overbought. StockSharphttps://stocksharp.com/handlers/atom.ashx?category=tag&id=overbought&type=articlesCopyright @ StockSharp Platform LLC 2010 - 20242024-03-28T09:05:35Zhttps://stocksharp.com/images/logo.pnghttps://stocksharp.com/topic/24701/Mean Reversion Trading techniques in Algorithmic Trading2023-05-08T16:21:11Z2023-05-14T08:09:03ZPannipahttps://stocksharp.com/users/164332/info@stocksharp.com<div align="center"><a href='https://stocksharp.com/file/142842/maxresdefault_jpg/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/142842/maxresdefault_jpg/?size=500x500" alt="maxresdefault.jpg" title="maxresdefault.jpg" /></a></div><br /><br />💥💥Mean Reversion Trading is a popular strategy in quantitative analysis that involves identifying assets whose prices have deviated significantly from their average levels and then entering a trade with the expectation that the price will eventually return to the mean. The strategy is based on the assumption that markets tend to oscillate around a mean value, and that deviations from this value will eventually be corrected.<br /><br />There are several techniques used in Mean Reversion Trading, some of which include:<br /><br />👉 1. Moving Average: A common technique is to use moving averages as a mean-reverting indicator. When the price of an asset moves away from the moving average, it is considered to be overbought or oversold, and a trader can enter a trade with the expectation that the price will eventually return to the moving average.<br /><br />👉 2. Bollinger Bands: Bollinger Bands are a technical indicator that measures the volatility of an asset's price relative to its moving average. When the price of an asset moves outside of the upper or lower Bollinger Band, it is considered to be overbought or oversold, and a trader can enter a trade with the expectation that the price will eventually return to the moving average.<br /><br />👉 3. Mean Reversion Oscillator: The Mean Reversion Oscillator is a technical indicator that measures the distance between an asset's price and its mean value. When the oscillator is above a certain threshold, the asset is considered overbought, and when it is below a certain threshold, the asset is considered oversold. A trader can enter a trade with the expectation that the price will eventually return to the mean value.<br /><br />👉 4. Pairs Trading: Pairs trading is a mean reversion strategy that involves identifying two assets that are highly correlated and trading the difference in their prices. When the price of one asset deviates from the other, a trader can enter a trade with the expectation that the prices will eventually converge.<br /><br />👉 5. Relative Strength Index (RSI): The RSI is a momentum oscillator that measures the strength of a security by comparing its average gains to its average losses over a certain period of time. The RSI ranges from 0 to 100, and a security is considered oversold when the RSI falls below 30 and overbought when the RSI rises above 70. Traders use the RSI to identify potential buy and sell signals when a security becomes oversold or overbought.<br /><br />👉 6. Moving Average Convergence Divergence (MACD): The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. Traders use the MACD to identify potential buy and sell signals when the MACD line crosses above or below the signal line.<br /><br />👉 7. Mean Reversion Trading Strategies: Mean reversion trading strategies involve buying or selling a security when its price moves away from its mean, with the expectation that the price will eventually return to its mean. One example of a mean reversion trading strategy is pairs trading, where a trader identifies two securities that are highly correlated and buys the underperforming security while simultaneously selling the overperforming security. The trader then waits for the prices to converge before closing the positions.<br /><br />👉 8. Statistical Arbitrage: Statistical arbitrage is a mean reversion strategy that involves identifying securities that are mispriced based on their historical relationships. Traders use statistical models to identify these mispricings and then buy the underpriced security while simultaneously selling the overpriced security. The trader then waits for the prices to converge before closing the positions.<br /><br /><div align="center"><a href='https://stocksharp.com/file/142843/mean-reversion-trading_png/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/142843/mean-reversion-trading_png/?size=500x500" alt="mean-reversion-trading.png" title="mean-reversion-trading.png" /></a></div><br /><br />💥These are just a few examples of the techniques used in mean reversion trading. The success of the strategy depends on the trader's ability to identify assets that are likely to revert to their mean values and to enter and exit trades at the appropriate times.https://stocksharp.com/topic/24277/What is William's %R Indicator similar or different to Stochastic Indicator? And overbought and oversold signals2023-01-05T18:49:05Z2023-04-24T16:06:38ZPannipahttps://stocksharp.com/users/164332/info@stocksharp.com<div align="center"><a href='https://stocksharp.com/file/142448/williams-percent-range_png/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/142448/williams-percent-range_png/?size=500x500" alt="williams-percent-range.png" title="williams-percent-range.png" /></a></div><br /><br />💥Williams %R, also known as Williams Percent Range, is a technical indicator used in financial analysis to measure oversold or overbought conditions of an asset. It was developed by Larry Williams and is similar to Stochastic oscillator in its calculation and interpretation.