Oscillators- Investment Management..pptx
- 1. Oscillators
- 2. • Oscillators are momentum indicators used in technical analysis, whose fluctuations are bounded by some upper and lower band. • When oscillator values approach these bands, they provide overbought or oversold signals to traders. • Oscillators are often combined with moving average indicators to signal trend breakouts or reversals.
- 3. How Oscillators Work • Oscillators are typically used in conjunction with other technical analysis indicators to make trading decisions. • Analysts find oscillators most advantageous when they cannot find a clear trend in a company's stock price easily, for example when a stock trades horizontally or sideways.
- 4. The most common oscillators are the: • Stochastic Oscillator • Relative Strength (RSI) • Rate of Change (ROC) • Money Flow (MFI)
- 5. Stochastic Oscillator • A stochastic oscillator is a popular technical indicator for generating overbought and oversold signals. • It is a popular momentum indicator, first developed in the 1950s. • Stochastic oscillators tend to vary around some mean price level since they rely on an asset's price history. • Stochastic oscillators measure the momentum of an asset's price to determine trends and predict reversals. • Stochastic oscillators measure recent prices on a scale of 0 to 100, with measurements above 80 indicating that an asset is overbought and measurements below 20 indicating that it is oversold.
- 7. Understanding the Stochastic Oscillator • The stochastic oscillator is range-bound, meaning it is always between 0 and 100. This makes it a useful indicator of overbought and oversold conditions. • Traditionally, readings over 80 are considered in the overbought range, and readings under 20 are considered oversold. • However, these are not always indicative of impending reversal; very strong trends can maintain overbought or oversold conditions for an extended period. • Instead, traders should look to changes in the stochastic oscillator for clues about future trend shifts. • Stochastic oscillator charting generally consists of two lines: one reflecting the actual value of the oscillator for each session, and one reflecting its three-day simple moving average. Because price is thought to follow momentum, the intersection of these two lines is considered to be a signal that a reversal may be in the works, as it indicates a large shift in momentum from day to day.
- 8. • Divergence between the stochastic oscillator and trending price action is also seen as an important reversal signal. • For example, when a bearish trend reaches a new lower low, but the oscillator prints a higher low, it may be an indicator that bears are exhausting their momentum and a bullish reversal is brewing.
- 10. Notably, %K is referred to sometimes as the fast stochastic indicator. The "slow" stochastic indicator is taken as %D = 3-period moving average of %K.
- 11. Relative Strength Index (RSI)
- 12. What Is the Relative Strength Index (RSI)? • The relative strength index (RSI) is a momentum indicator used in technical analysis. • RSI measures the speed and magnitude of a security's recent price changes to evaluate overvalued or undervalued conditions in the price of that security. • The RSI is displayed as an oscillator (a line graph) on a scale of zero to 100. The indicator was developed by J. Welles Wilder Jr. and introduced in his seminal 1978 book, New Concepts in Technical Trading Systems.
- 13. • The relative strength index (RSI) is a popular momentum oscillator introduced in 1978. • The RSI provides technical traders with signals about bullish and bearish price momentum, and it is often plotted beneath the graph of an asset’s price. • An asset is usually considered overbought when the RSI is above 70 and oversold when it is below 30. • The RSI line crossing below the overbought line or above oversold line is often seen by traders as a signal to buy or sell. • The RSI works best in trading ranges rather than trending markets.
- 14. How the Relative Strength Index (RSI) Works • As a momentum indicator, the relative strength index compares a security's strength on days when prices go up to its strength on days when prices go down. • Relating the result of this comparison to price action can give traders an idea of how a security may perform. • The RSI, used in conjunction with other technical indicators, can help traders make better-informed trading decisions
- 16. • Periods with price losses are counted as zero in the calculations of average gain. Periods with price increases are counted as zero in the calculations of average loss. • The standard number of periods used to calculate the initial RSI value is 14. • For example, imagine the market closed higher seven out of the past 14 days with an initial average gain of 1%. The remaining seven days all closed lower with an initial average loss of −0.8%.
