FXS - Stochastics

Name:
FXS-Stochastics
Characteristic:
Momentum
Parameter Defaults:
Length
14
Plots:
PercentK

PercentD

Overbought
80

Oversold
20
Stochastics were created by George Lane in the 1950’s and have become a popular momentum indicator due to the apparent simple nature of its overbought/oversold signals. There are two versions of Stochastics – Fast and Slow. George Lane did provide full rules as to when to use Stochastics but many find these rather difficult to apply. Essentially the basic element of Stochastics is the Percent K line. This is derived from a simple formula that measures the relative position of the current price in percentage terms against the recent range. Percent D is a form of average of Percent K and Percent Slow D is another average of Percent D.
Another use of Stochastics is the crossover of the faster line across the slower. (%K through %D and %D through %SlowD) One of the distracting features of Stochastics, particularly the Fast Stochastic, is the number of occasions when the two lines cross, providing apparent bullish and bearish signals. All too often there is no follow through and the crossover provides a false signal.
FXS-Stochastics provides a smoother Stochastic with fewer crossovers, and therefore fewer false signals.

Usage

The chart shows the 10-minute bar chart of USDCHF in the middle of February 2003. All three forms of Stochastics are plotted and it can be seen that the standard Fast Stochastic is constantly suffering crossovers of PercentK through PercentD, even to the extent of being almost every bar during the sideways consolidation around 15:30 – 17:30. The Slow Stochastic does reduce the number of signals. But at the far left, at the start of the data series both Fast and Slow Stochastics can be seen moving higher and lower without reflecting price action that well. At the same time, FXS-Stochastics provided a consistent bullish trend to price and avoided the confusion caused by the standard indicators.
This same situation occurred to the right of the chart, also, as FXS-Stochastics indicated the basic bearish direction of price.

Another feature of FXS-Stochastics is that it has been developed to cause less crossovers in trending markets, times when standard momentum indicators traditionally fail. Note how in the daily GBPJPY market FXS-Stochastics held positive throughout the entire move while the standard Slow Stochastics caused a series of crossovers.
One point to appreciate is that to accommodate the feature of less whipsaws the indicator is slower than the standard version and is not totally suited to finding peaks and troughs. However, with an integrated analytical methodology the smoother features help in identifying the underlying price direction.

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Moving Average Convergence Divergence (MACD)

Characteristic:
Trend Direction
Parameter Defaults:
First EMA Period
12
controls the measurement period for the short average

Second EMA Period
26
controls the measurement period for the long average

Signal EMA Period
9
controls the measurement period for the signal average
Plots:
MACD
The MACD line

MACD_Signal
The signal line for MACD

MACD_Hist
The spread between the MACD and Signal
The MACD indicator was developed by Gerald Appel and is simply a method of identifying the potential for two exponential moving averages to cross. MACD is calculated using a short length and a long length exponential moving averages (defaulted to 12 and 26) and calculating the difference between these two averages. In other words, it is the spread between the two averages. A signal line is then derived by calculating an exponential moving average of the MACD. This is plotted as the MACD Signal. Finally, the difference between the MACD and the MACD Signal is calculated and plotted in a histogram as the MA Hist.
The MACD is often used as a trend-following indicator, and may be interpreted similarly to other moving averages. That is, when the MACD crosses above the MACD Signal, an uptrend may be beginning, indicating a buy signal. Similarly, when the MACD crosses below the MACD Signal, a downtrend may be beginning. As an oscillator, the MACD can signal overbought and oversold conditions though there is no method to identify overbought and oversold conditions.
However it must be noted that while MACD is often used as a trending indicator, when price direction slows it will result in the spread between the two exponential moving averages reducing, thus causing the MACD line to decline in the case of an uptrend or rise in the case of the down trend. This will cause losses if MACD is utilized for crossovers of MACD line across the Signal line.




The point A displays and example of how MACD can rise even though for a while both averages are declining, but the spreads is narrowing. A similar event occurs at point B where it can be seen that MACD is diverging against price while both averages are pointing lower. Note at point C how the MACD Hist is displaying a slowing of the rise in the spread between MACD and Signal and on a break of the trend line price reverses lower.Finally, Point D gives another example of a bullish divergence between MACD and price.

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Commodity Channel Index (CCI)

Characteristic:
Momentum Indicator
Parameter Defaults:
CCI Period
20
controls the measurement period for the CCI
Plots:
CCI

The Commodity Channel Index is commonly used primarily to identify beginning and ending of cycles in futures markets and also to identify buy and sell opportunities. The CCI may also be used to signal overbought and oversold markets, much like an oscillator.
The CCI is calculated to arrange 70-80% of all price activity falls between +100 and -100 on its vertical scale. Many users believe a long position is indicated when the CCI exceeds +100 while a short position is indicated when the CCI falls below –100 but this interpretation should be based more on an individual’s market analysis. For example, it may be decided that -125 indicates taking a short position while a +150 indicates taking a long position for the specific market being evaluated.
Like other oscillators CCI may also used to signal overbought and oversold markets. Levels above the CCIlong line may indicate an overbought market and breakouts below the CCIshort line may indicate an oversold market.




The chart of the USDCHF 4-hourly market shows a successful application of CCI as an overbought/oversold indicator. Note that price reversed on every occasion that CCI moved above 100 or below -100, although one example shows a bearish divergence.
Because of the amount of time it spends in the neutral position (between the CCIlong and CCIshort lines) note that it is not unusual for CCI to miss the early part of a new move. Many users believe CCI crossing above or below zero identifies market conditions before the CCIlong and CCIshort lines are crossed.

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Bollinger Bands

Characteristic:
Support & Resistance and Volatility
Parameter Defaults:
MA Period
20
controls the measurement period for the average

Std Deviation
controls the placement of the bands around the average
Plots:
BLG UP
Upper Band

BLG DP
Lower Band
Developed by John Bollinger, Bollinger Bands were and are a volatility bands drawn around a simple moving average. They are calculated using the standard deviation of price over the same period as the moving average and plotted as lines above and below the moving average.
Since moving averages have been traditionally used to identify the underlying trend, Bollinger Bands combine this concept with the volatility of each individual market (the standard deviation) – to plot an envelope.




In brief, standard deviation represents a normalized distribution curve, shaped rather like a bell tapering off to each side. From a sample of data it is expected that on average, a deviation of one from the mean (the highest point) on each side would represent 68% of the sample results. A deviation of two from the mean would represent 95% of the sample results. Thus, the implication is that by taking two standard deviations from a moving average it will contain 95% of price action. Prices outside of the band should only occur 5% of the time and thus any movement out side should be considered an abnormality.
The distance between upper and lower Bollinger Bands is a reflection of volatility. As price forces itself away from the average, the standard deviation rises and thus the bands will fluctuate in varying amounts away from the average. During sideways periods, prices reaching the bands may indicate overbought or oversold conditions. Strong movement up through the upper band or down through the lower band may indicate the beginning of a trend.








The 10 minute GBPJPY chart shows how much of the price action in non-trending periods are broadly held within the bands. As the market trends, there is a persistent pattern of breach of the Bollinger Bands.


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