Technical Analysis: Oscillators by NSFX
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This document discusses four common technical indicators used to analyze financial markets: the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic oscillator. It explains what each indicator measures, how it is calculated, and what typical signals and patterns traders look for like divergences, crossovers, and overbought/oversold levels. Examples are shown of how these indicators can be combined on a daily chart of the S&P 500 index.
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