Guest Post by Kotak securities where they shares some of the key takeaways for investors and traders when using technical indicators like MACD, RSI or Stochastic.
I don’t prefer to have too many Guest Posts on my blog, I could not say NO to their views on some of the advance technical indicators that I don’t use myself when doing technical analysis. My strategy is more on Price Action Strategy but Kotak securities shares some of the key takeaways for investors and traders when using technical indicators like MACD, RSI or Stochastic.
Over to Kotak Securities.
Moving Average Convergence Divergence (MACD)
Do’s
- When using a technical analysis indicator such as the MACD, investors and traders need to pay attention to signal line calculations. It is best to buy when MACD line moves above zero (a bullish crossover), and sell when the signal line falls below zero (a bearish crossover).
- To catch a trending move, watch out for Kiss of life and Kiss of death(A term used where MACD moves up till trigger and then starts moving down) patterns.
- Always confirm prices before initiating position.
Don’ts
- Avoid anticipating stock patterns as unforeseen crossovers may be triggered.
Relative Strength Index (RSI)
Do’s
- A popular technical indicator to measure speed and scale of directional price movements, the best way to analyses the RSI is to look for divergences (both positive and negative) to ‘recognize’ imminent market turning points, but not ‘actionable’ points.
- Always be on the lookout for stocks coming out of Overbought and Oversold regions.
- Only when prices are confirmed act on divergences (preferably averages) so as to initiate trade.
Don’ts
- The most common mistake with respect to stocks entering overbought zone is that investors refrain from long side and start looking for shorting.
- Likewise, when a stock enters oversold zone, investors tend to refrain from short side and look at buying.
- Avoid bias when looking at either or both overbought and oversold regions.
Stochastic
Do’s
- A popular method to predict price turning points, one should lookout for divergence-convergence with a crossover towards the right side of cycle to act on a trade. For instance,if stochastic value rises from lower levels of 20 to trade above 30, then one should look for going long with price confirmation. In the same way, if value falls from relatively higher levels of 80 with the crossover to trade below 80 then should look for going short and consider selling.
- Always lookout for price confirmation (preferably averages) before initiating trade.
Don’ts
- Avoid selling the stock which has just entered the overbought zone.
- Avoid buying a stock which has just entered the oversold zone.
- Avoid bias when looking at either or both overbought and oversold regions.
Technical analysis indicators are great means to understand and predict trade patterns, which further helps enter or exit a trade more decisively. They do not initiate trade on their own, but they help indicate patterns that govern the course of the trade. Readings from technical indicators should only be acted upon after confirming prices to verify the significance of the indicator reading. Only when prices have been confirmed should the trade be initiated with stop loss. Markets have a tendency to remain volatile and one should always remember this while using technical indicators and oscillators.
About Kotak Securities
Kotak Securities is one of India’s leading share broking firm offering stock trading, mutual fund and IPO investing service’s along with a research division specializing in Sectoral research and Company Specific Equity Research. Express your views on their Facebook Page and Twitter Handle (@KotakSecurities) or you can also browse through their various videos on YouTube.
Hi, Shabbir I am die hard fan of slow stochastic indicator. I use it in almost all of my trades my experience for trading divergence has been wonderful using stochastic.
Glad to read that.
Thanks Shabbir bhai, for give me inform equity market strategy.
Trade Strategy should be clear to go with the trend rather taking contra call. Stop loss is the key to enter the trade. Determine the stop loss price using averages(depending on the time frame it is traded) or candle stick patterns.
Pretty valid observations. I wish someone would form a strategy to deal with situations where the overbought and oversold regions (especially in stochs) continue being overbought or oversold and prices make considerable moves in the same trend. I read in a Traderji post that if the the indicators continue in the overbought / oversold regions for five continuous candles, chances are same trend will continue rather than an imminent reversal.