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Today we are talking about an instrument, the stochastic oscillator, which is a useful indicator for minimizing the volatility of the prices of a financial instrument. Using this tool will make it easier for the investor to read the market and benefit from it in practice.

They are based on a series of tools that tend to predict the direction of the financial market. These tools are very useful when interpreting a trend is particularly complex. In this way, using these indicators to trade, you can analyze in detail situations of overbought and / or oversold.

It should be noted that the oscillators often appear at the bottom of a graph, in a manner substantially divided by prices. The most renowned are:

- Stochastic oscillator: it is the most famous oscillator (very useful in the phases of the lateral market). Compare the closing price of a given financial instrument and its movements (over a period taken as a reference point). It is represented below the price chart by two perpetually crossing lines. It can be calculated through two different techniques (slow stochastic and fast stochastic); what changes is the way in which the average price is analyzed. Moreover, the signals that we could exploit by using such a tool come from these strategies:

- the crossing of the oscillator lines
- its intervention in areas of overbought and oversold
- price direction is contrary to stochastic oscillator movement

- RSI: The Relative Strength Index represents the relative strength index. In practice it represents an oscillator capable of defining the strength of a trend; it is illustrated as a line that goes from zero to one hundred below the price graph. It is discreetly appreciated because it minimizes the "false signals of his colleagues"; it is used to show situations of overbought and oversold. It is very important, on a graphic level, to analyze the oppositions between CSR and the direction of the trend: all this could be useful to predict possible moments of weakness in the market.
- macd indicator: The Moving Average Convergence Divergence represents the convergences and divergences of the moving averages. Three different terms are used to define this tool in detail (obviously it is possible to take into consideration different short and long-time periods to analyze price movements). Speaking of strategies, it is possible to analyze the crossing of the MACD line with the signal line: in this sense we will know that the purchase signals are generated by upward crossings (and vice versa).

It is possible to use the classical techniques that concern the analysis of market inversion or it is possible to study the differences that revolve around price movements and oscillators. Let's see how to use the indicators for moving averages.

They represent the mathematical averages of the prices of a financial instrument, which are obtained by taking into consideration different temporal laxes. When trading, we remember the most important ones:

- the simple average puts all the data analyzed on an equal footing through its calculation
- the weighted value gives greater importance to the last values analyzed; all this to obtain greater precision to be used as a more precise estimate of market trends
- exponential averaging gives less weight to past prices
- the adaptive one (this is how it is called because it can adapt to the different scenarios that the market proposes)

Today on the market there are several financial graphics software that can analyze the data you give them in meal without problems and in no time. Once an average has been obtained, it should simply be used as a trend indicator. When prices go above our average we will have a buying signal and vice versa we will get a selling signal when they return below the average.

It is possible to cross two different averages, taking into consideration two different temporal laxes. The signals we are interested in will be generated when the fastest moving average crosses the slowest one.

We underline the fact that the moving average is very useful but can generate false signals, so it is advisable to cross the data coming out of the analysis of these indicators with other data due perhaps to the oscillators.

The Advance Decline Line is a very important indicator because it helps to predict the trends that follow the current one. In summary, it is a line that cumulatively expresses all the differences between up and down securities.

The element that led to the creation of this type of instrument is that in a bullish or bearish market, with a defined trend, most of the listed assets or sectors covered will move within a general trend. A movement in the opposite direction by a signal of the reached weakness of this trend and therefore the idea that it will be reversed.

To give a practical example and see how this index works in the field, weekly data from the Chicago Merchandise Exchange indices have been taken and the number of sectors growing for each week has been counted. The percentage relating to this term represents the Advance Decline Line, i.e. a 40-times moving average. To the graph where the line is drawn, we add a 15-term moving average representing the CRB Commodity index.

The result that will come out of our chart therefore are two different lines: The Advance Decline Line always changes before the index average, that is, it signals first the change of trend, the turning point of the market.

Once again it is good to repeat that this oscillator must be understood as an accessory indicator, which must be accompanied by an all-round analysis of the market; no indicator per se is infallible. However, it certainly helps in identifying a change in market trends.

The stochastic oscillator is composed of two lines that are defined by the formulas:

%K= 100 * ((Pc(i)-Min(n)) / ((Max(n)-Min(n)))

%D= is the moving average at 3 days of %K where: PC(i)= the last closing price; n= the number of observations (is usually set at 14 periods); Max(n)= maximum recorded by the valuables during the last observations; Min(n)= minimum recorded by the prices during the last observations.

The stochastic oscillator is therefore composed of two lines, %K and %D, which oscillate within the range 0 - 100 points: values close to 100 indicate that the security is close to the maximums of the observation period; values close to 0 indicate that the security is close to the minimums of the last n days.

The above formulas define what is called "fast Stochastic", where the %K and %D values are calculated at 14 days and as a linear 3-day moving average, respectively. There is also a slow version of the Stochastic "slow Stochastic" oscillator that allows you to generate more linear and less erratic curves and that is calculated in this way:

%K(slow)= is the 3-day moving average of %K

%D(slow)= is the 3-day moving average of %K(slow)

The Stochastic oscillator, both in the fast and slow versions, is used for:

- Identify situations of overbought or oversold. The values of %K above 80 points show a situation of overbought and values below 20 points detect a state of oversold;
- Provide buying and selling signals generated by %K line crossings with the %D line. A buying signal is generated when the %K cuts, from bottom to top, the %D line from its oversold area, and a selling rye is generated when the %K cuts, from top to bottom, the %D from its overbought area.
- Identify possible discrepancies. In a bearish trend followed by prices, positive divergences (i.e. two rising lows within the oversold area) of %K or %D will be sought, which can provide attractive buying signals. In a bullish trend, negative divergences (i.e. two decreasing maxima within the overbought area) of %K or %D must be identified that anticipate possible corrections.

Divergences are a typical warning signal which, in some cases, may anticipate a reversal of the trend:

- Positive/hierarchical divergence: this is the moment when the oscillator does not confirm a negative trend in which prices have been included. All this happens at the moment when prices reach decreasing minimums with the oscillator moving inside its oversold area but, instead of confirming the negative trend, it draws increasing minimums.
- Negative/Response Divergence: That is, the moment in which the oscillator does not create a trend where prices have been entered. It happens when prices draw increasing maximums with the oscillator moving within its overbought area but, instead of confirming the positive trend, it draws decreasing maximums.

The downward trend reversal is perfected when prices fall below the trendline.

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