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September 3, 2018

Trading with Multiple Techniques: Candlesticks with Oscillators

moving averages

Oscillators in technical analysis include tools as the relative strength index, stochastics, and momentum

The Relative Strength Index (RSI) compares price advances to price declines

The RSI is a comparison of the relative strength of price advances to price declines over a specified time period. The most popular periods used are 9 and 14 days. The calculations are based only on the closing prices.

How to Use RSI

As an oversold indicator, the RSI implies that the market is overbought when it approaches the upper end of the range (above 70 or 80). At such a point, the market may be vulnerable to a pullback or could move towards a period of consolidation. On the opposite, at the lower end of the RSI range (below 30 or 20), this reflects an oversold condition, where there is a potential for a short covering move.

As a deviation tool, RSI calculations can be helpful when prices reach a new high and the Relative Strength Index fails to make a concurrent high. This is named a negative divergence and it is potentially bearish. A positive divergence happens when prices make a new low, but the RSI doesn`t. Divergences gain more meaning when Relative Strength Index oscillator readings are in overbought or oversold areas.

Japanese candlesticks give a bullish or bearish indication prior to the additional confirmation

The example below demonstrates another reason to use Japanese candlesticks complimentary to the RSI. Candlesticks may give a bullish or bearish indication before the additional confirmation which is sometimes needed by the RSI. Some technical analysts will view the RSI as giving a bullish signal when 2 steps occur. The first is the positive divergence as explained above. And the second is that the Relative Strength Index has to move above its prior high.

 

 

 

Example of Relative Strength Index (RSI) with Japanese candlesticks

Stochastics compare the latest closing price with the total price action

The stochastic indicator makes a comparison between the latest closing price and the total range of price action for a specified time period. Stochastic values are read between 0 and 100.
A high stochastic reading means the close is near the upper end of the entire range for the period measured. A low reading signifies that the close is near the low end of the period’s range. The idea behind stochastics is that, as the market moves higher, closes aspire to be near the highs of the range or, as the market moves lower, prices tend to cluster near the lows of the range.

Momentum measures the difference in today`s closing price with some days ago

Another naming for momentum is price velocity. This is a measurement of the difference between the closing price today and the closing price a specified number of days ago. With a 10-day momentum, today’s close is compared to that of 10 days ago. When today’s close is higher, the momentum will have a positive number on the momentum scale. If today’s close is lower than 10 days ago, the momentum will display a minus figure.

A momentum index under 0 is bearish, above 0 is bullish

In using the momentum index, price differences (the difference between today’s close and that of the selected time period) should rise at an increasing rate as a trend moves further. This displays an uptrend with an incremental greater momentum. Or, the price velocity is increasing. If prices are rising and momentum begins to level out, a price trend is decelerating. As such, this could be an early warning that a prior price trend could come to an end. If the momentum crosses under the 0 line, it could be interpreted as a bearish sign, above the 0 line, as a bullish indicator.

Bearish candlestick confirmation strengthens the reading of an oversold momentum

The odds of a top reversal with an overbought momentum reading are higher if there is
bearish candlestick confirmation. In the following example, in February an overbought momentum level is linked with an evening star and then a harami cross. In early April another overbought oscillator teamed with another evening star pattern, whereas Hammers A and B accompanied the oversold momentum levels in March and April. At such points, further selloffs became unlikely and either sideways action or rallies could develop to relieve the oversold nature of the market.

 

 

 

 

 

Example of Momentum with Japanese candlesticks

Conclusion: combine Japanese and Western technical analysis in your trading strategy

In this introductory course on Japanese candlestick charts, several useful tips were given to allow for a more advantageous trading strategy. Unifying Japanese and Western technical analysis techniques constitute an exciting synergy.

One must remain flexible about chart reading though. Your HitBTC trading position in relation to the overall technical analysis evidence may be much more important than an individual Japanese candlestick pattern. A bullish candlestick signal in a major bear market should not be used as a buy signal for instance. A bullish candlestick formation, in particular when confirmed by other technical analysis indicators in a bull market, would be a buying point.

Source: Japanese Candlestick Charting Techniques (by Steve Nison)