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Indicators: Stochastics Part II
What good would I be as a resource if I did not provide you with an example on how you might go about using the stochastic indicator.
First, I needed to find a stock that has been trading sideways for the most part on a one-year weekly chart. The Jutia Portfolio provided me with one such candidate: Google (GOOG). Let’s take a closer look.
For this particular graph I used the “Slow Stochastic” indicator that Bigcharts has proved as an option. I was quite surprised to find that this chart of Google fits well in regards to the discussion points…
20Nov2006 | S. Oakes | Comments Off | ContinuedIndicators: Stochastics Part I
Every technical investor has his or her favorite indicators. I have tried and tested dozens of indicators. What I found was that using only one indicator did not work. It did not give me the buy and sell signals in a consistent and profitable fashion. The same conclusion was made using more than three. Just too much conflicting data. At this point I then mixed and matched the narrowed field of indicators in order to find the best system possible given my investment horizon.
Although Stochastics are preferred by some, it is not my indicator of choice. So why would I…
20Nov2006 | S. Oakes | Comments Off | ContinuedIndicator – Directional Movement Indicator (DMI)
When the DMI Indicator is selected, the stock chart will plot the Positive Directional Indicator (+DI), Negative Directional Indicator (-DI) and Average Directional Index (ADX – not Shown in graph below). +DI is green and -DI is red. +DI measures the force of the up moves and -DI measures the force of the down moves over a set period. The default setting is 14 periods, but users are encouraged to modify these settings according to their personal preferences.
In its most basic form, buy and sell signals can be generated by +DI/-DI crosses. A buy signal occurs when +DI moves above…
23Jul2006 | S. Oakes | Comments Off | ContinuedIndicator – Momentum
The Momentum indicator measures the amount that a security’s price has changed over a given time span. The interpretation of the Momentum indicator is identical to the interpretation of the Price ROC. Both indicators display the rate-of-change of a security’s price. However, the Price ROC indicator displays the rate-of-change as a percentage whereas the Momentum indicator displays the rate-of-change as a ratio.
There are two ways to use the Momentum indicator:
You can use the Momentum indicator as a trend-following oscillator similar to the MACD (this is the method I prefer). Buy when the indicator bottoms and turns up and sell when…
23Jul2006 | S. Oakes | Comments Off | ContinuedIndicator – Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence(MACD)is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts.The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average is plotted on top of the MACD to show buy/sell opportunities.
The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD: crossovers, overbought/oversold, and divergences.
Crossovers: The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy…
23Jul2006 | S. Oakes | Comments Off | ContinuedIndicator – Bollinger Bands
Some useful indicators that have been effective for me and some of my colleagues are Bollinger Bands, MACD, and DMI. Each of these indicators can be found at Bigcharts under interactive charting.
Bollinger Bands were created by John Bollinger and are similar to moving average envelopes. The difference between Bollinger Bands and envelopes is that envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at standard deviation levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during…
23Jul2006 | S. Oakes | Comments Off | ContinuedMomentum Bearish Divergence
With the same rules applying to our buying signal using divergences in momentum compared to price, we will now follow this format to find such a point to sell:
- Find the highest prince on the chart. Once this price high has been found, mark it with the letter A.
- Now move to the momentum indicator for about the same date and mark it accordingly with the letter B. This point can vary by a few days left or right of point A.
- From this point move to the left on the momentum to find the highest momentum and mark it with the letter…
Momentum Bullish Divergence
To find a bullish divergence on daily charts, we will use a 3-month charting window. You may use charts that are greater than the 3-month period, but do not try this technique when looking at charts under the given 3-month time frame. Be certain to use a 28-period momentum indicator as well. With this 28-period, each momentum length will be 1 hour each. When a divergence is found make sure that the divergence lasts at least six periods.
The steps used in finding a divergence are as follows:
- Find the lowest price low on the chart and mark it with the letter…
Cup and Handle Reversal Pattern
Another common reversal setup is known as the “cup and handle†pattern as seen below:
The picture is self-explanatory 
Head and Shoulders Reversal Pattern
Another setup is known as the “head and shoulders†pattern. In figure 20 we see that this pattern can be bullish or bearish. A bearish pattern forms by forming a person-like shape complete with shoulders and a head in the middle. If the pattern were to be completely flipped upside down with the head forming at the bottom, we would call it a bullish head and shoulders pattern.
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