depends on how "sensitive" you want your oscillator to be. The smaller the stochastic parameters, the faster it will react to market changes and the more crossovers will be shown. Stochastic settings of (5, 3, 3) are highly sensitive and are useful for detecting rapidly changing market trends but it tends to be too choppy and prone to fake-outs. My stochastic is set at (14, 3, 3), where 14 stands for the %K line, 3 is for the %D or signaling line, and 3 is the smoothing parameter.

The MACD is most effective in wide-swinging trading markets. There are three popular ways to interpret the Slow Stochastic:

1. Buy when the Oscillator (either %K or %D) falls below a specific level (e.g. 20) and then rises above that level. Sell when the Oscillator rises above a specific level (e.g. 80) and then falls below that level.

2. Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.

3. Look for divergences. For example, where prices are making a series of new highs and the Slow Stochastic Oscillator is failing to surpass its previous highs. - "Technical Analysis from A to Z" by Stephen Aechlis.

EMA3(%D) is a 3-period exponential moving average of %K.
EMA3(%D − Slow) is a 3-period exponential moving average of %D.

A 3-line Stochastics will give you an anticipatory signal in %K, a signal in the turnaround of %D at or before a bottom, and a confirmation of the turnaround in %D-Slow. [3] Typical values for N are 5, 9, or 14 periods. Smoothing the indicator over 3 periods is standard.

Stochastics predicts tops and bottoms.

Interpretation
The signal to act is when you have a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom.

As plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line. If price volatility is high, an exponential moving average of the %D indicator may be taken, which tends to smooth out rapid fluctuations in price.

Stochastics attempts to predict turning points by comparing the closing price of a security to its price range. Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period's trading range. When the momentum starts to slow, the settlement prices will start to retreat from the upper boundaries of the range, causing the stochastic indicator to turn down at or before the final price high.

An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the faster % K line crosses the % D line.

Divergence-convergence is an indication that the momentum in the market is waning衰退 and a reversal may be in the making. The chart below illustrates an example of where a divergence in stochastics relative to price forecasts a reversal in the price's direction. Please see Chart 1

Stochastics pop
This is when prices pop through and keep on going - that is, break out.
Rules to follow:
Increase long position — When price crosses the upper band from below. RSI <50,k%>D%
Increase short position — When price crosses the lower band from above. RSI >70,D%>k%
Liquidate position — When Stochastic %D crosses %K in direction reversed to open trade

RSI

The Relative Strength Index (RSI) is a technical indicator used in the technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. (It is not to be confused with relative strength.)


The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.


The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels--80 and 20, or 90 and 10--occur less frequently but indicate stronger momentum.

Divergence差异
Wilder further believed that divergence between RSI and price action is a very strong indication that a market turning point is imminent. Bearish divergence occurs when price makes a new high but the RSI makes a lower high, thus failing to confirm. Bullish divergence occurs when price makes a new low but RSI makes a higher low.

Overbought and oversold conditions
Wilder thought that "failure swings" above 70 and below 30 on the RSI are strong indications of market reversals. For example, assume the RSI hits 76, pulls back to 72, then rises to 77. If it falls below 72, Wilder would consider this a "failure swing" above 70.
Finally, Wilder wrote that chart formations and areas of support and resistance could sometimes be more easily seen on the RSI chart as opposed to the price chart. The center line for the relative strength index is 50, which is often seen as both the support and resistance line for the indicator. If the relative strength index is below 50, it generally means that the stock's losses are greater than the gains. When the relative strength index is above 50, it generally means that the gains are greater than the losses.

Uptrends and downtrends
In addition to Wilder's original theories of RSI interpretation, Andrew Cardwell has developed several new interpretations of RSI to help determine and confirm trend. First, Cardwell noticed that uptrends generally traded between RSI 40 and 80, while downtrends usually traded between RSI 60 and 20. Cardwell observed when securities change from uptrend to downtrend and vice versa, the RSI will undergo a "range shift."

Example of RSI Indicator Divergence
Next, Cardwell noted that bearish divergence: 1) only occurs in uptrends, and 2) mostly only leads to a brief correction instead of a reversal in trend. Therefore bearish divergence is a sign confirming an uptrend. Similarly, bullish divergence is a sign confirming a downtrend.

