Momentum

momentum

Momentum

Momentum indicator measures the speed of price change of an instrument

About Momentum

Momentum is an indicator that measures the speed of price change of an instrument. Momentum normally moves in the same direction as price. It is a very useful indicator for gauging market strengths and weaknesses.

When price rises sharply, momentum will increase sharply too. When price starts to slows down, momentum will also weaken and start leveling off. In a sideways market, falling momentum does not necessarily mean market is bearish and trend has changed from up to down.

Momentum indicator is not a standalone trading system. It should always be combined with other indicators.

Trading Application

Divergence

Bullish divergence occurs when prices fall and make new low but momentum does not fall or even rises.

Bearish divergence occurs when prices rise and make new high but momentum does not rise or even fall.

Center line crossover

BUY when momentum crosses above 100 line from below and SELL when momentum crosses below 100 line from above.

Please keep in mind that center line crossover is prone to whipsaws, i.e. momentum crosses above/below the 100 line only to come back below/above it.

Divergence

Red lines on the chart below depicts a bearish divergence condition where prices rose but not followed by RSI. Red circle (1) showed when the breakout occurred and price changed direction from up to down.

Blue lines on the chart depicts a bullish divergence condition where prices fell but not followed by RSI. Blue circle (2) showed when the breakout occurred and prices changed direction from down to up.

Center Line Crossover

Please keep in mind that center line crossover is prone to whipsaws where it would generate many buy and sell signals as shown on chart below (green box 1). It is better to only trade the signals that are in the direction of the current trend. For example, when the trend is up, we only trade the signals generated when momentum crosses above the center line.

The center line is also known as the zero line or 100-line, depending on how this indicator is calculated.

Blue arrows and red lines on the chart show when momentum crosses above center line from below. BUY at open of next bar/candle (blue arrows) with stop loss below the last low.

Red arrows and red lines on the chart show when momentum crosses below center line from above. SELL at open of next bar/candle (red arrows) with stop loss above the last high.

Relative Strength Index

relative-strength-index

Relative Strength Index

A momentum indicator used to determine overbought and oversold conditions

Developed by J. Welles Wilder Jr.

About Relative Strength Index

Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes by comparing the size of its gains with its losses over a period of time.

Relative strength index is used to determine overbought and oversold conditions of trading instruments. The RSI is range-bound and fluctuates between 0 and 100. A reading above 70 is considered overbought while a reading below 30 is considered oversold.

The most commonly used period for RSI is 14 period. Choice of time period is dictated by trading styles employed. For short term trading, it is advised to use smaller time period (less than 10). For longer term trading, it is advised to use longer time period (higher than 20).

Trading Application

Divergence

Bullish divergence occurs when prices fall and make new low but RSI does not fall or even rises.

Bearish divergence occurs when prices rise and make new high but RSI does not rise or even fall.

Overbought/Oversold

BUY when RSI crosses above 30 from below and SELL when RSI crosses below 70 from above.

Please keep in mind that during a strong uptrend/downtrend, prices could stay in overbought/oversold conditions for a long time.

Divergence

Blue lines on the chart below depicts a bullish divergence condition where prices fell but not followed by RSI. Blue circle (1) showed when the breakout occurred and price changed direction from down to up.

Red lines on the chart depicts a bearish divergence condition where prices rose but not followed by RSI. Red circle (2) showed when the breakout occurred and prices changed direction from up to down.

Overbought/Oversold

Please keep in mind that during a strong uptrend/downtrend, prices could stay in overbought/oversold conditions for a long time.

BUY when RSI crosses above 30 from below and SELL when RSI crosses below 70 from above with stop losses below/above the last low/high.

Blue circles and red lines on the chart show when RSI crosses above 30 from below. BUY at open of next bar/candle (blue arrows) with stop loss below the last low.

Red circles and red lines on the chart show when RSI crosses below 70 from above. SELL at open of next bar/candle (red arrows) with stop loss above the last high.

