View source for Technical Analysis Quiz 9

<quiz display=simple shuffle=true case=(i)>
{==Momentum oscillators in different markets==}

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{ Momentum oscillators } are used primarily to trade ranging markets.

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They can be used to enter trends and as { confirmation } of trend following indicators at the { end } of trends.

{==The moving average oscillator revisited==}

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The { slope } of a trendline or moving average describes the { momentum } of the trend.

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The moving average oscillator is the { difference } between two moving averages and a measure of { momentum } of the trend.

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Other { oscillators } are easier to use.

{==Momentum and the rate of change==}

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The oscillator known as { momentum } is the { difference } between the price { today } and the price a given time earlier and is a measure of the { speed } of price change.

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Rate of change is a very similar { oscillator } that is the { ratio } between the price { today } and the price a given time earlier.

{Trading rules for '''ranging markets'''}

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Rule 1: Go long when the indicator has { fallen } into the { oversold } zone and rises back above it.

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Rule 2: Go short when the indicator has { risen } into the { overbought } zone and falls back below it.

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Rule 3: Go long on { bullish } divergences, where the indicator's first { trough } is in the { oversold } zone.

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Rule 4: Go short on { bearish } divergences, where the indicators first { peak } is in the { overbought } zone.

{Trading rules '''trending markets'''}

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Rule 1: In an up trend, go long when { momentum } turns up from below the { centre } line.

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Rule 2: In a down trend, go short when { momentum } turns down from above the { centre } line.

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Rule 3: Use trend following indicators to { exit } these trends.  { Divergence } on momentum may be used to take profits in a trend, but unless confirmed by a { trend following } indicator, these are likely to be only { swing } highs or lows in the trend.

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Rule 4: A { trendline } drawn on momentum can also be used to confirm a trend following indicator.

{==Relative strength index (RSI)==}

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The RSI formula measures the { ratio } of average { gains } made on up days to average { losses } made on down days over a period.  This tells us whether the net { momentum } is up or down and how { strongly }.

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RSI fluctuates between 0 and { 100 }. Over bought is set at { 70 } and oversold is set at { 30 }. These levels are { varied } in trends. 

{Trading rules for '''ranging markets'''}

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Rule 1: Go long when RSI has { fallen } below 30 and { rises } back above it.

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Rule 2: Go short when RSI has { risen } above 70 and { falls } back below it.

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Rule 3: Go long on { bullish } divergences, where the first { trough } is below 30.  If the divergence forms a { failure swing } , it is an even stronger signal.  

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Rule 4: Go short on { bearish } divergences, where the first { peak } is above 70.  If the divergences forms a { failure swing }, it is an even stronger signal.

{Trading rules for '''trending markets'''}

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Rule 1: In an up trend, go long when RSI falls { below } the { oversold } line and crosses back above it.  A failure swing is an even stronger signal.

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Rule 2: In a down trend, go short when RSI rises { above } the overbought line and crosses back below it.   A failure swing is an even stronger signal.

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Rule 3: Use { trend following } indicators to exit these trends.  Divergence on RSI may be used to take profits in a { trend }, but unless confirmed by a { trend following } indicator, these are likely to be only { swing } highs or lows in the trend.

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Rule 4: A trendline or a { support } or { resistance } line on RSI can also be used to confirm a trend following { indicator }. Other chart patterns, such as { head } and { shoulders } also sometimes appear on the RSI itself, not always matches on the { price } chart.

{==Stochastic oscillator==}

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Stochastic measures where the { closing price } falls relative to the recent { range }.  When the { close } moves away from the high or the low, we know that { control } by the buyer or sellers is { weakening }.   

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Stochastic consists of a fast { %K } lines and a slow { %D } line.  They fluctuate between 0 and { 100 }. Overbought is set at { 70 } and oversold is set at { 30 }.

{Trading rules for '''ranging markets'''}

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Rule 1: Go long on { bullish } divergences, especially where the first { trough } is below { 30 }.

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Rule 2: Go short on { bearish } divergences, especially where the first { peak } is above { 70 }.

{Trading rules for '''trending markets'''}

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Rule 1: When either { stochastic } line crosses below { 30 }, place a stop order to go { long } if prices rises above the { high } of the signal day or any subsequent day with a { lower } { low }.  Place a stop loss order below the { low } of the same day.

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Rule 2: When either stochastic line crosses above { 70 }, place a stop order to go { short } if price falls below the low of the signal day or any subsequent day with a { higher } { high }.  Place a stop loss order above the { high } of the same day.

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Rule 3: Use { trend following } indicators to exit these trends.  Divergence on { stochastic } may be used to take profits in a trend, but unless confirmed by a { trend following } indicator, these are likely to be only swing highs or lows in the trend.

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