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Strategies & Market Trends : Underexposed Technical Analysis

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From: Underexposed	4/5/2017 1:29:45 AM
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Evaluating Oscillating Indicators - Slow Stochastics Introduction to Indicator selection Indicators are necessary to make good trading decisions. However saying that it is necessary to make some wise decisions as to which indicators you choose from the many available indictors. In my opinion some indicators perform better than others. When it comes to evaluating a bullish/bearish position of a ticker and it is not just a simple manner of picking indicators at random and expecting them to be evaluated. My basic philosophy when it comes to overall analysis of a chart using indicators is: 1. 1. All indicators give good bullish/bearish indicators at one time or another. 2. 2. All indicators will give misinformation (lie) at times. 3. 3. But indicators do not lie at the same time 4. A consensus of all indicators in your chosen stable will usually give a pretty good picture as to the bull/bear status of a ticker. The object of the game here is to find good indicators that do not perform in a similar manner. They should give different looks when charted and ideally have different ways of being calculated. An example of two indicators that are calculated differently but look the same is the TRIX and MACD indicators. Look at the following chart comparing the two indicators. See how similar they look? If you chose both of these indicators for your evaluation stable... you would be biasing your evaluation as they will always give the same indication. I chose MACD in this case... note that I don’t use a signal line for the MACD. I don’t find the signal line useful and will discuss this in detail in another post. Evaluation of Oscillator Indicators The first type of indicator we will look at are oscillators. These are indicators that range usually from 0 – 100 in values and continually travel up and down in that range.... Consider the following graphic: Usually oscillator indicators such as RSI and Stochastics have a similar setup. In a traditional evaluation, oscillator values over 80 are considered “overbought” and as such this is considered a sell signal. If the values are less than 20 the stock is considered “oversold” and this is often considered a buy signal. I don’t agree with this at all. There are many times when the indicator stays above 80 or below 20 for months on end. Therefore my evaluation of these types of indicators as in the above graphic. A indicator is not bullish until it rises above the mid-point of the chart. A indicator rising from below 20 is not bullish or a buy until then... it can still easily turn around and go back to below 20. Similarly an idicator falling below 80 is still somewhat bullish as it can return to the Bull range easily. Consider the following charts of a Slow Stochastic indicator for the price of Gold The Slow Stochastic stayed below 20 from mid November to the end of December. If you used the traditional “oversold” designation when do you buy?? You could lose a fair bit of money if you did it too early. Similarly, it was “overbought” from mid January to the end of February... do you sell as soon as you enter that zone? If you did, you would lose a significant gain... and see how it ducked below 80 for a few days at the end of January... only to re-enter the Bull zone... that drop was not bearish of any significance. Now this is the evaluation of only ONE indicator. As you will see, You will get a lot more information when we combine it with others to form what I call my “Trigger chart” .... but that is for another post. So I choose Slow Stochastics as one of my indicators. I could choose a Slow or Fast Stochastic chart... I could choose a 14 day or 30 day (or any other time period) for a lookback (a lookback in charting terms means how many time intervals of data (mins, hours, days, weeks or months depending on the chart type) that are used in the calculation of the indicator. Here is a comparison graphic: I find the top chart, Slow Stochastics %K(30), D(3) to be the easiest to read and does not whipsaw with every minor fluctuation. The D(3) is a signal line much the same as used in the MACD indicator... I don’t personally like signal lines in long term charting... If I were a day trader looking at a 5 minute time interval chart... I probably would use the signal line...but in longer term charts I find they lag too much to be useful. Ok, this is a lot of material to chew on. Questions are welcome, of course. When we finish the next post on MACD and BBWidth... we will then fully discuss my “Trigger chart” and that is where the good stuff really happens J... Good trading......

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