Stochastic Oscillator

stochastic

Stochastic Oscillator

Developed by George Lane | A popular momentum indicator

About Stochastic Oscillator

Stochastic Oscillator (often called Stochastic) is a momentum indicator that compares current closing price with its range (highest and lowest price) over a certain period of time. This indicator does not follow price or volume, but it follows rate of change of prices or momentum. Developed in the 1950s by George Lane. It is a very popular momentum indicator.

Stochastic Oscillator chart consists of two lines, one which reflects actual value of oscillator (%K or main line), and another which uses Simple Moving Average period 3 (SMA-3) of the %K line. This line is called the signal line. Price movements are assumed to follow momentum, so the crossover of these two lines are thought to be an indication of reversal, since it indicates large shift in momentum.

Understanding Stochastic Number

Value of stochastic indicator is range-bound between 0 and 100. Low stochastic number (below 20) means that current price is near the low of the price range. In other words, price is currently less than 20% away from the low of the price range.

High stochastic number (above 80) means that current price is near the high of the price range or price is currently less than 20% away from the high of the price range.

Level above 80 is considered as overbought. Level below 20 is considered as oversold.

Please keep in mind that in a strong up trend/down trend moves, an instrument can be in overbought/oversold condition and still continue to rise/fall and stay in that condition for a prolonged period of time. Overbought readings are not necessarily bearish and oversold readings are not necessarily bullish.

Trading Application

Reversal

BUY when stochastic is above the signal line and crosses above level 20.

SELL when stochastic is below the signal line and crosses below level 80.

Divergence

Bullish divergence happens when prices fall but stochastic oscillator does not fall.

Bearish divergence happens when prices rise but not accompanied by rise in stochastic.

Trend

BUY when stochastic is above signal line and crosses above level 80. Close position when stochastic is below signal line and crosses below level 80.

SELL when stochastic is below signal line and crosses below level 20. Close position when stochastic is above signal line and crosses above level 20.

Reversal

Chart below shows example of stochastic reversal. When stochastic is above signal line and crosses above level 20, BUY at open of next bar/candle. Blue circles show when stochastic is above signal line crosses above 20. Blue arrow show the BUY positions taken.

When stochastic is below signal line and crosses below level 80, SELL at open of next bar/candle. Red circles show when stochastic is below signal line and crosses below 80. Red arrows show the SELL positions taken.

Divergence

When prices and stochastic do not move in the same direction, we have a so-called divergence, which indicates that price could be changing direction soon. Chart below shows example of bearish divergence and bullish divergence between prices and stochastic.

Blue circle (1) shows bearish divergence. Price rising but not followed by stochastic. This indicates possible change of direction from up to down.

Red circle (2) shows bullish divergence. Prices falling, but stochastic rising. This indicates possible change of direction from down to up.

Trend

Another way to use stochastic is by following the current trend. When stochastic is above signal line and crosses above level 80 (blue-colored area), BUY at open of next bar/candle (blue arrow). Close out position when stochastic is below signal line crosses below 80 (orange cross).

When stochastic is below signal line and crosses below level 20 (red-colored area), SELL at open of next bar/candle (red arrow). Close out position when stochastic is above signal line and crosses above 20 (orange cross).

Moving Average Convergence Divergence (MACD)

moving-average-convergence-divergence

MACD

Moving Average Convergence Divergence

About MACD

It is a momentum trend-following indicator which measures relationship between two moving averages. MACD line/histogram is calculated by substracting the longer EMA (usually 26) with the shorter EMA (usually 12). Standard setting for MACD is 12, 26, 9. Moving average of the MACD line/histogram is called the “signal line”.

In its simplest form, relationships between MACD line/histogram with signal line can act as trigger for BUY and SELL signals. MACD helps traders understand whether momentum in the current up move/down move is getting stronger or weaker.

The most common methods to utilize MACD are signal line crossovers and divergences.

Trading Application

Signal Line Crossover

BUY when MACD line/histogram crosses above the signal line. SELL when MACD line/histogram crosses below the signal line.