Reversals
Finally, Cardwell discovered the existence of positive and negative reversals in the RSI. Reversals are the opposite of divergence. For example, a positive reversal occurs when an uptrend price correction results in a higher low compared to the last price correction, while RSI results in a lower low compared to the prior correction. A negative reversal happens when a downtrend rally results in a lower high compared to the last downtrend rally, but RSI makes a higher high compared to the prior rally.

In other words, despite stronger momentum as seen by the higher high or lower low in the RSI, price could not make a higher high or lower low. This is evidence the main trend is about to resume. Cardwell noted that positive reversals only happen in uptrends while negative reversals only occur in downtrends, and therefore their existence confirms the trend.

MACD - EMA

EMA
Exponential moving averages highlight recent changes in a stock's price. By comparing EMAs of different periods, the MACD line illustrates changes in the trend of a stock. Then by comparing that difference to an average, an analyst can chart subtle shifts in the stock's trend.

Since the MACD is based on moving averages, it is inherently a lagging indicator. As a metric of price trends, the MACD is less useful for stocks that are not trending or are trading erratically.

The period for the moving averages on which an MACD is based can vary, but the most commonly used parameters involve a faster EMA of 12 days, a slower EMA of 26 days, and the signal line as a 9 day EMA of the difference between the two. It is written in the form, MACD(faster, slower, signal) or in this case, MACD(12,26,9).

MACD = EMA[fast,12] – EMA[slow,26]
signal = EMA[period,9] of MACD
histogram = MACD – signal

Signal line crossovers are the primary cues provided by the MACD. The standard interpretation is to buy when the MACD line crosses up through the signal line, or sell when it crosses down through the signal line.
The upwards move is called a bullish crossover and the downwards move a bearish crossover. Respectively, they indicate that the trend in the stock is about to accelerate in the direction of the crossover.

The histogram shows when a crossing occurs. Since the histogram is the difference between the MACD line and the signal line, when they cross there is no difference between them.
The histogram can also help in visualizing when the two lines are approaching a crossover. Though it may show a difference, the changing size of the difference can indicate the acceleration of a trend. A narrowing histogram suggests a crossover may be approaching, and a widening histogram suggests that an ongoing trend is likely to get even stronger.
While it is theoretically possible for a trend to increase indefinitely, under normal circumstances, even stocks moving drastically will eventually slow down, lest they go up to infinity or down to nothing

Timing
The MACD is only as useful as the context in which it is applied. An analyst might apply the MACD to a weekly scale before looking at a daily scale, in order to avoid making short term trades against the direction of the intermediate trend.Analysts will also vary the parameters of the MACD to track trends of varying duration. One popular short-term set-up, for example, is the (5,35,5).

False signals
Like any indicator, the MACD can generate false signals. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there was no bullish crossover, yet the stock accelerated suddenly upwards.
A prudent strategy would be to apply a filter to signal line crossovers to ensure that they will hold. An example of a price filter would be to buy if the MACD line breaks above the signal line and then remains above it for three days. As with any filtering strategy, this reduces both the probability of false signals as well as the frequency of missed profit.

Limitations
The MACD has often been criticized for failing to respond in very low or alternately very high volatility market conditions.Since the MACD measures the divergence between averages, it can only give meaningful feedback as trends change. Thus, the MACD is less useful if the market is not trending—trading sideways or trading erratically—making sudden, dramatic, and/or countervailing moves.
In a sideways market, the divergence between averages will not have a trend to illuminate. In an erratic market, the changes will happen too quickly to be picked up by moving averages or will cancel each other out, diminishing the MACDs usefulness. A partial caveat to this criticism is that whether a market is trending or volatile is always relative to a particular timeframe, and the MACD can be adjusted to shorter or longer spans.
Finally, though some analysts trade on technical indicators alone, the abundance of experts recommend a complete work-up of a company's business sectors, financial strength, past earnings, new products, management, and institutional buying. For more traditional investors, an indicator like the MACD may be used only to support a previously determined stock choice, or to select an ideal entry-point into a fundamentally sound stock