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Technical Analysis: Oscillators by NSFX

  1. Technical Analysis - Standard Oscillators 1NSFX Trading Desk
  2. Agenda • What are oscillators? • Relative Strength Index (RSI) • Moving Average Convergence/Divergence (MACD) • Stochastics 2NSFX Trading Desk
  3. What are oscillators? • A mathematical tool to assess market moves • Compared to Moving Averages and other indicators, which are applied on the chart, the oscillators are separate and give an index to measure market conditions from an overbought/oversold, divergence/convergence perspective • Good for identifying potential reversals and have historically proven most successful when markets are trading sideways, without a clear trend. 3NSFX Trading Desk
  4. Relative Strength Index (RSI) • Developed by Welles Wilder and first published in 1978 • The RSI is a momentum indicator which compares the average price change of the advancing periods with the average change of the declining periods. • Useful in both short and long term analysis, but standard criteria are set different • Standard formula: 𝑅𝑆𝐼 = 100 − 100 1+𝑅𝑆 , 𝑤ℎ𝑒𝑟𝑒 𝑅𝑆 = 𝐴𝑣𝑔 𝑜𝑓 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠′ 𝑢𝑝 𝑐𝑙𝑜𝑠𝑒𝑠 𝐴𝑣𝑔 𝑜𝑓 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠′ 𝑑𝑜𝑤𝑛 𝑐𝑙𝑜𝑠𝑒𝑠 This will give us an index ranging from 0-100, making it possible to assess possible divergence or if an instrument is oversold/overbought 4NSFX Trading Desk
  5. Relative Strength Index (RSI) 1. Oversold – market corrects higher 5NSFX Trading Desk
  6. Relative Strength Index (RSI) 1. Oversold – market corrects higher 2. Overbought – market corrects lower 6NSFX Trading Desk
  7. Relative Strength Index (RSI) 1. Oversold – market corrects higher 2. Overbought – market corrects lower 3. Divergence – price moves opposite of indicator 7NSFX Trading Desk
  8. MACD • Developed in late 1970s by Gerald Appel • Built on several exponential moving averages and applied for both trend- following and gauging of momentum. • Compared to the RSI, the MACD fluctuates around zero, not indexed and is not as useful as the RSI as identifying overbought/oversold levels. • Consisting of a so-called MACD-line and a signal line (and a histogram showing the difference between the two): Standard Parameters: MACD-line: (12-day EMA – 26-day EMA) Signal Line: 9-day EMA of MACD Line MACD Histogram: MACD Line – Signal Line 8NSFX Trading Desk
  9. MACD Signal Line MACD Line MACD Histogram (MACD Line – Signal Line) 9NSFX Trading Desk
  10. MACD 1. Line crossovers 10NSFX Trading Desk
  11. MACD 1. Line crossovers 2. Bullish Divergence (convergence) 11NSFX Trading Desk
  12. Stochastic Slow • Developed in the late 1950s by George C. Lane • Shows location of the close relative to a high-low range over an interval and follows the momentum of the price action. • Good for finding reversal setups as well as overbought/oversold situations. Formula: %𝐾 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑙𝑜𝑠𝑒 −𝐿𝑜𝑤𝑒𝑠𝑡 𝐿𝑜𝑤(𝑛) 𝐻𝑖𝑔ℎ𝑒𝑠𝑡 𝐻𝑖𝑔ℎ 𝑛 −𝐿𝑜𝑤𝑒𝑠𝑡 𝐿𝑜𝑤 (𝑛) ∗ 100 %𝐷 = 3𝑑𝑎𝑦 𝑆𝑀𝐴 𝑜𝑓 %𝐾 12NSFX Trading Desk
  13. Stochastic Slow %K %D 13NSFX Trading Desk
  14. Stochastic Slow 1. Overbought/Oversold 14NSFX Trading Desk
  15. Stochastic Slow 1. Overbought/Oversold 2. Crossovers 15NSFX Trading Desk
  16. Stochastic Slow 1. Overbought/Oversold 2. Crossovers 3. Convergence/Divergence 16NSFX Trading Desk
  17. Example - MACD, RSI & STOCHS Combined on the S&P Daily 17NSFX Trading Desk