FTSE Stochastic & RSI Movement

bracke

Experienced member
1,286 12
I have noticed that on a number of occasions whilst watching ftse intraday changes, that although the index may be hardly changing the Slow Stochastic & RSI are declining ( eg at 14.00 today)- why?

I thought that these two indicators charted the momentum of the index. To be falling although the index is nearly static or even rising slightly is confusing.

Regards

bracke
 

darrenf

Well-known member
481 3
Think about it. If an indicator followed the price exactly, ie indicator rises/ stays same/ falls in line with price, what is the point of having the indicator in the first place if it tells you nothing else other than what the price is doing? You may as well just trade from the price (An argument many put forward anyway).

I am no expert on the technicalities of indicators but have observed stochastics and in particular RSI's behaviour.

A well known pattern with RSI (and many other indicators) is that if the indicator is falling whilst the price is rising/ steady, the indicator could be signalling a reversal, especially if this can be seen across a range of price peaks. ie three rising price peaks, together with three falling RSI peaks = "3 peak negative divergance" potentially signalling the end of an up move and time to take profits.

Have a look at some of chartmans threads on trading the dow. He gives some very detailed examples of this with charts etc.
 

DaveT

Well-known member
434 6
To add to darrenf's reasoning regarding RSI/Stochasics:

As stated, both are types of momentum oscillators. They measure THE VELOCITY OF PRICE MOVES, or the rate of change.

Therefore , when the SPEED of a price move decreases, for example, the oscillator goes DOWN, BEFORE THE PRICE DOES.
This gives us advance warning of a turn, (amongst other factors)

"MOMENTUM LEADS THE PRICE."

A simple analogy or two makes things clearer.

When you toss a ball into the air, it must slow down BEFORE it starts to head back to earth! So, it's MOMENTUM FALLS , BEFORE IT'S HEIGHT.

Similarly, when a car approaches a turn, it invariably must SLOW DOWN before turning. (ie SPEED DECREASES BEFORE CHANGE OF DIRECTION)


RSI (Relative Stength Index) was developed by J. Welles Wilder, Jr.
It's formula uses a specified range of periods (days, weeks,etc) to interpret and depict certain momentum charcteristics.

RSI = 100 - { 100/(1+RS) }

where:

RS = Average of X periods up closes/Average of X periods down closes


Stochastics were devised by George Lane. It's formula represents the distance of a close to the low of a recent range, as a percentage of the total range (high to low).
It graphically depicts the phenomena of closes moving away from the highs near a top, or closes moving away from the lows near a bottom.

Which is another way of saying MOMENTUM TURNS BEFORE PRICE

In Fast Stochasic :

%K = {Ct - Ln/Hn - Ln} * 100

where :

Ct = the closing price today
Ln = the lowest low for n days
Hn = the highest high for n days
N = the number of days

%D = %K smoothed over 3 days

For the Slow stochastic:
the %K is the %D of the fast stochastic.
the %D is the new %K smoothed again over 3 periods


You don't HAVE to know how these are formulated, but I believe it helps to see what EXACTLY the are supposed to be telling you.

I hope that's made things clearer (Or has it muddied the waters even more???)
 
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darrenf

Well-known member
481 3
Nicely explained Davet- I like the balls and cars bit best!
 

bracke

Experienced member
1,286 12
DaveT

Thank you for your explanation, it has not muddied the waters but clarified them.

I now understand that because RSI/STOC may be falling it does not mean that the price is also falling merely that the rate of increase is slowing.

The ball and car were excellent examples.

Many thanks

Regards

bracke
 

Buk

Established member
615 6
Dave T

'ball & car' - brilliant!!....not an ex teacher by any chance are ya!!!..... :cheesy:

more of the same when explaining techniques pleeeeeeeze :D

now then....where's that damned list.....................................
 
 
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