The indicators
The technical indicators are wavy lines evolving inside a gradation box. It is according to certain past references, calculated either from the opens/closes; or from the highiest high/lowest low, depending on the tool itself, that we obtain this dynamic and graphic result.
Such tools are used in swing trading as well as in shorter term, intraday trading, in order to obtain signals – in concomitance with an initial reading of the graphs – that can help in the decision making process.
Nevertheless, take into account that the data necessary to “bring these analysis tools to life” is based as much on past as on present information. Thus technical indicators can be asynchronous and dangerously distort our reading of the markets.
We cannot simply adjust our trade choices with these tools alone.
Developed by George C. Lane in the late 1950s, the stochastic indicator is specific to momentum. The Stochastic momentum indicator relies on comparisons to establish its values.
As with all indicators, several adjustments in terms of parameters are used by traders to maximize the performance of this indicator, depending on whether one is interested in working in swing (a few days) or daily (1 day or less). But essentially, when using the default stochastic, the calculations that make it up are performed over 14 periods.
Many people refer to stochastics to anticipate a reversal in the price movement. Of course, like all other indicators, one will end up with many false signals if one does not know how to filter out certain movements in the tool, not necessarily in line with reality.
Stochastics is a secondary tool whose data is composed of past and current information. Consequently, to ensure a correct interpretation of our signals, the trader will have to refer to the market movements before reacting. This is how we will validate the relevance of our signals.
This initial reading of the chart is essential. Any self-respecting approach must follow a perfect and logical order, in order to orchestrate our understanding. In this respect, the price/time chart shows movements that appear like notes on a musical score.
Your results depend on your analytical work, your discipline and your rigor…
Stochastic calculation
The stochastic parameters are set on 14 periods. These periods represent either days or months, or shorter time units – 4h, 1h, 30min or less, in intraday timeframes.
Two lines in one box:
The 14%K – slow line – takes into account the most recent closure to highlight some disparities. It is precisely from this closing that we can compare the most recent (highiest high) with the 14 previous periods. We will do the same for the most recent (lowest low) over the same 14 period.
%D is a 3-day simple moving average derived from K%.
This fast graphical line (%) compared to the 14k%, works according to its particular parameterization, in concomitance with the 14k% (which is much slower). It is these two shifted tempos from which we will obtain certain information.
Developed by J. Welles Wilder, the RSI is a momentum indicator that measures the speed and changes of price movement.
For Wilder, the RSI can give us key information about overbought conditions when the chart breaks through the 70 level, as well as oversold conditions when it falls below the 30 level.
However, we use the RSI differently at Orbital. We are more interested in the information about the market sentiment established by the tug of war between buyers and sellers. This is perfectly exposed by some differential calculations related to the RSI: decisive variations between winners and losers / over 14 periods (when the indicator is programmed according to the initial formula)
The RSI can be used to confirm a trend movement, but never to establish it, because the RSI is based on past and current data to make its chart progression.
Consequently, although this tool is effective, it tends to provide an asynchronous signal compared to the actual market movements, which move in a different logical order. Market prices always operate according to supply and demand, in a cyclicality characterized by accumulations and distributions. The RSI only implements this reading and cannot be given more importance than the price movements themselves recorded on the market.
This is why the RSI is only a secondary tool (lagger). Even though its importance remains appreciable, the concomitant reading of the RSI with the charts must constantly be interpreted and re-examined to provide us with the clearest possible signals.
When observing the internal movements of the RSI, it can be advantageous to apply some advanced notions such as the one related to the uniformity of the RSI:
trends + breaks
supports + breaks
resistances + breaks. This deepening of our understanding of the RSI is part of the curriculum during the training courses offered at Orbital Trading.
In the same way, we will be able to reprogram certain variables regarding the RSI settings according to our type of trading (swing, intraday, scalping) and the timeframes on which we wish to operate.
To help you work with the RSI, watch our introduction video.
The MACD is another useful secondary tool in our arsenal. It is a versatile and powerful momentum indicator that we cannot do without. Like the RSI, the MACD is a laggard, in that it can be asynchronous with real price movements in the market. This is because the data used by the tool to give us a reading of market variations is based more on the past than on the present itself.
The reading of this indicator, therefore, must always be done in conjunction with a careful observation of the graph representing the raw reality: that of the fight between buyers and sellers.
The inventor of the MACD, Mr. Gerard Appel, deserves our consideration and generations of traders have benefited from his foresight. As is the case for Welles Wilder and his famous RSI.
The acronym MACD does not mean: woe to the graduate pickle, but rather, Moving Average Divergence/Convergence. We will work with such a concept to capture the essence of perpetually developing movements. (see Orbital course)
The MACD is just as valuable for tracking a trend as it is for determining the relative momentum of that trend.
Calculation of the MACD
The MACD-LINE is made up of an exponential average of 12 periods and 26 periods. Note that we use the closing prices for this small calculation. A 9-period exponential average is intertwined with (depending on time and market price movements) the MACD-LINE itself, so the indicator can provide us with a variety of signals/and potential reversals (turning points).
The histogram represents the difference between the MACD and the 9-period exponential average. Above this graphical figure, we consider to be in a positive zone, and below, in a negative zone. (ADD CALCULATION)
By default, the MACD is set as follows: 12, 26, 9. As with the RSI, we can readjust its values according to our type of trading and our needs.
