**Relative Strength****Index****Intraday Momentum Index****Rate of****Change****Stochastic Oscillator****Commodity Channel****Index**

Momentum

**“Momentum” refers to the velocity or the rate-of-change****of a security’s price****Momentum indicators oscillates above or below****an equilibrium line****All momentum indicators compare price changes****from a period to another****They measure if a rising trend is accelerating or decelerating****or whether prices are declining at a faster or slower pace**

Relative Strength Index - RSI

**Developed by J. Welles Wilder and featured in his 1978 book “New Concepts in Technical Trading Systems”****RSI compares the average price change of the bullish bars****with the average change of the bearish bars of a security**

RSI - Calculation

**U = average of upward price changes****D = average of downward price changes****The default parameter for RSI is 14 periods**

RSI - Interpretation

**RSI fluctuates between 0 and 100 with equilibrium level at 50****As RSI goes above 50, upward momentum increases****when it goes below 50, downward momentum increases****RSI is also used to reveal extreme price conditions****A security is considered overbought when RSI moves****above 70 and oversold when RSI moves below 30**

Intraday Momentum Index - IMI

**IMI – developed by Tushar ****Chande**** and considered a cross-breed between the RSI and Candlestick Analysis**

**It uses the relationship between opening and closing ****prices to determine if the period is “Bullish” or “Bearish”**

**IMI separates the Bullish and Bearish candlesticks and performs ****an RSI calculation on the Candlestick bodies**

IMI - Calculation

**The IMI default look-back period is 14**

## IMI - Interpretation

**IMI fluctuates between 0 and 100 with****its equilibrium level at 50****As IMI goes above 50, upward momentum increases****as IMI goes below 50, downward momentum increases****IMI is also used to reveal extreme price conditions****A security is considered overbought when IMI moves****above 70 and oversold when IMI moves below 30**

Rate of Change - ROC

**Rate-Of-Change – a momentum oscillator that measures the****percent change in price from one period to the next****The result is the percentage that the security’s price****has changed in the last x-periods****ROC is identical to momentum oscillator with****the only difference of momentum being normalized****The ROC has an equilibrium of 0 whereas the momentum oscillator fluctuates above or below 100**

ROC - Calculation

**ROC = Close Today – Close x periods ago****How a 4 look-back period ROC is calculated****The****default look-back period is 21**

ROC - Interpretation

**Centerline Crossover: ROC fluctuates above or below its equilibrium level at zero****As the advance accelerates, ROC expands into positive territory****As the decline accelerates, ROC dives deeper****into negative territory****ROC is used to reveal extreme price conditions****Traders can visually identify levels that caused previous turning points to identify overbought and oversold areas**

Stochastic Oscillator

**The Stochastic Oscillator is another popular momentum indicator developed in the late 1950s by George C. Lane****It compares the security’s closing price relative to its price****range over a given period of time****The Oscillator does not follow price, it does not follow volume****but rather follows the speed or momentum of prices**

Stochastic - Calculation

**Let’s check how a 5 period Stochastic****is calculated****This plot is also known as the Fast Stochastic**

**As Fast %K is choppy and sharp it can be replaced****with the Slow %K****For signals, add to the %K the %D line which****is a x-period SMA of the Slow %K****The default look-back setting for the Stochastic****is 5 for Fast %K, 3 for %D, 3 for Slow %K**

Stochastic - Interpretation

**Stochastic oscillator fluctuates between 0 and 100****Readings above 80 indicate that price is near its high****Readings below 20 indicate that price is near its low****It is used to reveal extreme price conditions****A security is considered overbought when %K moves above 80****and oversold when %K drops below 20**

Commodity Channel Index - CCI

**The Commodity Channel Index (CCI), is a versatile indicator****developed in 1980 by Donald Lambert****It can be used to identify the beginning of a new trend****or warn of extreme conditions****Originally developed to identify cyclical turns in commodities, but the indicator can be successfully****applied to other asset classes****CCI measures the current price level relative to an****average price over a given period of time**

CCI - Calculation

**Constant is 0.015 and Mean Deviation is calculated as follows: **

**Subtract the 20-period SMA of TP from each period’s TP****Add their absolute values and divide by number of periods**

CCI - Construction

**The default look-back setting for****the CCI Oscillator is 20 periods****The constant is at 0.015 to ensure that****70% –****80% of CCI values would fall between -100 and +100**

CCI - Parameters and Interpretation

**The CCI fluctuates above and below the zero level **

**Surges above +100 reflect strength and can signal the ****start of an uptrend**

**Plunges below -100 reflect weakness and can signal the ****start of a downtrend**

**Chartists can look for overbought or oversold ****conditions around ±200**

**As an unbound oscillator, extreme levels may depend on ****the volatility of the security**

**Oscillator Analysis****Direction****Area****Divergences**

Three Dimensions Analysis

**Direction – Bullish or Bearish****Area – Overbought or Oversold****Divergence – Bullish or Bearish**

Direction – Bullish or Bearish

**The same techniques that are used for analyzing price trends can be applied to momentum****When the indicator goes below its trendline we have the bearish signal****When the indicator goes below its moving average we have a bearish signal and vice versa****A trend reversal in momentum is not always associated with a similar reversal in the price – PRICE IS THE BOSS**

Area - Overbought & Oversold

**The financial markets are essentially driven by psychological forces****Our emotions move from one extreme to another,****from greed to fear, from hope to despair****This is what causes momentum indicators to fluctuate from oversold to overbought levels****Momentum reflects crowd psychology and measures the intensity of the emotions****of market participants**

**Banded oscillators fluctuate between****0% and 100%****For RSI and IMI extreme levels are those beyond****70% and 30%****For Stochastic extreme levels are those beyond****80% and 20%****Other oscillators are****unbanded****and traders must manually identify overbought and oversold lines****Extreme levels are manually determined where the indicator previously topped or bottomed**

**Extreme momentum readings indicate a possible correction in price****Signals are used by some traders to exit or enter new positions against the previous direction****A bullish signal occurs when the indicator goes below 30 and then crosses above it from below****A bearish signal occurs when the indicator goes above 70 and then crosses below it from above**