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RSI parameter settings

RSI articles and reports

Signals generated by RSI

Examples of the different RSI parameter settings

Stochastic parameter settings

Stochastic articles and reports

Signals generated by Stochastic Oscillator

The Stochastic Oscillator generates signals in three main ways:

1. Extreme values when the 20% and 80% trigger lines are crossed. Buy when the stochastic falls below 20% and then rises above that level. Sell when the stochastic rises above 80% and then falls below that level. The pattern of the stochastic is also important; when it stays below 40-50% for a period and then swings above, the market is shifting from overbought and offering a buy signal. And vice versa when it stays above 50-60% for a period of time.
   
   
2. Crossovers between the %D and %K lines. Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line. Beware of short-term crossovers. The preferred crossover is when the %K line intersects after the peak of the %D line (right-hand crossover). Crossovers often provide choppy signals that need to be filtered through the use of other indicators.
   
   
3. Divergences between the stochastic and the underlying price. For example, if prices are making a series of new highs and the stochastic is trending lower, you may have a warning signal of weakness in the market.

For a more conservative approach, extreme values should be used as the warning signals and the follow through the 50 line for the confirmation of the trend change. Some traders also state that by moving the extreme values to the 10 and 90 lines ensures a more reliable signal.

Examples of the different slow stochastics parameter settings

The general rule of thumb for most indicators is that when you increase the parameter the indicator "smooths out." Larger numbers for parameters make the indicator less sensitive to recent moves and the longer-term trend is more apparent. When you decrease the parameter value, the indicator becomes more sensitive to the recent price moves and allows the trader to react more quickly. The shortfall to this is that the indicator no longer shows the longer-term trend well and may report signals during a correction rather than a breakout (which are what some short term traders are looking for).

Choosing some technical indicators

Now that we have covered trend, timeframes and parameter settings, we can get down to choosing some complimentary technical indicators.

So here is the next tip. According to Bollinger, one of the biggest mistakes in technical analysis is the multiple counting of the same information. For example, using different indicators all derived from the same series of closing prices to confirm one another.

There are quite a few technical indicators featured on ChartFilter.com. Where do you begin? I would recommend starting with the following approach to using a combination of indicators in your analysis.

Sample checklist

Other sample DJIA checklists:

Sample checklist applied to MSO over a short period.

The answer to the question: "Which indicators work for me?" can best be answered by building a checklist, setting up your indicators to your timeframe, testing, fixing and repeating. When you are confident in your signals, then you will know what indicators work for you.

Some basic rules should apply no matter what your indicator choices are. Ride your rights and cut your losses. When you are wrong, find out why (there is always a reason) and fix the system so you do not repeat the mistake. Stick to the rules - they are there for a reason.

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