Question

Short note on: (Simple and precise words)

1)Reversal patterns

2)Triangles, flags and pennants

3)ROC and RSI

Answer 1

Reversal patterns:

A reversal pattern is a transitional phase that marks the turning point between a rising and a falling market. If prices have been advancing, the enthusiasm of buyers has outweighed the pessimism of sellers up to this point, and prices have risen accordingly. During the transition phase, the balance becomes more or less even until finally, for one reason or another, it is tipped in a new direction as the relative weight of selling pushes the trend down. At the termination of a falling market, the reverse process occurs. Imagine a fast-moving train, which takes a long time to slow down and then goes into reverse. The same is normally true of financial markets! A reversal is a change in the price direction of an asset. Reversals are based on overall price direction and are not typically based on one or two periods/bars on a chart.

Triangles, flags and pennants:

Flag and pennant chart patterns are short-term continuation patterns that are formed when there is a sharp price movement followed by a sideways price movement. This pattern is then completed when another sharp price movement heads in the same direction as the move that initiated the trend. Flag and pennant chart patterns are usually short-lived, lasting generally between one and three weeks. There is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trend lines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trend lines. In both cases, the trend is expected to continue when the price moves above the upper trend line.

Formula= ROC= Current price-Earlier Price/Earlier Price*100

ROC and RSI=A particular stock rises or falls compared to other stocks or a market average, the relative strength index (RSI), developed by J. Welles Wilder, compares the stock's gains over its losses over a specific duration, usually 14 trading days. Wilder reasoned that if gains were significantly greater than losses over the period, then the stock as overbought, and if losses significantly exceeded gains, then it was oversold. As an oscillator indicating either an overbought or oversold condition, Wilder normalized his function so that it ranged from 0 to 100, with a value greater than 70 indicating an overbought condition and a value lower than 30 indicating an oversold condition. However, some technicians use different numbers depending on the trend. An RSI greater than 50 can also indicate an uptrend and an RSI less than 50 indicates a downtrend. For the 1^st calculation of the RSI for security, Wilder simply added all the gains over the 14-day period and divided it by the sum of all the losses. This was then used in the RSI equation to normalize it.

RSI has been broken down into its basic components which are the Average Gain, the Average Loss, the First RS, and the subsequent Smoothed RS's. For a 14-period RSI, the Average Gain equals the sum total all gains divided by 14.