Example of MACD Crossovers: Overbought Oversold Relative Strength Index

Example of MACD Crossovers
As shown on the following chart, when the MACD falls below the signal line, it is
a bearish signal which indicates that it may be time to sell. Conversely, when the
MACD rises above the signal line, the indicator gives a bullish signal, which
suggests that the price of the asset is likely to experience upward momentum.
Some traders wait for a confirmed cross above the signal line before entering a
position to reduce the chances of being "faked out" and entering a position too
early.
Crossovers are more reliable when they conform to the prevailing trend. If the
MACD crosses above its signal line following a brief correction within a longer-
term uptrend, it qualifies as bullish confirmation.
f the MACD crosses below its signal line following a brief move higher within a
longer-term downtrend, traders would consider that a bearish confirmation.
Example of Divergence
When the MACD forms highs or lows that diverge from the corresponding highs
and lows on the price, it is called a divergence. A bullish divergence appears
when the MACD forms two rising lows that correspond with two falling lows on
the price. This is a valid bullish signal when the long-term trend is still positive.
Some traders will look for bullish divergences even when the long-term trend is
negative because they can signal a change in the trend, although this technique
is less reliable.
When the MACD forms a series of two falling highs that correspond with two
rising highs on the price, a bearish divergence has been formed. A bearish
divergence that appears during a long-term bearish trend is considered
confirmation that the trend is likely to continue. Some traders will watch for
bearish divergences during long-term bullish trends because they can signal
weakness in the trend. However, it is not as reliable as a bearish divergence
during a bearish trend.
Example of Rapid Rises or Falls

When the MACD rises or falls rapidly (the shorter-term moving average pulls
away from the longer-term moving average), it is a signal that the security
is overbought or oversold and will soon return to normal levels. Traders will often
combine this analysis with the Relative Strength Index (RSI) or other technical
indicators to verify overbought or oversold conditions.
Stochastic RSI -StochRSI Definition
REVIEWED BY ADAM HAYES
Updated Jun 25, 2019
What Is the Stochastic RSI?

The Stochastic RSI (StochRSI) is an indicator used in technical analysis that
ranges between zero and one (or zero and 100 on some charting platforms) and
is created by applying the Stochastic oscillator formula to a set of relative
strength index (RSI) values rather than to standard price data. Using RSI values
within the Stochastic formula gives traders an idea of whether the current RSI
value is overbought or oversold.
The StochRSI oscillator was developed to take advantage of both momentum
indicators in order to create a more sensitive indicator that is attuned to a specific
security's historical performance rather than a generalized analysis of price
change.
KEY TAKEAWAYS
 A StochRSI reading above 0.8 is considered overbought, while a reading

below 0.2 is considered oversold. On the zero to 100 scale, above 80 is
overbought, and below 20 is oversold.
 Overbought doesn't necessarily mean the price will reverse lower, just like
oversold doesn't mean the price will reverse higher. Rather the overbought
and oversold conditions simply alert traders that the RSI is near the
extremes of its recent readings.
 A reading of zero means the RSI is at its lowest level in 14 periods (or
whatever lookback period is chosen). A reading of 1 (or 100) means the
RSI is at the highest level in the last 14 periods.
 Other StochRSI values show where the RSI is relative to a high or low.
Where:
RSI = Current RSI reading;
Lowest RSI = Lowest RSI reading over last 14 periods (or chosen lookback
period); and
Highest RSI = Highest RSI reading over last 14 period (or lookback period).
How to Calculate the Stochastic RSI
The StochRSI is based on RSI readings. The RSI has an input value, typically
14, which tells the indicator how many periods of data it is using in its calculation.
These RSI levels are then used in the StochRSI formula.
1. Record RSI levels for 14 periods.
2. On the 14th period, note the current RSI reading, the highest RSI reading,
and lowest RSI reading. It is now possible to fill in all the formula variables
for StochRSI.
3. On the 15th period, note the current RSI reading, highest RSI reading, and
lowest reading, but only for the last 14 period (not the last 15). Compute
the new StochRSI.
4. As each period ends compute the new StochRSI value, only using the last
14 RSI values.
What Does the Stochastic RSI Tell You?

The StochRSI was developed by Tushar S. Chande and Stanley Kroll and
detailed in their book "The New Technical Trader," first published in 1994.
While technical indicators already existed to show overbought and oversold
levels, the two developed StochRSI to improve sensitivity and generate a greater
number of signals than traditional indicators could do.
The StochRSI deems something to be oversold when the value drops below
0.20, meaning the RSI value is trading at the lower end of its predefined range,
and that the short-term direction of the underlying security may be nearing a low
a possible move higher. Conversely, a reading above 0.80 suggests the RSI may
be reaching extreme highs and could be used to signal a pullback in
the underlying security.
Along with identifying overbought/oversold conditions, the StochRSI can be used
to identify short-term trends by looking at it in the context of an oscillator with a
centerline at 0.50. When the StochRSI is above 0.50, the security may be seen
as trending higher and vice versa when it's below 0.50.
The StochRSI should also be used in conjunction with other technical indicators
or chart patterns to maximize effectiveness, especially given the high number of
signals that it generates.
In addition, non-momentum oscillators like the accumulation distribution line may
be particularly helpful because they don't overlap in terms of functionality and
provide insights from a different perspective.
The Difference Between the Stochastic RSI and the Relative Strength Index
(RSI)
They seem similar, but the StochRSI relies on a different formula from what
generates RSI values. RSI is a derivative of price. Meanwhile, stochRSI is
derivative of RSI itself, or a second derivative of price. One of the key differences
is how quickly the indicators move. StochRSI moves very quickly from
overbought to oversold, or vice versa, while the RSI is a much slower moving
indicator. One isn't better than the other, StochRSI just moves more (and more
quickly) than the RSI.
Limitations of Using the Stochastic RSI
One downside to using the StochRSI is that it tends to be quite volatile, rapidly
moving from high to low. Smoothing the StochRSI may help in this regard. Some
traders will take a moving average of the StochRSI to reduce the volatility and
make the indicator more useful. For example, a 10-day simple moving average of
the StochRSI can produce an indicator that's much smoother and more stable.
Most charting platforms allow for applying one type of indicator to another without
any personal calculations required.
Also, the StochRSI is the second derivative of price. In other words, its output is
two steps away from the actual price of the asset being analyzed, which means
at times it may be out of sync with an asset's market price in real time.

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Example of MACD Crossovers

Example of Rapid Rises or Falls

Updated Jun 25, 2019

What Is the Stochastic RSI?

 A StochRSI reading above 0.8 is considered overbought, while a reading

1. Record RSI levels for 14 periods.

What Does the Stochastic RSI Tell You?

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