Divergences

When price rises and MACD line/histogram falls, we have bearish divergence. When price falls and MACD line/histogram rises, we have bullish divergence.

Signal Line Crossover

BUY at open of the next bar/candle when MACD line/histogram crosses above the signal line. Some examples can be seen on the chart as represented by the blue circles and blue arrows. Blue circles show when MACD crosses above signal line. Blue arrows show the corresponding trades.

SELL at open of the next bar/candle when MACD line/histogram crosses below the signal line. Red circles on the chart below show when MACD crosses below signal line. Red arrows show the corresponding trades.

Divergences

Prices and MACD in general move in the same direction. When prices and MACD move in opposite direction, we have a divergence. There are 2 types of divergence: bearish divergence and bullish divergence.

Bearish divergence happens when price rises but MACD falls or do not rise. This indicates that up move is losing momentum and could reverse down. Area marked “1” on the chart below shows a bearish divergence. Prices continued to rise but MACD was falling. Prices then broke lower and reversed direction from up to down.

Bullish divergence happens when price falls but MACD rises or do not fall. This indicates that demand is strong and building up momentum. Area marked “2” on the chart below shows a bullish divergence. Prices moved lower but MACD was rising and building momentum. Prices then broke higher and reversed direction from down to up.

MACD can also be used together with other indicators such as moving average

Moving Average time period 12 & 26 on H1 chart

The above chart shows EMA(26) in red, EMA(12) in blue. When EMA(12) crosses above EMA(26), this indicates price is rising. BUY signal is then confirmed by MACD line/histogram (blue bars) being above the MACD base line (zero line). Conversely, EMA(12) crosses below EMA(26) indicates price is falling. SELL signal is confirmed by MACD line/histogram being below the MACD base line (zero line).

Moving Average (MA)

moving-average

Moving Average (MA)

A simple and very popular trend-following technical indicator

About Moving Average

Moving Average (MA) is a simple technical analysis tool. It is used to identify direction of a trend or to determine support and resistance levels. This is a lagging trend-following indicator.

Moving Average is an easily adjustable indicator. Traders can use and choose any time period. A more common time period used is 15, 20, 30, 50, 100 and 200. The shorter the time period used will make the indicator more sensitive to price changes. The longer the time period, the less sensitive the indicator to changes in prices.

Moving Average which uses short time period is normally used for short term trading, whereas one that uses long time period is used for long term trading.

2 of the most used Moving Average are Simple Moving Average (SMA) and Exponential Moving Average (EMA).

Trading Application

Moving Average time period 15 on H1 chart

Moving Average time period 200 on daily chart

Moving Average with shorter time period will generate more trading signals than the longer period one

The chart on the left show that shorter time period is more appropriate to be used with Moving Average in shorter time frame and the target can be adjusted to match the short term trading goals. The chart on the right displays a 200-day Moving Average. MA(200) is used to catch bigger moves in longer time frame and more suitable for long term trading.

Price-MA Crossover

BUY when price crosses above the Moving Average. SELL when price crosses below the Moving Average. Stop loss is placed below/above the last low/high. Choice of Moving Average’s time period depend on the time frame selected. Smaller time frame like M15 would use lower time period when compared to higher time frame like D1 (Daily).

2-Moving Averages Crossover

BUY when price is above the shorter moving average AND short moving average crosses above long moving average. SELL when price is below the shorter moving average AND short moving average crosses below long moving average. Moving average with lower time period is the short moving average. The one with the longer time period is the long moving average.

Moving Average is best suited to trending market and not suitable for range/sideways market

Price-MA Crossover

BUY at open of the next bar/candle when price crosses above moving average with stop loss below the last low, as shown by the blue arrows and orange bars underneath them.

SELL at open of the next bar/candle when price crosses below moving average with stop loss above the last high, as shown by the red arrows and orange bars above them.

2-Moving Averages Crossover

In this example we use time period of 10 and 50 for the 2 moving averages. MA(10) is the short moving average and MA(50) is the long moving average.

