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Relative Strength Index (RSI)

Utility: Identifying Overbought / Oversold Market Levels

Standard Settings: 14 Periods

The Relative Strength Index or RSI is a momentum oscillator that is able to measure the velocity and magnitude of each directional price movements. The RSI is also known for its ability to identify overbought and oversold markets.

 

As suggested by its developer, the default RSI calculation is involving 14 periods.

□ In case of a Ranging market, when RSI is found above 70, the market is considered overbought. In case of a Strong Trending Market with downward movement the value RSI=60 is overbought level.

□ In case of a Ranging market, when RSI is found below 30, the market is considered oversold. In case of a Strong Trending Market with upward movement the value RSI=40 is oversold level.

Relative Strength Index (RSI)

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Commodity Channel Index (CCI)

Utility: Evaluating Overbought / Oversold Market Levels

Standard Settings: 20 Periods

The Commodity Channel Index or CCI can identify if an asset or a market is trading at overbought or oversold levels. CCI is able to measure the current position of a financial asset with respect to its moving average. CCI can also signal trades as you can see below.

 

Commodity Channel Index Calculation

CCI = (TP - SMA (20) of TP) / (Constant x Mean Deviation)

Where:

TP (Typical Price) = (High + Low + Close) / 3

Constant = .015

 

Mean Deviation can be calculated as follows:

i) The 20-period average of the Typical Price is subtracted from each period's Typical Price

ii) The absolute values of these numbers are taken

iii) The absolute values are summed

iv) The total number is divided by the total number of periods. In our case by 20 periods.

 

Trading with the Commodity Channel Index

The CCI can offer buy and sell trading signals. The crucial points are -100 and +100.

When CCI is found below -100 and suddenly moves above -100 you get a buy signal

When CCI is found above +100 and suddenly moves below +100 you get a sell signal

Commodity Channel Index (CCI)

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Moving Average Convergence Divergence (MACD)

Utility: Evaluating the Trend / Providing Trading Signals

Standard Settings: 12 periods Fast, 26 periods Slow and 9 periods SMA (12,26,9)

The Moving Average Convergence Divergence or MACD is certainly one of the most widely used indicators especially as concerns the Foreign Exchange Market. MACD is able to identify the strength of any trend and to provide buy and sell trading signals.

MACD is also known for its ability to evaluate the momentum of a strong trend.

 

Calculating MACD

■ MACD Line = { Exponential Moving Average (12 periods) – Exponential Moving Average (26 periods) }

The MACD line is used as a measure of the convergence and the divergence of the fast and slow EMAs (Exponential moving averages).

■ Signal Line = { Exponential Moving Average (9 periods) of MACD Line }

The MACD signal line is used as an indicator of the directional change of the MACD line

■ MACD Histogram = MACD Line – Signal Line

The MACD histogram reflects the difference between the MACD line and the MACD signal line. The MACD histogram is positive when the MACD line is above the MACD signal line. The MACD histogram is negative when the MACD line is below the MACD signal line.

Moving Average Convergence Divergence

MACD Signal line crossovers

□ When the MACD turns higher and crosses the MACD signal line then a buying signal is generated.

□ When the MACD turns down and crosses, below, the MACD signal line then a selling signal is generated.

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Trading with the Directional Movement System (DMS)

Utility: Evaluating the Trend

Standard Settings: 14 Periods

The Directional Movement System was developed by Welles Wilder. The indicator was presented on the book “New Concepts in Technical Trading Systems”. What distinguishes Directional Movement System from other systems is that it first evaluates if a market is trending before offering trading signals. The default settings for the indicator involves 14 periods.

 

The Directional Movement System consists three lines:

(a) The Positive Direction Indicator (+DI) which summarizes the upward trend movement

(b) The Negative Direction Indicator (-DI) which summarizes the downward trend movement

(c) The Average Directional Movement Index (ADX) which indicates whether the market is trending or ranging.

Trading with the Directional Movement System (DMS)

 

Calculating the Directional Movement System:

First we must calculate the today’s Directional movement

■ +DM = Today's High - Yesterday's High (when the market moves upward)
■ -DM = Yesterday's Low - Today's Low (when the market moves downward)

After we calculate the True Range for the day.

■ Today's High - Today's Low
■ Today's High - Yesterday's Close
■ Yesterday's Close - Today's Low

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Stochastic Oscillator

Utility: Evaluating the Trend

Standard Settings: 14 Periods (14,3,3)

The Stochastic Oscillator is a momentum indicator developed by George Lane. The Stochastic Oscillator can measure the momentum and the speed of a price. It can be used as a tool of identifying trend reversals or trend continuation.

 

The Stochastic bound between 0 and 100 and it can identify overbought and oversold market levels as follows:

□ Overbought market levels are set at reading 80

□ Oversold market levels are set at reading 20

 

Calculating the Stochastic Oscillator

The Stochastic is formed by two lines

■ %K = {(Last Close - Lowest Low in K period)/(Highest High in K period - Lowest Low in K period)} * 100

Where,

K is the number of periods. Standard settings K=14 (14,3,3)

 

Trading with the Stochastic Oscillator

A bullish trading signal occurs when the price of an asset forms a lower high but the stochastic forms a higher high. A bearish trading signal occurs when the price of an asset forms a higher low but the stochastic oscillator forms a lower low.

Stochastic Oscillator

 

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Trading with the Momentum Oscillator

Utility: Identifying the Trend

Standard Settings: 21, 63, 125, 250 Periods

The Momentum oscillator operates in a way similar to the Rate of Change (ROC) indicator.

 

The Momentum oscillator measures the difference between last price and the price of T periods ago. The result is a series that oscillates around a horizontal equilibrium line (zero line), this line represents the level at which the price is unchanged from its reading T periods ago. Momentum is very closely related to the, it will generate identical trading signals as the ROC.

Momentum Oscillator

 

Calculating the Momentum Oscillator

This is Momentum Oscillator Formula:

Momentum = Closing Price – Closing Price (T periods ago)