<br /><br /><b>Williams %R is calculated using the following formula:</b><br /><br />%R = (Highest High - Close)/(Highest High - Lowest Low) x -100<br /><br />💥Where Highest High is the highest price in a certain period, Lowest Low is the lowest price in the same period, and Close is the closing price.<br /><br />💥Like the Stochastic oscillator, the Williams %R fluctuates between 0 and -100. When the indicator is above -20, the asset is considered overbought, and when it is below -80, it is considered oversold. Traders may use these signals as a potential time to sell or buy respectively.<br /><br />💥One key difference between the Williams %R and the Stochastic oscillator is that Williams %R is a momentum oscillator that reflects the level of the close relative to the high-low range over a certain period, while Stochastic oscillator compares the closing price to the range of prices over a certain period of time. Additionally, the Williams %R is considered to be more volatile than the Stochastic oscillator, meaning it can provide signals for more frequent price reversals.<br /><br /><div align="center"><a href='https://stocksharp.com/file/142449/stochastic-divergence_pre0_png/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/142449/stochastic-divergence_pre0_png/?size=500x500" alt="Stochastic-Divergence_pre0.png" title="Stochastic-Divergence_pre0.png" /></a></div><br /><br />💥The Stochastic Indicator is a technical analysis tool used to measure the momentum of an asset's price relative to its price range over a given period of time. It compares the current price of an asset to its price range over a specified period of time and generates signals based on overbought and oversold conditions. The Stochastic Indicator consists of two lines: %K, which measures the current price in relation to the high and low range over a specified time period, and %D, which is a moving average of %K. It is similar to William's %R Indicator in that they both measure overbought and oversold conditions, but the Stochastic Indicator is based on the idea that closing prices tend to close near the high of the price range in an uptrend, and near the low of the price range in a downtrend, while Williams %R is based solely on the high-low range.<br /><br />💥Williams %R and Stochastic Indicators are both momentum oscillators used to identify overbought and oversold conditions in the market.<br /><br />💥The main difference between the two is in the way they are calculated. Williams %R uses the highest high and the lowest low of the last n periods, while Stochastic uses the current closing price in relation to the high-low range of the last n periods.<br /><br />💥In terms of overbought and oversold signals, both indicators use the same threshold levels of 20 and 80. When the Williams %R or Stochastic value falls below 20, it is considered oversold, and when it rises above 80, it is considered overbought.<br /><br />💥However, Williams %R tends to be more volatile than Stochastic, which can sometimes result in more false signals. It is also known for its ability to identify divergences between the indicator and the price action, which can be useful for predicting potential reversals in the market.<br /><br />💥This indicator is named after its inventor, Mr. Larry Williams, and is based on the same concept as the Stochastic indicator. However, the graph is inverted, with the scale climbing from 0 down to 100 or a small value above it. Therefore, the overbought area is above the 20 line and the oversold area is below the 80 line. Instead of measuring the current price in relation to the high-low range of the last n periods like the Stochastic indicator, Williams %R measures the distance between the closing price and the high in N days, usually 10 days.<br /><br />💥William's %R indicator is almost the same as the Stochastic indicator, so some people refer to William's %R as the 10-day Stochastic. However, William's %R uses the 80, 20 line instead of the 70, 30 line of the Stochastic indicator because it is more sensitive and prone to false signals. In fact, William himself suggested using a buy signal below 95% and a sell signal above 10% (keep in mind that the values run upside down from 0 to 100).<br /><br />💥Unlike the Stochastic indicator, William's %R does not offer a moving average as a signal. Some analysts use a moving average, but because William's %R is a Stochastic, it runs very fast and can sometimes give an error signal. Therefore, some technical analysts use it only in combination with other technical tools.<br /><br />💥Using William's %R for stock prices can be seen in the example image below. An arrow below or equal to 95 represents a buy or hold moment, while an arrow equal to 10 represents a sell or drain moment. However, it should be noted that William's %R adjustment sometimes does not correspond to the share price, as seen in the example around numbers 1, 2, and 3. William's %R can also show divergence with the price, which makes the signal more significant. You can learn more about William's %R indicator from <b><a href="https://stocksharp.com/store/trading-terminal/" title="Terminal - free trading terminal and charting application for manual trading">Terminal</a></b>.