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Transcript of Technical Analysis Workshop Series Session 11–Semester · PDF fileBasic Candlesticks...
Technical Analysis Workshop Series
Session 11– Semester 2 Week 5
Oscillators Part 2
DISCLOSURES & DISCLAIMERS
This research material has been prepared by NUS Invest.
NUS Invest specifically prohibits the redistribution of this material in whole or in part without the
written permission of NUS Invest.
The research officer(s) primarily responsible for the content of this research material, in whole or
in part, certifies that their views are accurately expressed and they will not receive direct or
indirect compensation in exchange for expressing specific recommendations or views in this
research material.
REVERSAL
PATTERNSINTRODUCTION PRACTICE
DISCLOSURES & DISCLAIMERS
Nothing in this research material constitutes a representation that any investment strategy or
recommendation contained herein is suitable or appropriate to a recipient’s individual
circumstances or otherwise constitutes a personal recommendation. It is published solely for
information purposes, it does not constitute an advertisement and is not to be construed as a
solicitation or an offer to buy or sell any securities or related financial instruments.
No representation or warranty, either expressed or implied, is provided in relation to the
accuracy, completeness or reliability of the information contained herein. The research material
should not be regarded by recipients as a substitute for the exercise of their own judgement. Any
opinions expressed in this research material are subject to change without notice.
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
Oscillator and momentum
principlesStochastics RSI Q & A
• 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
principlesStochastics RSI Q & A
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)
Oscillator and momentum
principlesStochastics RSI Q & A
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
Oscillator and momentum
principlesStochastics RSI Q & A
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.
Oscillator and momentum
principlesStochastics RSI Q & A
Basic Candlesticks
Oscillator and momentum
principlesStochastics RSI Q & A
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
Oscillator and momentum
principlesStochastics RSI Q & A
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)
Oscillator and momentum
principlesStochastics RSI Q & A
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
Oscillator and momentum
principlesStochastics RSI Q & A
1st Use
• When the %K line crosses the %D line below
the 20 level or 80 level
• Oversold or Overbought
Oscillator and momentum
principlesStochastics RSI Q & A
1st Use-Closer look
Oscillator and momentum
principlesStochastics RSI Q & A
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…
Oscillator and momentum
principlesStochastics RSI Q & A
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.
Oscillator and momentum
principlesStochastics RSI Q & A
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
Oscillator and momentum
principlesStochastics RSI Q & A
2nd Use-Divergence(1st)
• Regular Bullish
Divergence
• Price making
lower lows
• Oscillator
making Higher
lows
Oscillator and momentum
principlesStochastics RSI Q & A
http://www.babypips.com/school/divergence-cheat-sheet.html
2nd Use-Divergence(2nd)
• Regular Bearish
Divergence
• Price making
Higher highs
• Oscillator
making Lower
highs
Oscillator and momentum
principlesStochastics RSI Q & A
http://www.babypips.com/school/divergence-cheat-sheet.html
2nd Use-Divergence(3rd)
Oscillator and momentum
principlesStochastics RSI Q & A
• Hidden Bullish
Divergence
• Price making
Higher low
• Oscillator
making Lower
low
http://www.babypips.com/school/divergence-cheat-sheet.html
2nd Use-Divergence(4th)
• Hidden Bearish
Divergence
• Price making
Lower high
• Oscillator
making Higher
high
Oscillator and momentum
principlesStochastics RSI Q & A
http://www.babypips.com/school/divergence-cheat-sheet.html
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
Oscillator and momentum
principlesStochastics RSI Q & A
Application
INDICATOR SIGNAL
+
CONTEXT(MARKET SENTIMENT)
=
TRUE BUY/SELL SIGNAL
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)
Oscillator and momentum
principlesStochastics RSI Q & A
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.
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)-
Parameters• Time period
• Overbought-Oversold Level
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)
Oscillator and
momentum principles
• Trading the RSI
– Divergence
– Overbought/Oversold
– Reversals
– Failure swings
– Trending Market
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)-
Divergence
Q & A
Bullish Signals:
Downtrend
Price: Lower Low
RSI: Higher Low
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)-
Divergence
Recap RSI Q & A
Bullish Signals:
Downtrend
Price: Lower Low
RSI: Higher Low
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)-
Overbought/Oversold•
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)-
Overbought/Oversold
Recap
•
Enter at support/ Resistance after a sharp move
Confirmed by RSI
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)-
Reversals
Recap RSI Q & A
Bullish signals
Price: Higher Low
RSI: Lower Low
RSI: 30-70
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)-
Reversals
Q & A
Bearish signals
Price: Lower High
RSI: Higher High
RSI: 30-70
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)-
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
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)
Failure Swings• Independent of Price Actions
• Signal Reversals
• Movement flow:
Overbought/Oversold
�Temporary support/resistance
�Overbought/Oversold
�Break support/Resistance
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)
Failure Swings
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)
Failure Swings
Oversold Below 30
Temporary Support at 50
Oversold: Higher low
Break support
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)
Trending Market
Oscillator and momentum
principlesStochastics RSI Q & A
Relative Strength Index (RSI)
Trending Market
Oscillator and momentum
principlesStochastics RSI Q & A
Limitation/Q&A
StochasticsRecap RSI Q & A