Stochastics Buy & Sell Signals

How to Read a Stochastic Chart

In addition to giving clear buy and sell signals, the Stochastic technical analysis indicator is also helpful in detecting price divergences and confirming trend.

How to Read a Stochastic Chart

Buy Signal 

When the Stochastic is above the 80 overbought line and the %K line crosses below the %D line, sell.

There are two common ways to interpret these waves. The first is based on when the red and blue lines cross. A potential buy signal is generated when the blue line crosses above the red line, and a potential sell signal is generated when the red line crosses above the blue line.

Sell Signal

When the Stochastic is above the 80 overbought line and the %K line crosses below the %D line, sell.

The second way to translate these charts is based on a reading of the blue line (%K). When %K is at 20 or below, the stock is considered to be oversold . When %K goes above 20, the stock should be bought. On the other hand, when %K is at 80 or above, the stock is considered to beoverbought , and when %K goes below 80, the stock should be sold

Stochastics come in two flavors: fast and slow. Fast stochastics produce more buy and signals than slow stochastics, but some of the signals produced by fast Stochastics may be "false." Slow Stochastics produce fewer, but "stronger" signals.

Stochastic Fast

Stochastic Fast plots the location of the current price in relation to the range of a certain number of prior bars (dependent upon user-input, usually 14-periods). In general, stochastics are used to measure overbought and oversold conditions. Above 80 is generally considered overbought and below 20 is considered oversold. The inputs to Stochastic Fast are as follows:

• Fast %K: [(Close - Low) / (High - Low)] x 100
• Fast %D: Simple moving average of Fast K (usually 3-period moving average)

Stochastic Slow

Stochastic Slow is similar in calculation and interpretation to Stochastic Fast. The difference is listed below:

• Slow %K: Equal to Fast %D (i.e. 3-period moving average of Fast %K)
• Slow %D: A moving average (again, usually 3-period) of Slow %K

Homeriz

MARKET DIRECTION?

Oil Prices

Falling factory output in China and the onset of recession in Europe means that a continued fall in the demand for crude oil is inevitable. The recent return to production of Algeria, Libya, Iraq and Iran means that the world is already oversupplied with crude oil. The astonishing rise of production by hydraulic fracturing in the USA means that America is increasingly self-sufficient in oil. When supply exceeds demand a fall in the price of any product is inevitable.


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Malton and Warrant B

Fibonacci Retracement

Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician Leonardo Fibonacci in the thirteenth century. However, Fibonacci's sequence of numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the series. In technical analysis, Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. Before we can understand why these ratios were chosen, we need to have a better understanding of the Fibonacci number series. (For a more in-depth discussion of this subject, see Fibonacci And The Golden Ratio.)

The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each term in this sequence is simply the sum of the two preceding terms and sequence continues infinitely. One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number. This common relationship between every number in the series is the foundation of the common ratios used in retracement studies.

The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the golden mean" - is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819.

The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.

For reasons that are unclear, these ratios seem to play an important role in the stock market, just as they do in nature, and can be used to determine critical points that cause an asset's price to reverse. The direction of the prior trend is likely to continue once the price of the asset has retraced to one of the ratios listed above. The following chart illustrates how Fibonacci retracement can be used. Notice how the price changes direction as it approaches the support/resistance levels.

In addition to the ratios described above, many traders also like using the 50% and 78.6% levels. The 50% retracement level is not really a Fibonacci ratio, but it is used because of the overwhelming tendency for an asset to continue in a certain direction once it completes a 50% retracement.

Based on depth, we can consider a 23.6% retracement to be relatively shallow. Such retracements would be appropriate for flags or short pullbacks. Retracements in the 38.2%-50% range would be considered moderate. Even though deeper, the 61.8% retracement can be referred to as the golden retracement. It is, after all, based on the Golden Ratio.

Shallow retracements occur, but catching these requires a closer watch and quicker trigger finger.


Golden Retracements

Chart below shows Pfizer (PFE) bottoming near the 62% retracement level. Prior to this successful bounce, there was a failed bounce near the 50% retracement. The successful reversal occurred with a hammer on high volume and follow through with a breakout a few days later.

Chart below shows JP Morgan (JPM) topping near the 62% retracement level. The surge to the 62% retracement was quite strong, but resistance suddenly appeared with a reversal confirmation coming from MACD (5,35,5). The red candlestick and gap down affirmed resistance near the 62% retracement. There was a two day bounce back above 44.5, but this bounce quickly failed as MACD moved below its signal line (red dotted line).

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Stochastic Oscillator

1. Developed by George C. Lane in the late 1950s
2. Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. 
3. Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price.
4. As a rule, the momentum changes direction before price." 
5. As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. 
6. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. 
7. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels.

Setting

Calculation:

%K = 100[(C - L14)/(H14 - L14)]

C = the most recent closing price
L14 = the low of the 14 previous trading sessions
H14 = the highest price traded during the same 14-day period.

%D = 3-period moving average of %K

The default setting for the Stochastic Oscillator 
is 14 periods, which can be days, weeks, months or
an intraday timeframe. A 14-period %K would use 
the most recent close, the highest high over the last
14 periods and the lowest low over the last 14 periods.
%D is a 3-day simple moving average of %K. This line is
plotted alongside %K to act as a signal or trigger line.

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. Transaction signals occur 
when the %K crosses through a three-period moving average called the 
"%D". 

Further reading : stockcharts.com 

Relative Strength Index (RSI)

What is it?

Developed by J. Welles Wilder Jr., RSI was published in his 1978 classic "New Concepts in Technical Trading Systems".