<br /><br /><div align="center"><a href='https://stocksharp.com/file/136493/williamr-02_png/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/136493/williamr-02_png/?size=500x500" alt="william%R 02.png" title="william%R 02.png" /></a></div><br /><br />https://stocksharp.com/topic/24268/What is the difference between the Relative Momentum Index (RMI) indicator and the Relative Strength Index (RSI) indicator when overbought and oversold?2023-01-01T16:09:19Z2023-04-23T17:21:43ZPannipahttps://stocksharp.com/users/164332/info@stocksharp.com<br /><div align="center"><a href='https://stocksharp.com/file/136257/kwit9ogq_mid_png/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/136257/kwit9ogq_mid_png/?size=500x500" alt="kwIt9OgQ_mid.png" title="kwIt9OgQ_mid.png" /></a></div><br /><br />💥The Relative Momentum Index (RMI) and the Relative Strength Index (RSI) are both momentum indicators that are commonly used to analyze financial markets. However, there are some differences between the two indicators when it comes to overbought and oversold conditions.<br /><br />💥The RSI indicator is typically used to identify overbought and oversold conditions in a market. It oscillates between 0 and 100 and is considered overbought when it reaches 70 or higher, and oversold when it reaches 30 or lower. When the RSI is in overbought territory, it suggests that the market is overextended to the upside and may be due for a correction. Conversely, when the RSI is oversold, it suggests that the market is oversold and may be due for a rebound.<br /><br />💥On the other hand, the RMI indicator is a more recent innovation that aims to improve on the shortcomings of the RSI. While the RMI also oscillates between 0 and 100, it is designed to be more responsive to changes in market conditions. The RMI uses a different calculation method that incorporates both the positive and negative momentum of price changes, as opposed to the RSI which only considers the magnitude of price changes.<br /><br />💥When it comes to overbought and oversold conditions, the RMI can be interpreted differently than the RSI. The RMI is considered overbought when it reaches 70 or higher, and oversold when it reaches 30 or lower, just like the RSI. However, the RMI may reach these levels more frequently than the RSI, due to its more responsive nature. Therefore, it may be necessary to adjust the overbought and oversold levels when using the RMI in order to get more accurate signals.<br /><br />💥Overall, while both the RMI and RSI can be useful for identifying overbought and oversold conditions in the market, the RMI may provide more timely and accurate signals due to its more responsive calculation method. However, traders should still use caution and look at other indicators and factors when making trading decisions.<br /><br />💥Relative Momentum Index (RMI) One of the disadvantages of the RSI is that the RSI itself is not always evenly distributed between the overbought and oversold areas due to the effect of calculating the parameter and denominator in the formula, which can sometimes skew the distribution of the RSI toward the overbought or overbought areas. Too much oversold in either way, making the signal unsuitable for short-term use. Some people solve this problem by using a moving average as a supplement to send trading signals, some people use a trend line charting technique to supplement.<br /><br />💥To address this disadvantage, Roger Altman proposed an idea to improve the RSI with one more parameter: instead of measuring today's price change compared to yesterday's gain or loss, it measures the change in price. Today versus 3 days ago, which is a measure of y-day Momentum. Therefore, Altman calls this updated RSI the y Relative Momentum Index (RMI) indicator.<br /><br /><div align="center"><a href='https://stocksharp.com/file/136258/rmi-1491674567cp48l_png/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/136258/rmi-1491674567cp48l_png/?size=500x500" alt="rmi-1491674567cp48l.png" title="rmi-1491674567cp48l.png" /></a></div><br /><br />💥We can also say that the RSI is a special case of the RMI, that is, the RSI is the RMI in case y=1. Since the RSI compares today's price with yesterday's price, the value of the RMI ranges between 0 to 100 and its interpretation or analysis is exactly the same as RSI, but has the advantage that If we choose a good y value for Momentum calculations, it will help the RMI to spread well overbought and oversold ranges and deliver a more accurate signal.https://stocksharp.com/topic/24266/Overbought, Oversold, Divergences in Relative Strength Index (RSI) indicators 2022-12-30T21:14:51Z2023-04-18T13:18:41ZPannipahttps://stocksharp.com/users/164332/info@stocksharp.com💥 The Relative Strength Index (RSI) is an indicator developed by J. Welles Wilder, based on Momentum, but with improvements. With Momentum, two things usually happen:<br /><br />1. If very unusual past data is used, it can cause a change in Momentum, even though there is very little movement in the current price.<br /><br />2. There is a problem in finding the standard zone to capture the exact overbought/oversold zone. In Momentum, we only have a zero line, and we can only indicate a level of 1 or 100 (in the case of Rate of Change), but we can't determine how high the momentum must go up to be called overbought or how low it must go to be called oversold.