oscillators. oscillators can be defined as a price derivative oscillators experience oscillations...

OSCILLATORS

Oscillators can be defined as a price derivative

Oscillators experience oscillations that permits to identifythe volatility in the market

Oscillators are the graphic representation of the change in pricesand determine the volatility within a market

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)

Oscillateur without limits(-X…0….+X)

RSI 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

NOT A SELL SIGNAL

PROFIT TAKING OPPORTUNITY

Alteration of a trend

Sell signal ?

CHARTISM ON OSCILLATORS

•Trend analysis possible on all oscillators

•Filters on oscillators can be used only in overbought/oversold conditions (RSI with a moving average)

•A trend break on an oscillator can predict a change in trendbut does not give a buying or selling signal

MAIN OSCILLATORS

•Oscillators with limits

•Oscillators without limits

•Other oscillators

Oscillateurs without limits

•MOMENTUM

•ROC

•MACD

MOMENTUM

Ct – Ct-x

51512157

•Without limit Not a good OB/OS indicator

•Trend lines Best use for momentum

MOMENTUM CARACTERISTICS

•Best time interval 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 TOUNUSUAL EXTREMES WELL BEYOND THE OVERBOUGHT/OVERSOLD EXPERIENCE

DIVERGENCE

THESE LINES ARE TOO CLOSE TO THE EQUILIBRIUMLINE.

THESE LINES ARE TOO FAR APART FROM THE EQUILIBRIUM LINE.

THESE LINES ARE NOT PERFECT BUT THEY ARE A REASONABLE COMPROMISE SINCE THEY ARE CLOSETO 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

MBT

THE ZERO LINE CORRESPONDS TO WHEN THE 2 MA ARE IDENTICAL

WHEN MACD>0 ST EMA is above LT EMA

MACD CARACTERISTICS

•Super buying/selling signal whenever MACD intersects E at equilibrium point 0

•Wise to doubledeck the linear and histogramme to get a better view

•Buying signal when the histogramm goes above 0

BUYING SIGNAL

Oscillators with Limits

•RSI

•Stochastics

Relative Strength Indicator

•Market oscillators between 0 (minimum) and 100 (maximum)

100RSI = 100 - ----------------

1 + RS

Average updays in X daysRS =----------------------------------------------------

Average downdays in X days

BAC

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 AFTERTHE RSI HAD ENTERED IN THE 30 ZONE.

NOTICE HOW THE INDEX KEPT TRADING SIDEWAYSWITH THE RSI CONTINUING TO GO UP !

STOCHASTICS

STOCHASTICS TAKES INTO ASSUMPTIONS THAT PRICES CLOSE NEARTHEIR 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 WHICHCLOSING PRICES START FURTHERING OUT FROM THE HIGHS IN A STILLRISING 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 priceLx : Lowest price in the last X daysHx : Highest price in the last X days

K..wick (gives major signal) D..awdling….(more sensitive of the 2)

"D" is a moving average of "K"

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 INDICATORSAN EXTREMELY HIGH "K-LINE" WARNS YOU OF FURTHERSTRENGTH ONCE THE INITIAL OVERBOUGHT LEVELS HAVE NEUTRALIZED.

THAT' S IT FOR TODAY !!!!!

ONE NOTE OF CAUTION :

IT IS POSSIBLE FOR ROC INDICATORS TO MOVE TOUNUSUAL EXTREMES WELL BEYOND THE OVERBOUGHT/OVERSOLD EXPERIENCE

THE ADVANTAGE OF ROC IS THAT IT EASILYLENDS ITSELF TO PRICE PATTERN CONSTRUCTION

RARE !

THE ROC PRICE PATTERN FORMATION WORKS BETTER AT AN AVERSOLD LEVEL IN RISING MARKETSAND AT OVERBOUGHT LEVELS IN DECLINING MKTS.

RELATIVE STRENGTH INDICATOR

THE RSI IS A FRONT- WEIGHTED PRICE VELOCITY RATIOFOR A SPECIFIC SECURITY Y RELATIVE TO ITSELF AND ISTHEREFORE RELATIVE TO ITS PAST PERFORMANCE ONLY

ONE OF THE PROBLEMS WITH THE ROC INDICATOR, IS THAT IT IS POSSIBLEFOR THEM TO MOVE TO UNREASONABLE EXTREMES. THE RSI DOES NOT SUFFERFROM THIS DRAWBACK.

RSI MEASURES GO FROM 0 TO 100 ALTHOUGH IN PRACTICETHEY ARE RARELY OBTAINED.

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 TENDSTOWARDS THE EQUILIBRIUM LEVEL IN A RISING MARKET

4. DIVERGENCES

A LOW IN THE BRITISH EQUITY MARKET OCCURED AFTERTHE RSI HAD ENTERED IN THE 30 ZONE.

NOTICE HOW THE INDEX KEPT TRADING SIDEWAYSWITH THE RSI CONTINUING TO GO UP !

5. TRENDLINES

DON'T EXPECT MUCH CORRECTION DOWNMOVES IN A BULL MARKET WHENTHE RSI IS AT OVERBOUGT LEVELS

SIMILARLY FOR BEAR MARKETS.

MACD

•MACD IS CALCULATED BY COMPARING 2 MOVING AVERAGES

MOVING AVERAGE CONVERGENCE DIVERGENCE METHOD

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 ARECLOSING NEAR THEIR HIGHS AND VICE VERSA.