BUY at open of the next bar/candle when price is above the short moving average and short moving average crosses above long moving average, with stop loss below the last low, as shown by the blue arrows and orange bars underneath them.

SELL at open of the next bar/candle when price is below short moving average and short moving average crosses below long moving average, with stop loss above the last high, as shown by the red arrows and orange bars above them.

Parabolic SAR

parabolic-sar

Parabolic SAR

Developed by J. Welles Wilder Jr. | SAR = Stop and Reverse

About Parabolic SAR

Parabolic SAR (Stop and Reverse) is a very popular indicator used to determine the short-term momentum of a trading instrument.

Developed by J. Welles Wilder Jr. This indicator when applied to a trading strategy would allow a trader to determine where a stop order must be placed.

This indicator uses a trailing stop and reverse methodology, hence called “SAR”, to identify suitable entry and exit points. Traders refer to this indicator as parabolic stop and reverse or parabolic SAR.

Parabolic SAR is shown on charts as a sequence of dots, appearing above or below prices, depending on the trend direction. A dot would show up below the price when the trend is up, and would show up above the price when the trend is down. Reversal happens when the dot position with respect to prices changes. When prices fall below these parabolic dots, then the dots will now appear above the prices. This indicates a downtrend is under way and vice versa.

Trading Application

Bullish Signal

A dot below the price indicates an up move in prices. When the dot flips from below to above the price, it indicates change in direction.   

Bearish Signal

A dot above the price indicates a down move in prices. When the dot flips from above to below the price, it indicates change in direction.

Parabolic SAR works best for a trending market. It does not work so well in a range/sideways market.

BULLISH SIGNAL

Chart below shows an example of bullish signals generated by Parabolic SAR in both trending and sideways market. Blue arrow on the left hand side (1) shows the dot flipped from above to below the price. Open BUY position at the open of the next bar/candle, with stop loss level set at or below the parabolic dot. Using parabolic SAR we can maximize profit potential by staying in the trade for as long as possible. Green arrows show that stop loss levels can be adjusted as parabolic dots move with prices. For as long as the dot has not flipped side, BUY position would be kept open. As can be seen the trade made a nice profit. 

On the right hand side we could see 4 blue arrows giving out bullish signals. Price was moving sideways. Same as before, open BUY positions at the open of next bar/candle. But this time, all these trades either got stopped out or liquidated because the dots flipped side and not making profits.

BEARISH SIGNAL

Chart below shows an example of bearish signals generated by Parabolic SAR in both trending and sideways market. When market is moving sideways, parabolic SAR do not work so well just like in the bullish signal example (see the 4 Red arrows in the middle). All these trades either got stopped out or liquidated because the dots flipped side and not making profits.

The last red arrow on the chart (2), also gave out bearish signal. SELL at the open of next bar/candle with stop loss at or above the parabolic dots. Green arrows show that stop loss levels can be adjusted as parabolic dots move with prices. For as long as the dot has not flipped side, SELL position would be kept open. As can be seen the trade made a nice profit. 

Always remember that Parabolic SAR is best used in a trending market with long rallies and not ideal for a sideways market. It is also best to combine it with other technical indicators.

Bollinger Bands

bollinger-bands

Bollinger Bands

Created by John Bollinger | Provide insights on price and volatility

About Bollinger Bands

Created by John Bollinger. These bands provide unique insights into prices and volatilities. Bollinger bands can be used to determine overbought and oversold levels, as a trend-following tool and to determine when a breakout occurs.

Bollinger Bands consist of three lines/bands:
1. Simple Moving Average (SMA) in the middle. Usually an SMA 20. It is also known as Middle Band or Middle Bollinger
2. Upper band or normally called Upper Bollinger Band (SMA20 + standard deviation)
3. Lower Band or normally called Lower Bollinger Band (SMA20 – standard deviation)

Traders can also add additional bands, to help gauge the strength of the price moves. When market volatility is down the bands contract, and when market is volatile, the bands widen. A contraction in the bands is considered to be potential signs of significant breakout in the future.