<br /><br /><div align="center"><b>Hence, the RSI was invented to solve this problem. The calculation formula is as follows:</b></div><br /><br /><div align="center"><a href='https://stocksharp.com/file/136247/rsi-calc_jpg/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/136247/rsi-calc_jpg/?size=500x500" alt="rsi-calc.jpg" title="rsi-calc.jpg" /></a></div><br /><br />💥Provided that RS is the ratio between the 7-day exponential moving average of gains versus the 7-day exponential moving average of losses (regardless of the market), the number of days used. Like any other oscillator, with a small number of days, the RSI is very sensitive to changes, which is suitable for those who like to speculate on a day-to-day basis. Commonly seen values for the number of days used are 4, 9, and 14. In addition, the RSI is also a tool used to measure the strength of a stock price's fluctuation, whether it fluctuates in a way that is driven or has inertia. The RSI value is always between 0 and 100. If the RSI is high, it indicates that in the past several days, the price has moved higher than it has decreased. A low RSI value indicates that the price, in the past few days, on average, has decreased more than it has increased.<br /><br /><b>The rules that apply to the widely used RSI are as follows:</b><br /><br />💥Overbought and Oversold levels are usually set at the RSI level of 70 or higher, indicating that the price has moved up excessively, and 30 or lower, indicating that the price has moved down excessively. Some traders wait for the RSI to cross the 30 line before buying, while others may use the moving average of the RSI as a signal and start trading when the line begins to point up in the oversold area (or pointing down in the overbought area in the case of selling). However, the past behavior of the RSI with its price during that period should also be taken into consideration as there are many instances where it may give erroneous results. Therefore, the mentioned rules should be considered together.<br /><br />💥Price patterns may not be apparent in the price action but can manifest or be found first in the RSI, which can serve as an early warning signal. Resistance or support levels may also be more prominently seen on the RSI in price, which can act as support or resistance for the RSI. The RSI and price relationship can provide a useful signal for trading decisions.<br /><br /><div align="center"><a href='https://stocksharp.com/file/136497/rsi-02_png/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/136497/rsi-02_png/?size=500x500" alt="RSI 02.png" title="RSI 02.png" /></a></div><br /><br />💥Divergences occur when, for example, the price breaks through the previous peak, while the RSI fails to do so and remains in its original balance. This is an early warning that there is a chance that the price will decline in the future because the RSI is a measure of momentum. Even if the price continues to rise, the RSI may decline due to price inertia.<br /><br />💥Divergence signals between the RSI and the price are often seen when the RSI fails or fails to swing. For example, while the RSI is in an upward direction and above the 70 line (overbought), but cannot create a new higher top and a new lower bottom. This is called a Top Failure Swing. Conversely, if the RSI is below the 30 line (oversold) in a downward direction but can create a new higher top and bottom, it is called a Bottom Failure Swing, which will be a reversal signal.<br /><br />💥We can see that these important signs usually occur in the OB/OS bands. As mentioned above, the RSI performs best in this area. Another important characteristic of divergence in the OB/OS area is that the RSI fails to break the resistance from the tops or the OB/OS bands. If the old base is gone, it will warn of an upcoming reversal.https://stocksharp.com/topic/24247/Let’s understanding the words Overbought, Oversold, Convergence and Divergence for basic indicator readings. 2022-12-24T18:42:34Z2023-04-18T12:21:39ZPannipahttps://stocksharp.com/users/164332/info@stocksharp.com<br /><div align="center"><a href='https://stocksharp.com/file/136185/screenshot_19-3_jpg/' class='lightview' data-lightview-options="skin: 'mac'" data-lightview-group='mixed'><img src="https://stocksharp.com/file/136185/screenshot_19-3_jpg/?size=500x500" alt="Screenshot_19-3.jpg" title="Screenshot_19-3.jpg" /></a></div><br /><br />💥Technical analysis has introduced various statistical and mathematical techniques to apply in analyzing stocks, which have become indicators of stock prices in many forms. In this text, we will discuss some of them, but those interested in other indices can read more as most of them use similar concepts.<br /><br />💥In the use of technical tools to analyze stocks, oscillators are the commonly used instruments that measure oscillation. Among them are RSI and Stochastic, which can serve as indicators of the market direction in the short to medium term, especially during times when the market moves without direction, also known as sideways or fluctuations within a narrow band. During these times, oscillators can closely follow prices, enabling traders to use them as tools for buying or selling in the short term. Even in market conditions that are not clearly uptrending or downtrending, oscillators can help determine if the trend will continue to strengthen or weaken.<br /><br />👉Introduction to Overbought, Oversold, Convergence, and Divergence👈<br /><br />💥Most indicators are derivatives that measure changes in stock prices. A simple analogy is to compare the price to the speed of a car and the indicators to the car's acceleration when we press the accelerator or decelerate when we press the brakes. Acceleration increases the speed of the car, and we see the acceleration and top speed rise simultaneously.