Essentially, RSI is a form of a smoothed momentum indicator. The term “relative strength” in this case is sometimes considered as a misnomer as RSI is not used to compare between two different instruments as the term “relative strength” would normally indicate. RSI’s formula takes into the consideration of the average closes of X number of up days and the average closes of X number of down days to determine a momentum number that ranges between 0 and 100. Plotted over time, RSI would resemble a line that fluctuations between 0 and 100.

What is it used for?

RSI is popularly used to identify potential buy and sell situations through overbought and oversold situations. It can be used to spot potential trend reversals through positive and negative divergences as well as the breaking of its own trendlines.

How to use it?

The first use of RSI is to determine overbought and oversold levels. Generally, it is considered to be oversold when RSI dips below 30 and overbought when RSI crosses above 70. However, in strong trending periods, RSI may stay overbought/oversold for an extended period of time and as such buy signals are only given when RSI crosses back above the 30 line from below and sell signals are given only when RSI crosses below the 70 line from above. It has also been suggested overbought/oversold signals are more reliable under range trading than non-trending periods.

Overbought and Oversold Signals

Using RSI, we can also gauge the momentum of a current market direction. When momentums in current market directions start to fail, positive and negative divergences can be spotted across the price and RSI levels. Such divergences are also known as "Failure swings". A bottom failure swing is a bullish indicator of a possible market bottom, occurs when the price continue to drop to new lows while RSI does not move in tandem and does not record new lows. A top failure swing is a bearish indicator of a possible market top, occurs when prices continue to climb higher to new highs while RSI does not gain in tandem and fails to record new highs. Wilder considers divergences between RSI and then price line when RSI is below 30 or above 70 as the single most indicative characteristic of the RSI and should be considered as a serious warning whenever spotted.

Bottome Failure Swing	Top Failure Swing

Trendlines can also be used in conjunction with the RSI line. A buy signal is given when RSI breaks above its downward trendline and a sell signal is given when RSI breaks below its upward sloping trendline.

RSI Trendlines

Conclusion

Depending on your style of trading, whether you are a momentum trader or range trader, RSI can help you identify better trading decisions. As with other technical systems, RSI has its strengths and weaknesses and will perform well in one market environment and may not do so well in another. Hence understanding when to RSI and how to use it in conjunction with other technical indicators will most definitely help us to determine more profitable trades.

Credit:  Marcus Fei

Candlestick Entry Strategy

Step 1 - Look for a LONG GREEN CANDLESTICK against MINOR PRICE RESISTANCE and also against a declining MAJOR MOVING AVERAGE (10 MA, 20 MA or 50 MA).


Step 2 - Pull up a 5 minute chart of the stock.

Step 3 - Note the opening price of the stock. If the stock gaps up or down more than 5/8th, DO NOT enter the trade. If the stock opens within 5/8th of the previous day's close, proceed to Step 4.

Step 4 - Wait for the stock to trade for 5 minutes. After 5 minutes, note the low of the first 5 minute candlestick.

Step 5 - Sell short the stock if it trades 1/8th below the low of the first 5 minute candlestick. If the stock does not trade lower than the low of the first 5 minute candlestick, DO NOT enter the trade.

Step 6 - Pull up a 15 minute chart of the stock.

Step 7 - After shorting the stock, place an initial protective stop 1/8th above the high price of the day.

Step 8 - Monitor the stock during the next 15 min. candlestick.

Step 9 - Adjust the protective stop to 1/8th above the high price of the previous 15 min. candlestick. Stay in the trade as long as the stock trades below this price.

Step 10 - Monitor the stock during the next 15 min. candlestick.

Step 11 - Adjust the protective stop to 1/8th above the high price of the previous 15 min candlestick. Stay in the trade as long as the stock trades below this price.

Step 12 - Continue to monitor the stock during each new 15 min. candlestick, and adjust your protective stop to 1/8th above each previous 15 min. candlestick's high.

Step 13 - Cover the stock for profit when it finally trades 1/8 above the high price of a previous 15 min. candlestick.

Candlestick Tutorial - Long Green Candlestick Play Instructions

Long Green Candlestick Play Instructions



Step 1 - Look for a LONG GREEN CANDLESTICK against MINOR PRICE RESISTANCE and also against a declining MAJOR MOVING AVERAGE (10 MA, 20 MA or 50 MA).



Step 2 - Pull up a 5 minute chart of the stock.

Step 3 - Note the opening price of the stock. If the stock gaps up or down more than 5/8th, DO NOT enter the trade. If the stock opens within 5/8th of the previous day's close, proceed to Step 4.

Step 4 - Wait for the stock to trade for 5 minutes. After 5 minutes, note the low of the first 5 minute candlestick.

Step 5 - Sell short the stock if it trades 1/8th below the low of the first 5 minute candlestick. If the stock does not trade lower than the low of the first 5 minute candlestick, DO NOT enter the trade.



Step 6 - Pull up a 15 minute chart of the stock.

Step 7 - After shorting the stock, place an initial protective stop 1/8th above the high price of the day.

Step 8 - Monitor the stock during the next 15 min. candlestick.

Step 9 - Adjust the protective stop to 1/8th above the high price of the previous 15 min. candlestick. Stay in the trade as long as the stock trades below this price.

Step 10 - Monitor the stock during the next 15 min. candlestick.

Step 11 - Adjust the protective stop to 1/8th above the high price of the previous 15 min candlestick. Stay in the trade as long as the stock trades below this price.

Step 12 - Continue to monitor the stock during each new 15 min. candlestick, and adjust your protective stop to 1/8th above each previous 15 min. candlestick's high.

Step 13 - Cover the stock for profit when it finally trades 1/8 above the high price of a previous 15 min. candlestick.

What Does Candlestick Mean?