Price rate-of-change (ROC)
Table of Contents
“Price Rate-of-change” is calculating by dividing the current price by the price in n periods before that. Usually the margin is given in percent. The “Momentum” indicator gives the same information, but submitted as a coefficient. The most used periods for defying the “Price Rate-of-change” are 12 and 25 days. ROC is used for defying the levels of overrating or underrating the price of the security. The higher the level of the indicator is, the more overrated is the share and therefore – the bigger is the chance of a recent change in the price course. Conversely the lower ROC moves, the more underrated is the security and the bigger is the chance of a recent risk. Like by all the other indicators that defy the level of over/under rating of shares by “Price rate-of-change”, despite the clear indications, you must firstly wait for the confirmation of the market about the change in the price before opening positions.
Wilder’s relative strength index (RSI)
Measures the speed of movement of the price, related to the highest high price and the lowest low price for a definite period of time. The borders from 70 and 30% are used for interpretation.
When “Wilder’s RSI” goes above the 70% line is considered that the share is overrated. When the “Wilder’s RSI” goes through the 70% line from top downwards this means the beginning of a new falling course.
When “Wilder’s RSI” falls under the 30% line is consider that the share is underrated. When the indicator crosses the 30% line moving upwards this means a new progress.
Note: This is one of the most popular oscillators, developed by Wels Wilder in 1978.
In essence this is an index of the inner force. It gives high values when the market course moves fast upwards and low values when the course falls sharply. The values of RSI vary between 0 and 100.
A characteristic of this type of a oscillator is that it slows down its movement when it reaches extreme values (levels of support and resistance) and than sharply changes its direction, even if the market quote give a mode-rate correction. This corrects the RSI to more neutral. Initially Wilder uses the 14-day period and this parameter is used by many traders. The 9-day period is also popular, because it’s faster and more sensitive to the market changes.
Reports on values 80/20 and 70/30 corresponding to 9-day and 14-day period.
Formula for calculating:
RSI=100 – (100/(1+RS)), where:
RS – (the average rising course of closing for n days)/(the average falling course of closing for n days)
Methods for using RSI
Usually the indicator’s top is over 70 and its bottom under 30 and it usually gets ahead of the course drawing
The indicator of then makes drawing models those are similar to the price drawing. (head to shoulders, line of support/resistance)
Known as a break to the levels of support and resistance (breakouts). They are observed when values of RSI go over the previous peak or fall under the previous bottom. By negative divergencе (the price have a new top peak, but the oscillator reports on a new lower peak and signals of a turn in the direction of course movements) when RSI turns the direction and falls under the previous bottom it’s said that there is a “failure swing” It’s considered that this is confirmation of the signal of turning the direction.
Used for defying the turn of the market. “Stochastics” measures the position of the price by closing, regarding to the price range for the definite period. It’s considered that by rising trend the closing price is usually in the higher part of the price range. Conversely, by a falling trend the closing price is usually in the lower end of the price range for the period. From here comes the essence of the indicator when in periods of a fall the closing price begins to move to the upper end of the price range a turn in the price course in direction upwards can be expected. On the contrary – when in periods of a rising market the closing price begins to move to the lower end of the price range – than a turn in the price in direction downwards is to be expected.
The indicator is pictured as the lines – %D and %K with values from 0 to 100. When the lines are with values over 80 this means that the closing price is close to the lowest for the period and a rise can be expected. A signal for selling is given when the fast %K line crosses the slow %D line from up downwards. A signal for buying is given when the fast %K line crosses the slow %D line from down upwards.
Developed by Jerald Apple, MACD is one of the simplest and most reliable indicators. MACD uses sliding middles that are lagging indicators and are characterized by following the trend. The turn into a oscillator that courses out by deducting the value of the fast from the value of the slow. So calculated the values are drawn as a line that oscillates above and under 0 without any fixed top or bottom borders.
It expresses the connection between two MA of the course. The most frequently people use the 12 and 26 period EMA, but it’s considered, that the choice and combination of the frequencies, in the context of the horizon and goals of investing, can have a substantial impact on the reliability of the given signal.
The most popular formula for calculating MACD uses the difference between values of EMA (exponential sliding middle) for 12 periods and EMA for 26 periods.
MACD (12,26)=EMA(12) – EMA(26)
This is the formula, set in many software programs for technical analysis and quoted in the most books about this subject. The author and other analytics have tried to change the number of the used periods aiming to optimize the indicator depending on the volatility of the analyzed markets. The use of shorter periods would make the indicator more sensitive and faster, while using longer periods would result in and faster, while using longer periods would result in a slower indicator and would decrease the number of wrong signals.
From the both sliding middles the one for 12 periods is the faster one and this for 26 periods is the slower one. For calculating the moth sliding middles are used the values of the course of closing.
EMA for 9 periods is calculated by the indicator. It serves as a signal line.
What shows MACD?