<br /><br />💥When we release the accelerator, the car continues moving due to inertia, but the acceleration is zero. When we gently tap the brake, the car still moves forward, but the braking force gradually slows it down, and the acceleration becomes negative. In this case, the acceleration and velocity of the car move in opposite directions because the car continues to move forward, but with negative acceleration (becoming a deceleration).<br /><br />💥Similarly, in the stock market, we may see that the price is still rising, but the market lacks momentum (which is like acceleration), and this is called overbought. This happens when traders have bought stocks to the point where almost everyone is holding stocks, but fewer people want to buy them. During a market crash, everyone rushes to sell, causing the price to drop rapidly due to strong selling pressure. But at a certain point, the selling pressure starts to decrease, and the market becomes oversold, even though the price is still declining.<br /><br />💥Indicators are also used to measure buying or selling pressure, which determines the direction of the price. Therefore, during a market acceleration, indicators will move in the same direction as the price, which is called Convergence. But when the market starts to run out of acceleration, although the price is still running in the same direction, some indicators will start to move in a different direction from the price, which is what we call Divergence. This serves as a warning signal that the market is starting to run out of steam, and traders need to be careful as the direction may soon reverse (Reversal) since there is no other support to keep the market going.<br /><br />💥Some traders are very quick and apply other technical principles to the indicator, such as using trendline charting techniques or finding the Moving Average of the indicator as a trading signal, which can give good signals. However, the best approach is to gradually start buying or selling little by little when there is a signal, using other technical tools with the indicator, and gradually buying or selling until the actual signal is confirmed. Some traders overreact to small indicator movements and buy or sell, which is not recommended.<br /><br />💥General rules for reading indicators include that if the indicator reaches the upper or lower band, known as Overbought and Oversold, it indicates that the stock is overbought or oversold. If the indicator and the price move in different directions, this is usually a warning that a reversal may follow, and an important signal will be generated when the oscillator is in the OB/OS zone. For some indicators, crossing the zero line is a signal to buy or sell according to the trend.<br /><br />💥Overbought and Oversold refer to indicators used to determine periods when market prices are too high or too low. When the indicator reaches the overbought level, it means that the asset is overbought and the price may start to fall. When the indicator reaches the oversold level, it means that the asset is oversold and the price may start to rise. Traders use these signals to make buying or selling decisions.<br /><br />💥Overbought and oversold refer to the levels at which an asset's price has moved too far in a particular direction, either upward or downward. Overbought conditions occur when an asset's price has increased too quickly and too far, and may be due for a pullback or correction. Oversold conditions occur when an asset's price has decreased too quickly and too far, and may be due for a rebound or rally.<br /><br />💥💥Traders can use various technical indicators, such as the Relative Strength Index (RSI) or Stochastic Oscillator, to identify overbought and oversold conditions. In general, when an asset is considered overbought, traders may consider selling or taking profits. When an asset is considered oversold, traders may consider buying or taking a long position.<br /><br />💥Convergence and Divergence refer to indicators used to determine trend changes. When the convergence indicator starts moving towards the X-axis, it means that the trend is starting to change and a buy can be expected. When the divergence indicator starts moving towards the X-axis, it means that the trend is continuing and a sell can be expected.<br /><br />💥Convergence and divergence are terms used to describe the relationship between an asset's price and a technical indicator. Convergence occurs when the asset's price and the indicator are moving in the same direction, indicating a strong trend. Divergence occurs when the asset's price and the indicator are moving in opposite directions, indicating a potential reversal in trend.<br /><br />💥💥Traders can use convergence and divergence to identify potential buy and sell signals. In an uptrend, traders may look for bullish convergence, where the indicator is rising while the price is also rising, indicating a strong trend. In a downtrend, traders may look for bearish convergence, where the indicator is falling while the price is also falling, indicating a strong trend. Conversely, traders may look for bullish divergence in a downtrend or bearish divergence in an uptrend, as these may signal a potential reversal in trend.<br /><br />💥Traders should use these indicators in combination with other tools and analyze data from multiple sources to obtain the most accurate buy and sell signals.