Relative Strength Index (RSI)
— A technical indicator , used in momentum trading , that measures the speed of a security’s recent price changes.
The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30. Signals can be generated by looking for divergences and failure swings. RSI can also be used to identify the general trend.
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.
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.
How this indicator works
RSI is considered overbought when above 70 and oversold when below 30. These traditional levels can also be adjusted if necessary to better fit the security. For example, if a security is repeatedly reaching the overbought level of 70 you may want to adjust this level to 80.
Note: During strong trends, the RSI may remain in overbought or oversold for extended periods.
RSI also often forms chart patterns that may not show on the underlying price chart, such as double tops and bottoms and trend lines. Also, look for support or resistance on the RSI.
In an uptrend or bull market, the RSI tends to remain in the 40 to 90 range with the 40-50 zone acting as support. During a downtrend or bear market the RSI tends to stay between the 10 to 60 range with the 50-60 zone acting as resistance. These ranges will vary depending on the RSI settings and the strength of the security’s or market’s underlying trend.
If underlying prices make a new high or low that isn’t confirmed by the RSI, this divergence can signal a price reversal. If the RSI makes a lower high and then follows with a downside move below a previous low, a Top Swing Failure has occurred. If the RSI makes a higher low and then follows with an upside move above a previous high, a Bottom Swing Failure has occurred.
The RSI uses a two-part calculation that starts with the following formula:
Stochastic Oscillator is one of the important tools used for technical analysis in securities trading. This technique was developed in late 1950s by Dr. George Lane. The indicator picks one observation point in current base and refers to all points in the defined range from where the highest and lowest point are considered for comparison. It helps to decide the current momentum when compared to high & low of historic set in form of support and resistance levels. For this the consideration point is price of the security in a term defined but it never follows the price pattern as it tracks the momentum or oscillation in the price movement. Dr. Lane stated the fact of rule “the momentum changes before the price moves to that direction” on the basis of which this tool was developed.
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.
How Do You Read the Stochastic Oscillator?
The stochastic oscillator represents recent prices on a scale of 0 to 100, with 0 representing the lower limits of the recent time period and 100 representing the upper limit. A stochastic indicator reading above 80 indicates that the asset is trading near the top of its range, and a reading below 20 shows that it is near the bottom of its range.
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.
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.
Developed by Larry Williams, Williams %R is a momentum indicator that is the inverse of the Fast Stochastic Oscillator. Readings from 0 to -20 are considered overbought. Readings from -80 to -100 are considered oversold. Williams %R reflects the level of the close relative to the highest high for the look-back period. This is a bound oscillator and oscillates from 0 to -100. As a result, the Fast Stochastic Oscillator and Williams %R produce the exact same lines, only the scaling is different. Williams %R corrects for the inversion by multiplying the raw value by -100.
Williams %R moves between zero and -100.
A reading above -20 is overbought.
A reading below -80 is oversold.
An overbought or oversold reading doesn’t mean the price will reverse. Overbought simply means the price is near the highs of its recent range, and oversold means the price is in the lower end of its recent range.
Can be used to generate trade signals when the price and the indicator move out of overbought or oversold territory.
How this indicator works
Williams %R moves between 0 and -100, which makes -50 the midpoint. A Williams %R cross above -50 signals that prices are trading in the upper half of their high-low range for the given look-back period (Bullish). Conversely, a cross below -50 means prices are trading in the bottom half of the given look-back period (Bearish).
Readings above -20 for the 14-day Williams %R would indicate that the underlying security was trading near the top of its 14-day high-low range. Readings below -80 occur when a security is trading at the low end of its high-low range. Default settings use -20 as the overbought threshold and -80 as the oversold threshold. These levels can be adjusted depending on the security’s characteristics.
Note: Keep in mind that even though a security is overbought or oversold it can remain in this state for an extended period of time. When using any indicator it is best to use an additional indicator to confirm any signals.
When Williams % R moves above -20 and then, in the next move up, fails to move above -20, this can indicate weakening momentum to the upside. Conversely, when Williams % R moves below -80 and then, in the next move down, fails to move below -80, this can indicate weakening momentum to the downside.
On-Balance Volume (OBV)
On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. When the security closes higher than the previous close, all of the day’s volume is considered up-volume. When the security closes lower than the previous close, all of the day’s volume is considered down-volume.
On-balance volume (OBV) is a technical indicator of momentum, using volume changes to make price predictions.
OBV shows crowd sentiment that can predict a bullish or bearish outcome.
Comparing relative action between price bars and OBV generates more actionable signals than the green or red volume histograms commonly found at the bottom of price charts.
How this indicator works
The actual value of the OBV is unimportant; concentrate on its direction.
- When both price and OBV are making higher peaks and higher troughs, the upward trend is likely to continue.
- When both price and OBV are making lower peaks and lower troughs, the downward trend is likely to continue.
- During a trading range, if the OBV is rising, accumulation may be taking place—a warning of an upward breakout.
- During a trading range, if the OBV is falling, distribution may be taking place—a warning of a downward breakout.
- When price continues to make higher peaks and OBV fails to make higher peaks, the upward trend is likely to stall or fail. This is called a negative divergence.
- When price continues to make lower troughs and OBV fails to make lower troughs, the downward trend is likely to stall or fail. This is called a positive divergence.
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