Flat Rate Indicators (Oscillators)

A steady trend in the market - This is a time when literally EVERYTHING works. Whatever trend indicator you take, whatever price model you use, there will always be a profit when the trend is good.

But after every trend there comes a FlatWe continue to open in the direction of the old trend. We continue to open in the direction of the old trend... and also on the breakout of peaks, and they, as if by chance, almost break through, and then go back to the flat. This is exactly the period we will talk about below.

We will, of course, talk about Flat Rate Indicators or oscillators (from Latin oscillatio - swaying, swinging). In a nutshell, an oscillator is an indicator that oscillates (swings) around the zero line or in the range of 0 to 100%. The main purpose of oscillators - show tops and lows during a flat, from which the market is likely to push off and head for the opposite border of the channel, either trending or reversing. Let's introduce the most popular oscillators

Stochastic

Building: stochastic is built in 3 steps. At the first step the window of, for example, 8 candles is taken, in which the highest maximum and the lowest minimum are located. These values will subsequently be 100% and 0% in the indicator window. The closing prices give a quick stochastic. Then, in step two, the fast stochastic is smoothed by a 3-period simple moving average to obtain a slow one. At the third step, a signal line is thrown over the slow stochastic, also most often with a period of 3.

The most commonly used parameters are: 5, 3, 3; 8, 3, 3; 14, 3, 3.

Usage/Trading Signals: is used both separately in the flat and in the trend with the trend indicator (as a filter). For purchase transactions Use a slow stochastic crossing the signal line from bottom to top. Alternatively, the stochastic may exit the oversold zone, which is often indicated by the 20 or 30 level. When the trend is strong, the stochastics do not have time to get down into the oversold area, so they increase it to 50-60 and use the pullback into that area for entry. Similar rules, but in the opposite direction, are used for trades on sale. Direct and inverse divergences are also used.

Fig. 1. Stochastic operation in a flat. 

Benefits: In a quiet market with pronounced price swings, the use of stochastics does not cause any inconvenience - the signals are very good, when the market moves like a sine wave. In a calm (and wide) flat this indicator shows well pinnacles и lowlands.

Fig. 2. Stochastic in a quiet trend.

Disadvantages: "sticking" in the trend - in a "ragged" flat, the signals lag a lot due to the use of two moving averages on the stochastics.

Fig. 3. Sticking with a strong trend.

Williams' %R

This indicator cannot be described separately from the stochastic. The reason: the Williams percentage range is the same as the fast stochastic, only with the scale inverted (from 0 to minus 100).

Building: to build the percentage range, just as for stochastics, we take a "window" of, for example, 14 candles, among which the highest maximum and lowest minimum are located, which in the indicator window, respectively, will become 0 and minus 100%. The indicator is built by closing prices and is not smoothed.

The most commonly used parameters are: 14, 21.

Usage/Trading Signals: is originally conceived as an indicator showing overbought/oversold zones. But since these notions are purely economic, then as far as the price chart is concerned, if the indicator is above -20 or below -80, it is a good indicator of overbought/oversold conditions. Rollback When there is a trend, or about the emergence of a wave against the trend with the subsequent change, or about the approach of the price to the flat boundary. And nothing else!

To enter a trade on purchase use an exit from the -80 zone (or others at their discretion). Similar rules, but in the opposite direction, are used for trades on sale. And thanks to the simple formula of the indicator, it is possible to calculate in advance where the -80 level or any other level will be.

Benefits of Williams' %R: if to use for entering the indicator reaching its extreme limits (-100 or 0), they often turn out to be sniper, and the trade does not hang in the red for a long time. But, nevertheless, this indicator needs a good filter (trend indicator), so as not to get into a deal at the reversal, hoping for the continuation of the trend. This indicator is a good solution to the problem of a "broken" flat, when the price bounces off the borders very quickly and the stochastic lags the signal as a result. The Williams indicator will not lag.

Disadvantages: is also "stuck" in the trend.

Fig. 4. Capturing peaks in the trend.

Fig. 5. "Ripped" flat.

Relative Strength Index, RSI

The indicator was developed by Welles Wilder in 1978.

Building: The indicator shows the ratio of the average value of closing price increase to the average value of closing price decrease in the price "window".

The most commonly used parameters are: 9, 14, 25.

Usage/Trading Signals: The most commonly used signal is divergence. This indicator is also used to construct trend linesThe price of the new trend line is often broken before the price breaks through its trend line on the chart.

Fig. 6. Divergence and breakdown of the trend line.

Benefits: Breakout of the trend line on the indicator heralds a price reversal faster than a price breakout of its trend line does. Also, price patterns that are not visible or indistinct on the chart are observed on the indicator.

Disadvantages RSI: False signals of overbought/oversold trends.

Envelopes - Envelopes

Indicators that show the boundaries of the price channel/flot boundaries directly on the price chart.

The most common ones are: Envelopes, Bollinger BandsThe Price Channel (the purpose of the latter is different from the first two and is constructed differently).

Building: The indicator is constructed using moving averages - the same moving average is set aside from the "main" moving average up and down at the same distance.

As a result, such an oscillator combines the characteristics of both trend and flat indicators. In other words, this indicator can be considered as the oscillation of the price around its sliding bar to the upper and lower bounds (compare, for example, with stochastic, which has bounds 0 and 100%). Envelopes are constructed so that their limits contain about 95% of price.

Often parameters are used: Envelopes - depends on the preferred moving average, Bollinger Bands - SMA(20) and two standard deviations.

Usage/Trading Signals: on-trend for shopping use the entry below the slip, to exit the market - the upper limit of the envelope. In the flat, trading from border to border works. Similar rules, but in the opposite direction, are used for trades on sale.

Fig. 7. Behavior of the envelope in a trend and a flat.