Leading Indicators (part 3)
March 20th, 2007 by daryIn the world of technical analysis, Leading indicators such as the Stochastic, or RSI oscillators, are used to try and predict price movement.
Leading indicators are typically used to provide an indication as to how ‘overbought’ or ‘oversold’ an equity is. The basic premise associated with using leading indicators is that when an equity is considered oversold it will re-bound and when it is considered overbought it will pull-back. Leading indicators are best suited to establishing entry and exit points based on price pivot points within an established trend, however for higher risk investors they can be used to try and identify price pivot points where a trend is potentially about to change direction. Lagging Indicators on the other hand are best suited to establishing the direction of a trend.
Consider the following General Electric (GE) charts that represent the 2 year price and corresponding Stochastic charts based on a weekly interval period:
In this example the Stochastic indicator works well as a leading indicator when GE was bouncing between highs and lows between October 2005 and the end of 2006. On each occasion when the stochastic was heavily oversold i.e. at or near 0, it corresponded with a price low and when the stochastic was heavily overbought, i.e. at or near 100 it corresponded with a price high.
You can use TimeToTrade to notify you when Stochastic and RSI investment conditions are met using the alert triggers beside each chart. For example you can set up an alert that will notify you when the Stochastic falls below 20% follow by a crossover whereby the green line (%k) rises above the red line (%d). When your investment conditions are met, you can be notified by email, text message to your mobile phone or instant messenger.