Technical Analysis: How to use Technical Indicators - part 2
By Mostafa
Soleimanzadeh
In the previous article I described two technical indicators:
Moving Average Convergence/Divergence (MACD), and Relative Strength
Index (RSI). Don't worry you can find link to complete article
in the bottom of this article. Also, you can subscribe to our
free Newsletter for new updates.
In this article I'll describe two technical indicators: an
oscillator that is Stochastic Oscillator and Bollinger Bands
indicator.
As I mentioned before, Oscillators are technical indicators
that tend to cycle or "oscillate" within a fixed or limited
range, and Momentum in general term means strongly movement
of prices in a given direction.
Stochastic Oscillator
The Stochastic Oscillator is a momentum indicator, it indicates
whether the market is moving to new highs or new lows or is
just meandering in the middle. This indicator is based on George
Lane's observations.
The Stochastic Oscillator is plotted in two lines Fast %k and
Fast %D.
The formula is:
Fast %k = 100 * [( C - L (n) ) / ( H (n) - L (n) )]
Where:
C is the most recent closing price.
L (n) is the low of n previous trading day (or bar).
H (n) is the high price of the same n previous day (or bar).
Usually n is chosen 14.
A 3-period (day or bar) moving average is taken from Fast %k
and called Fast %D. Fast %D is used as a signal line in the
same way that the moving average of the MACD is used as a signal
line for the MACD.
Stochastic Oscillator is plotted in two lines but, usually
these lines cross each other many times. Now to smooth the chart,
a 3-period moving average is taken from Fast %D and called Slow
%D (Also, Fast %D is called Slow %K), so the smoothed chart
is plotted with Slow %K and Slow %D.
Using of Stochastic Oscillator
1- Oscillators are used as an overbought/oversold indicator.
A buy is signaled when the oscillator moves below 20, and then
crosses back above 20. A sell is signaled when the oscillator
moves above 80, and then crosses below 80.
2- Also, when %K crosses above or below %D, Buy and sell signals
can be given. But, may be crossover occurs frequently in short
periods and causes bad results. This using isn't very common.
Bollinger Bands
John Bollinger created Bollinger Bands in the 1960s; Bollinger
Bands are used to determine support and resistance levels. This
indicator consists of three lines; the middle line is an exponential
moving average of price data and the two outside bands are equal
to the moving average plus or minus standard deviation.
Standard Deviation is a statistical measure that indicates
volatility of price. The bands will expand when price becomes
volatile and they will contract during less volatile periods.
Using of Bollinger Bands
1- Bollinger Bands are used to determine the boundaries of
market movements. If a market moved to the upper band or lower
band, then there was a good chance that the market would move
back to its average. In the other words, when price closes to
upper band, market is overbought and when price closes to lower
band, market is oversold.
2- Another using of Bollinger bands is that to indicate up-trends
and down-trends. If price deflects off the lower band and crosses
above moving average then price fluctuate between upper band
and moving average, it comes to indicate upper price target.
It is reverse for indicating lower price.
Simply click the link to read complete article:Using
of Technical Indicators
By Mostafa Soleimanzadeh. Find Free Basic and Advanced Stock
Investing Articles in his website.
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