- 18. Plotting RSI • After the RSI is calculated, the RSI indicator can be plotted • The RSI will rise as the number and size of up days increase. It will fall as the number and size of down days increase.
- 19. Why Is RSI Important? • Traders can use RSI to predict the price behavior of a security. • It can help traders validate trends and trend reversals. • It can point to overbought and oversold securities. • It can provide short-term traders with buy and sell signals. • It's a technical indicator that can be used with others to support trading strategies.
- 20. What is the Price Rate Of Change (ROC) Indicator • The Price Rate of Change (ROC) is a momentum-based technical indicator that measures the percentage change in price between the current price and the price a certain number of periods ago. • The ROC indicator is plotted against zero, with the indicator moving upwards into positive territory if price changes are to the upside, and moving into negative territory if price changes are to the downside.
- 21. • The Price Rate of Change (ROC) oscillator is an unbounded momentum indicator used in technical analysis set against a zero-level midpoint. • A rising ROC above zero typically confirms an uptrend while a falling ROC below zero indicates a downtrend. • When the price is consolidating, the ROC will hover near zero. In this case, it is important traders watch the overall price trend since the ROC will provide little insight except for confirming the consolidation.
- 24. Calculate the Price Rate of Change Indicator • The main step in calculating the ROC, is picking the "n" value. Short-term traders may choose a small n value, such as nine. Longer-term investors may choose a value such as 200. • The n value is how many periods ago the current price is being compared to. Smaller values will see the ROC react more quickly to price changes, but that can also mean more false signals. • A larger value means the ROC will react slower, but the signals could be more meaningful when they occur.
- 25. False Signal • False Signal is a term used in technical analysis to refer to a situation in which a trader enters into a position in anticipation of a future transaction signal or price movement, but the signal or movement never develops and the asset moves in the opposite direction.
- 26. Rate of Change Indicator • Select an n value. It can be anything such as 12, 25, or 200. Short- term trader traders typically use a smaller number while longer-term investors use a larger number. • Find the most recent period's closing price. • Find the period's close price from n periods ago. • Plug the prices from steps two and three into the ROC formula. • As each period ends, calculate the new ROC value.
- 27. Closing price • The closing price is the last price at which a security traded during the regular trading day. • A security's closing price is the standard benchmark used by investors to track its performance over time. • The closing price will not reflect the impact of cash dividends, stock dividends, or stock splits.
- 28. Money Flow Index
- 29. • What Is the Money Flow Index (MFI)? • The Money Flow Index (MFI) is a technical oscillator that uses price and volume data for identifying overbought or oversold signals in an asset. It can also be used to spot divergences which warn of a trend change in price. The oscillator moves between 0 and 100.
- 30. KEY TAKEAWAYS • The Money Flow Index (MFI) is a technical indicator that generates overbought or oversold signals using both prices and volume data. • An MFI reading above 80 is considered overbought and an MFI reading below 20 is considered oversold,1 although levels of 90 and 10 are also used as thresholds. • A divergence between the indicator and price is noteworthy. For example, if the indicator is rising while the price is falling or flat, the price could start rising.
- 33. How to Calculate the Money Flow Index • There are several steps for calculating the Money Flow Index. If doing it by hand, using a spreadsheet is recommended. • Calculate the typical price for each of the last 14 periods. • For each period, mark whether the typical price was higher or lower than the prior period. This will tell you whether raw money flow is positive or negative. • Calculate raw money flow by multiplying the typical price by volume for that period. Use negative or positive numbers depending on whether the period was up or down (see step above). • Calculate the money flow ratio by adding up all the positive money flows over the last 14 periods and dividing it by the negative money flows for the last 14 periods. • Calculate the Money Flow Index (MFI) using the ratio found in step four. • Continue doing the calculations as each new period ends, using only the last 14 periods of data.
- 34. What Does the Money Flow Index Tell You? • One of the primary ways to use the Money Flow Index is when there is a divergence. A divergence is when the oscillator is moving in the opposite direction of price. This is a signal of a potential reversal in the prevailing price trend.