Technical Analysis - Standard Oscillators

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Agenda

• What are oscillators?

• Relative Strength Index (RSI)

• Moving Average Convergence/Divergence (MACD)

• Stochastics

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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.

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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

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Relative Strength Index (RSI)

1. Oversold – market corrects higher

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Relative Strength Index (RSI) 1. Oversold – market corrects higher 2. Overbought – market corrects lower

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Relative Strength Index (RSI)

1. Oversold – market corrects higher 2. Overbought – market corrects lower 3. Divergence – price moves opposite of

indicator

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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

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MACD

Signal Line

MACD Line

MACD Histogram (MACD Line – Signal Line) 9 NSFX Trading Desk

MACD

1. Line crossovers

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MACD

1. Line crossovers 2. Bullish Divergence (convergence)

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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

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Stochastic Slow

%K

%D

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Stochastic Slow

1. Overbought/Oversold

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Stochastic Slow

1. Overbought/Oversold 2. Crossovers

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Stochastic Slow

1. Overbought/Oversold 2. Crossovers 3. Convergence/Divergence

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Example - MACD, RSI & STOCHS Combined on the S&P Daily

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