Introduction to Technical Indicators and Oscillators

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technical_indicators:introduction_to_technical_indicators_and_oscillators [2019/06/24 19:38]
127.0.0.1 external edit 		technical_indicators:introduction_to_technical_indicators_and_oscillators [2022/07/18 18:50] (current)
betseyp
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 Divergences,​ both positive and negative, can also form in non-momentum indicators like On Balance Volume, the Accumulation Distribution Line, the AD Line and Chaikin Money Flow. On the Expeditors (EXPD) chart above, the stock moved to a new high in September, but On Balance Volume (OBV) did not confirm with a higher high. A lower high is forming in OBV and the indicator moved below its 10-day SMA.  Divergences,​ both positive and negative, can also form in non-momentum indicators like On Balance Volume, the Accumulation Distribution Line, the AD Line and Chaikin Money Flow. On the Expeditors (EXPD) chart above, the stock moved to a new high in September, but On Balance Volume (OBV) did not confirm with a higher high. A lower high is forming in OBV and the indicator moved below its 10-day SMA. 
  
-===== Overbought and Oversold Extremes ​=====+==== Overbought and Oversold Extremes ====
  
 **Banded oscillators are designed to identify overbought and oversold extremes.** Since these oscillators fluctuate between extremes, they can be difficult to use in trending markets. Banded oscillators are best used in trading ranges or with securities that are not trending. In a strong trend, users may see many signals that are not really valid. If a stock is in a strong uptrend, buying on oversold conditions will work much better than selling on overbought conditions. **Banded oscillators are designed to identify overbought and oversold extremes.** Since these oscillators fluctuate between extremes, they can be difficult to use in trending markets. Banded oscillators are best used in trading ranges or with securities that are not trending. In a strong trend, users may see many signals that are not really valid. If a stock is in a strong uptrend, buying on oversold conditions will work much better than selling on overbought conditions.
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 The Microsoft (MSFT) chart reveals trading opportunities with the Relative Strength Index (RSI). Because a 14-period RSI rarely moved below 30 and above 70, a 10-period RSI was chosen to increase sensitivity. With the intermediate-term and long-term trends decidedly bearish, savvy traders could have sold short each time RSI reached overbought (black vertical lines). More aggressive traders could have played the long side each time RSI dipped below 30 and then moved back above this oversold level. The first two buy signals were generated with a positive divergence and a move above 30 from oversold conditions. The third buy signal came after RSI briefly dipped below 30. Keep in mind that these three signals were against the larger downtrend and trading strategies should be adjusted accordingly. The Microsoft (MSFT) chart reveals trading opportunities with the Relative Strength Index (RSI). Because a 14-period RSI rarely moved below 30 and above 70, a 10-period RSI was chosen to increase sensitivity. With the intermediate-term and long-term trends decidedly bearish, savvy traders could have sold short each time RSI reached overbought (black vertical lines). More aggressive traders could have played the long side each time RSI dipped below 30 and then moved back above this oversold level. The first two buy signals were generated with a positive divergence and a move above 30 from oversold conditions. The third buy signal came after RSI briefly dipped below 30. Keep in mind that these three signals were against the larger downtrend and trading strategies should be adjusted accordingly.
  
-===== Centerline Crossovers ​=====+==== Centerline Crossovers ====
  
 As the name implies, centerline crossover signals apply mainly to centered oscillators that fluctuate above and below a centerline. Traders have been also known to use centerline crosses with RSI in order to validate a divergence or signal generated from an overbought or oversold reading. However, most banded oscillators,​ such as RSI and Stochastics,​ rely on divergences and overbought/​oversold levels to generate signals. The middle ground is a bit of a no man's land for banded oscillators and is probably best left to other tools. For our purposes, the analysis of centerline crossovers will focus on centered oscillators such as [[:​glossary_c#​chaikin_money_flow_cmf|Chaikin Money Flow]], [[:​glossary_m#​macd_moving_average_convergence_divergence|MACD]] and [[:​glossary_r#​rate_of_change_percent|Rate-of-Change]] (ROC). As the name implies, centerline crossover signals apply mainly to centered oscillators that fluctuate above and below a centerline. Traders have been also known to use centerline crosses with RSI in order to validate a divergence or signal generated from an overbought or oversold reading. However, most banded oscillators,​ such as RSI and Stochastics,​ rely on divergences and overbought/​oversold levels to generate signals. The middle ground is a bit of a no man's land for banded oscillators and is probably best left to other tools. For our purposes, the analysis of centerline crossovers will focus on centered oscillators such as [[:​glossary_c#​chaikin_money_flow_cmf|Chaikin Money Flow]], [[:​glossary_m#​macd_moving_average_convergence_divergence|MACD]] and [[:​glossary_r#​rate_of_change_percent|Rate-of-Change]] (ROC).
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 On the IBM chart, Chaikin Money Flow began to turn down in July. At this time, the stock was declining with the market and the decline in the oscillator was normal. However, in the second half of August, concerns began to grow when the oscillator failed to continue up with the stock and fell below zero. As the stock advanced further, Chaikin Money Flow continued to deteriorate. This served as a signal that something was amiss. On the IBM chart, Chaikin Money Flow began to turn down in July. At this time, the stock was declining with the market and the decline in the oscillator was normal. However, in the second half of August, concerns began to grow when the oscillator failed to continue up with the stock and fell below zero. As the stock advanced further, Chaikin Money Flow continued to deteriorate. This served as a signal that something was amiss.
  
-===== Pros and Cons of Oscillator Signals ​=====+==== Pros and Cons of Oscillator Signals ====
  
 Banded oscillators are best used to identify overbought and oversold conditions. However, overbought is not meant to act as a sell signal, and oversold is not meant to act as a buy signal. Overbought and oversold situations serve as an alert that conditions are reaching extreme levels and close attention should be paid to the price action and other indicators. Banded oscillators are best used to identify overbought and oversold conditions. However, overbought is not meant to act as a sell signal, and oversold is not meant to act as a buy signal. Overbought and oversold situations serve as an alert that conditions are reaching extreme levels and close attention should be paid to the price action and other indicators.