MACD measures the difference between the values of the two sliding middles.
The positive values of the indicator show, that the sliding middle for 12 periods is above the sliding middle for 26 periods. The negative values show, that the sliding middle is under the sliding middle for 26 periods. When the values of MACD are positive and rise then the distance between the two sliding middles also grows. This indicates that the tempo of change of the faster one is higher than the tempo of change of the slower one. The positive momentum grows and this is considered to be supportive to the uprising movement.
If the values of MACD are negative and the negative difference between the two sliding middles grows the distance between the lines of the sliding middles growse. The downward going inert moment grows and this is considered to be supportive to a downwards going movement.
The indicator line breaks through the central line when the faster sliding middle (for the shorter period) breaks through the slower one (for the longer period).
No matter that the sliding middles are a lagging indicator, the drawing of MACD shows, that MACD reacts to course changes faster than the sliding middles used for its construction.
An indication that the end of the current trend is close is when the direction of the indicator starts to differ from the direction of the real course values.
We have a positive divergence when the rate of exchange records new lower bottoms and the indicator shows new higher bottoms. We have a negative divergence when the rate of exchange shows new higher peaks and the indicator – new lower peaks.
Both divergences are most likely when they appear by values that are indicating relatively over/underrated levels.
Signals for buying
MACD generates signals for buying from 3 main sources:
- Positive divergence
- Crossing the signal line by the indicator line from down upwards
- Crossing the central line by the indicator from down upwards.
Appears when indicator begins to note higher values and at the same time the course values continue their down going trend and note new lower bottoms. The indicator can form a series from higher bottoms or a second higher bottom. Positive divergence is rarely to find but usually the generated signals are the most reliable and prefaced big course movements. Crossing the signal line by the indicator line from down upwards
Appears when the MACD indicator crosses the signal line (its exponential sliding middle for 9 periods) from down upwards. The crossings are more reliable. It’s recommended that they are used in combination with other instruments of the technical analysis for avoiding the wrong positioning. Sometimes they are used as a confirmation of the positive divergence. In this case the second higher bottom of the indicator and positive divergence is considered valid when it is followed by crossing the signal line by the indicator line. There’s a practice of filtering with the help of the real courses so that the valid of the crossing can be guaranteed. An example for such a filter is to buy, if MACD crosses the signal line and stays above it for 3 periods. By this situation the signal for buying will be activated after the end of the tird period.
Crossing the central line by the indicator from down upwards
Happens, when MACD crosses the zero line from down upwards. This is clear indication that there is a positive inert moment. After positive divergence and crossing the signal line by the indicator the crossing of the central line can be a confirmation of the signal.
Using of combination of signals
No matter that the 3 signals can be used separately the combination of them leads to minimizing of the wrong positioning.
Signals for selling
MACD generates signals for selling from 3 main sources :
- negative divergence
- crossing the signal line by the indicator line from above
- crossing the central line by the indicator from above
Appears when the indicator starts to record lower values and at the same time the course values continue their rising trend and records new higher peaks or they consolidate on the peak. The indicator may form a lower peak or record turn of the direction. Negative divergence is more rarely to meet but usually the generated signals are the most reliable and go before big course movements.
Crossing the signal line by the indicator line from above
Appears when the MACD indicator crosses the signal line (its exponential sliding middle for 9 periods) from above. The crossings are the most frequently met signals and are more reliable. It’s recommended that they are used in combination with other instruments of the technical analysis to avoid the wrong positioning.
Sometimes the are used as a confirmation of negative divergence. In this case the second higher peak of the indicator by negative divergence Is considered to be valid when it is followed by crossing of the signal line by the indicator line. There’s a practice of filtering in order to be guaranteed the validity of the crossing. An example for such a filter is to buy if MACD crosses the signal line and stays above it for 3 periods. By this situation the signal for selling will be activated after the end of the third period.
Crossing of the central line by the indicator line from above
Appears when MACD crosses the zero line from above. This is a clear indication that we have a negative inert moment. The crossing of the central line can serve as an independent signal or confirm the signal that is generated by the negative divergence or the crossing of the signal line by the indicator
The importance of the crossing of the central line by the indicator will depend on the previous movements of MACD. If the values of the indicator have been positive for a long period of time and then the indicator turned the direction and goes through the central line this means turn of the market trend. If the values of the indicator have been negative for a long period of time the crossing of the central line from down upwards and then from above can be considered to be a correction of the rates of change. To estimate the importance of this crossing we can use the traditional technical analysis so that we can be sure if there is a change in the trend, a higher peak or a higher bottom.
Combining Momentum and RSI
Some traders prefer to use two or more indicators and they position on the market when they find a consensus in their signals.
Using the same standard we will combine the two indicators in a strategy for entering and leaving the market. This method requires that both the indicators give analogical results regarding the direction of the market courses so that a deal can be realized. For closing of already opened positions is necessary the confirmation of just one of the indicators.