Trading Application

BOUNCE

Price tends to move to the middle band after up/down move. When price bounce off the middle band after an up move then open BUY. When price bounce off the middle band after down move then open SELL.

SQUEEZE

Squeeze happens when the bands contract. Low volatility. Considered to be potential signs of significant breakout in the future. If prices start to break out above upper band, then BUY. If prices start to break below lower band, then SELL.

RANGE

Look for prices that are moving sideways and stuck in a range. When sideways-shaped Bollinger Bands is formed, traders will take advantage by trading the bands. BUY around the lower band and SELL around the upper band.

BOUNCE

Chart below shows a down move from A to B. Price then moved to the middle band but unable to break the middle band and bounced off it. Trade to take was to SELL at the open of next bar/candle. Conversely, if after an up move price corrects itself to the middle band but unable to break the middle band and bounced off it, then BUY at the open of the next bar/candle.

SQUEEZE

A squeeze happens when bollinger bands contract due to low volatility. Please keep in mind that a squeeze only indicates possible significant breakout in the future. It does not predict the direction of the breakouts. The bands that prices break next, usually indicate the direction.  The tighter the squeeze, the more significant the breakouts.

Chart below shows two examples of a squeeze and how to trade it. In example A, the bands contracted and then price broke above the upper band (1). BUY at the open of the next bar/candle. In example B, the bands contracted and then price broke below the lower band (2). SELL at the open of the next bar/candle.

RANGE

Chart below show prices moving sideways in a range. BUY when prices move near the low of the range and the lower band (red arrows). SELL when prices move near the high of the range and the upper band (yellow arrows).

Bollinger bands act like dynamic support and resistance levels. As with other technical analysis tools, the longer the time frame you are in, the stronger these bands tend to be. It should also be remembered that Bollinger bands is not a standalone trading system and should be combined with other technical analysis tools.

Inflation and Prices

inflation-prices

Inflation and Prices

Economic data to measure changes in prices from consumers’ and producers’ sides

Both Consumers Price Index and Producers Price Index are leading indicators for overall inflation

CONSUMER PRICE INDEX (CPI)

Measures the average change in retail prices over time for a basket consisting of more than 200 categories of assorted goods and services.

CPI UP => Interest rates UP => USD UP [Short-run]
CPI UP => Interest rates UP => USD DOWN [Long-run]

cpi-inflation-data
ppi-inflation-data

PRODUCER PRICE INDEX (PPI)

Measures the change in prices paid by businesses during various stages of productions. PPI does not take into account the price of services.

PPI UP => Interest rates UP => USD UP
PPI rising too fast => USD DOWN

Housing Construction

housing-construction-data

Housing Construction

4 Major housing and construction economic data

Housing sector is a leading indicator of the health of an economy
It is the first one to suffer during economic downturn and the first to rise during economic upturn

HOUSING STARTS

Records number of new homes being built. Residential estate is among the first sectors to shutdown when near recession and the first to bloom when economy start to turn up.

Housing UP => profit UP => inflation UP => Interest rates UP => USD UP

Housing DOWN => profit DOWN => inflation DOWN => Interest rates DOWN => USD DOWN

housing-starts-data
building-permits-data

BUILDING PERMITS

Records number of new permits for future construction.

Permits UP => profit UP => Inflation UP => Interest rates UP => USD UP

Permits DOWN => profit DOWN => Inflation DOWN => Interest rates DOWN => USD DOWN

EXISTING HOME SALES

Measures monthly sales of previously owned homes.

Sales UP => inflation UP => Interest rates UP => USD UP

Sales DOWN => inflation DOWN => Interest rates DOWN => USD DOWN

existing-home-sales-data
new-home-sales-data

NEW HOME SALES

Measures number of sales of new homes.

Sales UP => Inflation UP => Interest rates UP => USD UP

Sales DOWN => Inflation DOWN => Interest rates DOWN => USD DOWN

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