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:
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:
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:
Divergences are a typical warning signal which, in some cases, may anticipate a reversal of the trend:
The downward trend reversal is perfected when prices fall below the trendline.
The Momentum is one of the simplest indicators to calculate, it indicates in advance if trend inversions occur. If the value is upwards or downwards, it means that the asset we are interested in analyzing goes through a moment of imbalance in both directions and approaches a particularly interesting event.
Some important strategies have been developed, such as spread trading, a particular technique that allows you to have a completely neutral exposure on the market.
As part of our "study path", after addressing the main basic terms, today we will address a very important topic such as the analysis of trends in Forex market. As we did for the trends at home Trading, today we will deal with issues related to Forex indicators.
Among the many products and instruments, we find exotic options which are characterized purely by the simple fact of containing a simple conditional element that determines the value of the option itself.