Wednesday, 16 May 2018

Explanation About Overbought & Oversold, On Balance Volume Indicator, Accumulation-Distribution and Bollinger Bands RSI

Overbought and Oversold Situations:

  • When Stochastic is below 20 it is considered oversold.
  • When Stochastic is above 80 it is considered overbought.


  • Positive and Negative divergence between price and stochastic is observed, which should be utilized to go and short.

Significance of shapes of Tops and Bottoms:

  • When Stochastic forms a narrow top, it indicates weakness of bulls, which means that the imminent downtrend can extend for longer time.
  • When stochastic forms a narrow bottom, it indicates weakness of bears, which means that the imminent up trend can extend for longer time.
  • When stochastic forms broad tops, it indicates strength of bulls, and uptrend can continue on the downside.
  • When stochastic forms a broad bottom, it indicates a strength of bears, and down trend can continue on the upside.

On Balance Volume Indicator:

On Balance Volume goes to measure the points of accumulation or distribution by associates the volume to price movements. Volume is added to the indicator if closing price moves up and subtracted if closing price moves down. The basic assumption, regarding OBV (On Balance Volume) analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by rising OBV. When the public then moves into the security, both the security and the OBV will flow ahead.

If the security’s price movement precedes OBV movement, “a non-confirmation” is said to have occurred. Non – confirmations can happens at bullish market tops (when the security increases without, or before, the OBV) or at bearish market bottoms (when the security decreases without, or before, the OBV). When the OBV is moving sideways and it is not making successive highs and lows, it is in a doubtful trend. Once a trend is established, it remains in force until it is broken.
Trading Signals:
  • On Balance Volume should be used in conjunction with other indicators. During a ranging market watch for the following:
  • Rising OBV warns of an upward breakout.
  • Falling OBV warns of a downward breakout.

  • A Rising On Balance Volume confirms on up-trend and a falling OBV confirms a down-trend.
  • Bullish divergence between OBV and price warns of market bottoms.
  • Bearish divergence between OBV and price warns of market tops.

The divergence between price and on balance volume. The price was moving down but the on balance volume line was moving up steadily indicating that smart money was getting in stock.
Accumulation –Distribution:

Accumulation- Distribution trails the connection between the cost and volume and performs as a leading indicator of cost movements. It gives a measure of the commitment of bulls and bears to the market and is used to detect divergences between volume and price action-signs that a trend is weakening. Accumulation Distribution is an enrichment of the On Balance Volume Indicator. It first associates opening and closing prices to the trading range for the period, the result is then used to weight the volume traded.
Trading Signals:

The soundest trading signals on the Accumulation Distribution are divergences:
  • Go Buy when there is a positive (bullish) divergence.
  • Go Sell when there is a negative (bearish) divergence.

Stop-losses should be placed below the most recent low (when going long) and above the latest high (when going short).
Bollinger Bonds:
  • Bollinger bond is a commonly used volume indicator. In Bollinger bonds in center there is a moving average, and on both sides of it there are bands of standard deviation lines.

Time Frame:

  • Popularly used setting for Bollinger band is “20” and simple moving average is used.
  • Using settings less than “10” can make the indicator very choppy so its not that useful.

  • The expansion and contractions of bands are indicators of the rise and fall if volatility in the markets or of a particular stock.
  • When there is a huge volatility, bands are expanded.
  • In range bound markets, the bands become very narrow.
  • After the bands contract too much, the probability of a breakout increases.
  • When the price line crosses Bollinger bands on upside or downside, the trend can continue in respective direction for some time.
  • Once a top or bottom is established above or below the bands, when price line again takes support or faces resistances, on band lines, trend reversal signal is achieved.
  • RSI should be used with Bollinger bands to maximize the benefits of trading signals we can get from it.

Bollinger bands and RSI

  • When price line touches the upper band of Bollinger bands, and at that time RSI is rising, but is still below 70, it indicates that current uptrend can continue for some more time.

  • When price line touches the lower band of Bollinger Bands, and at that time RSI is declining below 50, but is still above 30 it indicates that the downside continue for some more time.
  • When price line is above Bollinger bands, and RSI is above 70 or 80, then the changes of trend reversal are high.

  • We get sell signal when the price line crosses the upper band on downside, and RSI breaks below 70.
  • When price line is below Bollinger bands, and RSI is below 20 or 30, then the chances of trend reversal are high.

  • We get buy signal when the price line crosses the lower band on upside, and RSI rises above 30.
  • When the bands expand, they indicate high volatility as well as imply a change in trend.
  • It is generally plotted on prices, and when the price charts tends to touch either part of the band, trend reversal is expected from that point.

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