Plotting different indicators
together and combining their analyses is a popular analytical method for timing
trades. But how about using one indicator and varying its parameters? Stuart
Meibuhr takes stochastics and varies the length of the lookback for trades of
different time frames .
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The popular concept "if one is
good, two are better" has often been used by technicians in the selection
of indicators in the belief that combining the signals of different indicators
is a more reliable strategy than following just one. But this idea has rarely
been applied to the use of multiple-length indicators, with the exception of
perhaps multiple-length moving averages. Few other indicators have been studied
for their value as multiple-length trading tools. In a recent STOCKS & COMMODITIES article, Barbara Star showed that
the crossover of the seven-day and the 14-day commodity channel index (CCI, short and intermediate term) could
serve as an early warning system forewarning of impending price reversal for
live cattle. Star sometimes also used the 28-day CCI (long term) and even suggested that the three CCI plots be overlaid, with buying or
selling then occurring when all the plots turn at the same time above or below
the 100 level.
One
logical conclusion stemming from these charts was that a long-term stochastic
could help the investor or trader remain on the correct side of the market.
In contrast, Martin Pring used
multiple-length rate of change (ROC) indicators on monthly and daily price data for the Standard &
Poor's 500 index and other markets. He showed that when three ROC plots peak or bottom together,
significant moves occur in the S&P 500. With monthly data, he used six-,
12- and 24-month ROC curves that
were smoothed by six- and nine-month moving averages. For daily data, he used
10-, 15- and 30-day ROC curves.
Walter Bressert, in his book The
Power of Oscillator/Cycle Combinations, calculated the relative strength
index (RSI) indicator for different lengths
using the Fibonacci series up to 21 on daily Treasury bond data. When all the RSI curves peaked above the 70 level at
the same time, the T-bond price would also tend to make a significant peak. A
similar situation existed for lows when the RSI curves bottomed below the 30 line.
These multiple-length indicators
appear to reflect the importance of the interaction of several different time
cycles. When these cycles are peaking (or bottoming), all the different length
indicators are also peaking or bottoming, and so, a low-risk trading
opportunity exists. How the trader takes advantage of that opportunity reflects
the needs of the individual trader; securities, options (puts or calls), LEAPs (long-term equity appreciation
securities) and futures are all valid trading vehicles. Traders select the
vehicles that best meet their trading time frames for the best possible dollar
gain per dollar invested. And so, it would behoove us to examine the benefits
that can be gleaned from the use of multiple-length stochastic plots (see
sidebar, "Calculating stochastics").
In
comparing the many charts, I realized that at certain times,
many
of the stochastics reached an extreme value simultaneously. That led me to
overlay the stochastic plots.
Stochastic & RSI
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