|
Trading without
indicators is like running blind and it encourages emotional trading that is
the bane of successful investment and speculation. It is hard to know what to
buy or sell let alone just when to do prudently. Thank goodness there are
indicators available that provide information of stock and index movement of
a more immediate nature making life during these times somewhat more
bearable.
There are over 80
such indicators divided into 6 categories. The most popular indicators, and
also available for use free at online charting service such as
stockcharts.com and/or bigcharts.com, are the trend (See: http://www.munknee.com/2010/07/timing-the-mar...end-indicators/),
momentum, market strength and volatility categories. This article will deal
with the 6 most popular Momentum Indicators as follows:
Momentum Indicators
At its most
fundamental level, momentum is a means of assessing the relative levels of
greed and fear in the market at any given point in time. Securities ebb and
flow, surge and retreat, and such action is measured by oscillators which are
powerful leading indicators of the security's immediate direction and its
speed.
Oscillators are
most useful and issue the most valid trading signals when their readings
diverge from prices. A bullish divergence occurs when prices fall to a new
low while an oscillator fails to reach a new low. This situation demonstrates
that bears are losing power, and that the bulls are ready to control the
market for the stock or index again and such divergence often marks the end
of a downtrend. Bearish divergences signify up-trends, when prices rally to a
new high while the oscillator refuses to reach a new peak. In this situation,
bulls are losing their grip on the security, prices are rising only as a
result of inertia, and the bears are ready to take control again.
The 6 Most Useful Momentum Indicators
1.
Stochastic Oscillator (SO)
SO compares a
security's closing price to its price range over a given period of time. The
theory behind this indicator is that in an upward-trending market, prices
tend to close near their high, and during a downward-trending market, prices
tend to close near their low.
There are two
components to the SO: the %K which is the main line indicating the number of
time periods (usually 14), and the %D which is a three-period moving average
of the %K. Buy/sell signals occur when the %K crosses above/below the %D. A
%K result of 70 (or 30), for example, is interpreted to mean that the price
of the security closed above 70% (or below 30%) of all prior closing prices
that have occurred over the past 14 days and assumes that the security's
price will trade at the top (or at the bottom) of the range in a major
uptrend (or downtrend). Amove above 80 suggests that the security is
overbought and therefore should be sold while a move below 20 suggests that
the stock or index is oversold and, as such, is a buying signal.
The SO, which
ignores market jolts, is an ideal companion to the MACD to provide an
enhanced and more effective trading experience. Using the two together gives
traders an opportunity to hold out for a better entry point on an up-trending
security or to be more sure that any down-trend is truly reversing itself
when bottom-fishing for long-term holds. However, on the downside, because
the stock or index generally takes a longer time to line up in the best
buying position, the actual trading of the security occurs less frequently,
so you may need a larger basket of stocks to watch.
2. Relative
Strength Index (RSI)
RSI compares the
magnitude of recent gains in price to recent losses in an attempt to
determine overbought and oversold conditions of a security.
The RSI, on a
scale of 0-100, indicates that a stock is overbought when it is over 70 and
oversold when it is below 30. Because large surges and drops in the price of
a security will create false buy or sell signals the RSI works best when it
is used in conjunction with short-term moving average crossovers such as the
Stochastic Oscillator to confirm a directional shift.
3. StochRSI
StochRSI was
created by applying the Stochastic Oscillator to the Relative Strength Index
values rather than standard price data thereby giving the trader a better
idea of whether the current RSI value is overbought or oversold - a measure
that becomes specifically useful when the RSI value is confined between its
signal levels of 30 and 70.
4. TRIX
TRIX displays the
percent rate-of-change of a triple exponentially smoothed moving average of a
security's closing price and is designed to filter out stock movements that
are insignificant to the larger trend of the security.
The user selects
a number of periods (such as 15) with which to create the moving average, and
those cycles that are shorter than that are filtered out. TRIX is also a
leading indicator and can be used to anticipate turning points in a trend
through its divergence with the security's price.
5. Commodity
Channel Index (CCI)
CCI is an
oscillator which quantifies the relationship between the security's price, a
moving average of the security's price, and normal deviations from that
average to determine when a security has been overbought or oversold.
The CCI, when
used in conjunction with other oscillators, can be a valuable tool to
identify potential peaks and valleys in the security's price, and thus
provide investors with reasonable evidence to estimate changes in the
direction of price movement of the security.
6. Price
Rate of Change (ROC)
ROC measures the
percentage rate of change, indicating the strength of the momentum, between
the most recent price and the price over "x" periods (the narrower
the better) thereby identifying bullish or bearish divergences. As such, the
ROC is able to forecasts sooner than almost any other indicator an upcoming
reversal of a trend and whether or not a security's price action is created
by those over-buying or over-selling it. A number other than zero (a personal
choice) can be used to indicate an increase in upward momentum and a number
less than zero to indicate an increase in selling pressure.
Conclusion
There you have it
- an extensive and in-depth assessment of how to evaluate when you should be
buying or selling particular stocks, warrants, ETFs, gold, silver or any
other type of security.
If ever
there was a "cut and save" investment advisory this article is it!
Lorimer Wilson
MunKnee.com
Lorimer
Wilson is Editor of www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an economic analyst and financial
writer. He is also a frequent contributor to this site and can be reached at
editor@munknee.com.
|
