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Technical Analysis – Summary of Oscillators: ROC, RSI, Stochastic, MACD

Posted by ozstock on Nov 23rd, 2008

This is a brief summary of the main types of oscillators for technical analysis. They include Rate of Change, Relative Strength Index (RSI), Stochastic Oscillator, MACD. In general, the following points should be noted before use:
1. OScillators are secondary indicators – Always consider the the Basic Trend first before using oscillator to look for change in trend.
2. Oscillators, by their nature, tend to be leading indicators.
3. Useful at extreme points, when market is overbought or oversold.
4. Divergence between price and oscillator is an important warning.

Note: This article does not aim to be comprehensive. It is hear to provide a quick summary and comparison. For details on technical indicatos, one site is:
http://www.forexrealm.com/technical-analysis/technical-indicators.html

Rate of Change (ROC) = 100% * (Price(now) – Price(Ndays ago)) / Price(Ndays ago)
Typical Paramenters: N >= 10.
Sensitivity: small N is more sensitive.
Signals: ROC crossing zero upward and market trend is up => Buy and vice versa.
Can fit trend line to ROC.

Relative Strength Index (RSI)
Advantages: Smoother than ROC and provide a range from 0 to 100.
Typical Paramenters: N = 5 or 7 for short; 9 or 14 for medium; 21 or 28 for long term
Sensitivity: small N is more sensitive.
Signals: Overbought when above 70 (80 for Bull market), Oversold when below 30 (20 for Bear market)
Can fit trend line to RSI.
Divergence: Important signal when RSI diverge with Price when above 70 or below 30.

Stochastic Oscillator: K, D
Signals: Sell when faster K line crosses the slower D line downwards from above 80, as well as the D line and price diverge with price still upwards. Vice versa for crossing above 20.

Moving Average Convergence / Divergence (MACD)
Typical Paramenters: 12, 26, 9
Signals: Faster MACD line cross above slower Signal line => buy. Vice versa for sell. Also Overbought when far above zero. Oversold when far below zero.
Divergence: When in Oversold region, MACD move up ahead of price line. Vice versa.