Technical Indicators for Strategic Trading on Aark

Aark’s recent update has enhanced its UI, focusing on indicators and providing traders with advanced tools to refine their strategies.

This article delves into the Stochastic RSI and MACD indicators — imperative tools in a trader’s arsenal that help gauge market momentum and identify potential entry and exit points.

Stochastic RSI: Identifying Overbought & Oversold Conditions

What is the Stochastic RSI?

The Stochastic RSI merges the Stochastic Oscillator with the Relative Strength Index (RSI), offering a dynamic tool for identifying overbought and oversold market conditions. This hybrid indicator is handy for traders looking for quick and responsive signals.

Understanding the Basics of RSI

The Relative Strength Index (RSI) is a momentum indicator that measures the speed and change of price movements on a scale from zero to 100. It helps traders identify potential trend reversals by evaluating overvalued or undervalued conditions in the market.

How Stochastic RSI Differs from RSI

While both indicators are designed to gauge market momentum, the Stochastic RSI is faster, owing to its derivation from the RSI, making it more sensitive to immediate price changes. This characteristic makes the Stochastic RSI ideal for Aark’s high-leverage trading environment, particularly within short time frames like those used in Moon Mode.

Typical Settings for Stochastic RSI

RSI Period: This refers to the number of periods used to calculate the RSI component of the Stochastic RSI. The RSI measures the magnitude of recent price changes to evaluate overbought and oversold conditions. Common periods range from 14 to 21, but traders may adjust this based on their trading preferences and the timeframe being analyzed.

  1. A reading of 100 means RSI is highest in 14 periods (or whatever chosen lookback period). A reading of 0 means RSI is at the lowest level in the chosen period.
  2. An asset is usually considered overbought above 80 and oversold under 20. It is important to recognize that overbought doesn’t necessarily mean the price will reverse lower, and vice versa.

Stochastic Period: This represents the number of periods used to calculate the Stochastic Oscillator component of the Stochastic RSI. The Stochastic Oscillator measures the location of the current price relative to the range over a certain period. Typical periods for the Stochastic Oscillator component of the Stochastic RSI range from 5 to 14, with 14 being the most commonly used.

  1. It is important to note that the parameters shouldn’t be considered a static value but will depend on factors such as general market trends, asset type, timeframe, and others.
  2. It is recommended to utilize higher lookback periods in a shorter timeframe to show the bigger momentum changes within the short timeframe.
Settings for Stoch RSI

Formulas for the Stochastic RSI

Identifying Trade Signals:

Crossover above Over-bought line (e.g.,80) or Under-bought line (e.g., 20)

  • During a bearish trend, when the Stochastic RSI crosses above the overbought line (e.g., 80), it is recommended to take a short position and vice versa for long positions.

However, as with any technical indicator, it’s essential to experiment with different settings and conduct thorough testing to determine the most effective parameters for specific trading strategies and market conditions. A stochastic RSI indicator must be used to confirm before entering a position. Avoid relying solely on Stochastic RSI for trading decisions.

MACD: Momentum Tracking with Precision

Introduction to MACD

The Moving Average Convergence Divergence (MACD) is another momentum indicator that shows the relationship between two moving averages of an asset’s price. Unlike Stochastic RSI, the MACD does not have bounded ranges, providing a different perspective on market momentum.

The Components of MACD

  • MACD Line: The difference between the 12-period and 26-period or any two chosen periods of exponential moving averages (EMAs).
  • Signal Line: The 9-period EMA, or any chosen period of signal length.
  • Histogram: Measures the distance between the MACD Line and the Signal Line, indicating momentum strength and potential price direction changes.

The Formula for the MACD Histogram:

Using MACD for Effective Trade Decisions

MACD is particularly useful for identifying trend reversals and momentum strength through crossovers and divergences:

  • Crossovers: A crossover of the MACD line above the signal line suggests bullish momentum, whereas a crossover below indicates bearish momentum.
  • Divergence: If the price is making new highs while MACD is not, or if the price is making new lows while MACD is rising, it could indicate a potential reversal.

Identifying Trade Signals:

MACD Crossovers:

  • When the MACD line crosses over the Signal Line, it generally indicates that it will follow with an upward momentum.
  • When the MACD line crosses under the Signal Line, it generally indicates that it will follow with a downward momentum.

MACD Divergence:

  • When the chart shows slow and continuous bearish price movements while the histogram of the MACD indicator shows a clear increase in bullish momentum, this is known as divergence, and it indicates a possible upcoming momentum change.

Traders can adjust these settings based on their preference and the market conditions they are analyzing. However, it is recommended to use longer timeframes. This indicator can be used to identify trends before entering a shorter timeframe for a scalp.

Ultimately, the optimal settings for the MACD indicator may vary based on a trader’s preference and depend on factors such as market volatility, time frame, and individual risk tolerance.

Example of a bullish cross-over entry.

Combining Stochastic RSI and MACD

While the Stochastic RSI excels in rapid response to price movements, MACD offers depth in trend analysis and momentum strength. Combining these indicators can provide a robust approach to trading on Aark:

  • Use MACD in a bigger timeframe to estimate the general trend and market momentum.
  • Use Stochastic RSI for confirmation in a short-term time for accurate entry and exit signals.