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Learn Forex Trading > Day 7 Class  ( Oscillators & Momentum Indicators ) > Oscillators / Leading Indicators
Oscillators / Leading Indicators
Exploring Oscillators and Indicators: Introduction

Technical analysis is broken into two main categories, chart patterns and indicators. Indicators are essentially calculations based on the price and the volume of a security and measures factors such as money flow, trends, volatility and momentum.

Within technical analysis, indicators are used as a measure to gain further insight into to the supply and demand of securities. Indicators, such as volume, are used to confirm price movement and the probability that the given move will continue. Along with using indicators as secondary confirmation tools, they can also be used as a basis for trading as they can form buy-and-sell signals. In this tutorial, we'll take you through the second building block of technical analysis and explore oscillators and indicator in depth.

How Indicators Are Used

The two main ways that indicators are used to form buy and sell signals are through crossovers and divergence.

Crossovers occur when the indicator moves through an important level or a moving average of the indicator. It signals that the trend in the indicator is shifting and that this trend shift will lead to a certain movement in the price of the underlying security.

For example, if the relative strength index crosses below the 70-level it signals that security is moving away from an overbought situation, which only will occur when the security declines.

The second way indicators are used is through divergence, which occurs when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. This signals that the direction of the price trend may be weakening as the underlying momentum is changing.

There are two types of divergence - positive and negative. Positive divergence occurs when the indicator is trending upward while the security is trending downward. This bullish signal suggests that the underlying momentum is starting to reverse and that traders may soon start to see the result of the change in the price of the security. Negative divergence gives a bearish signal as the underlying momentum is weakening during an uptrend.

On the other hand, assume that the relative strength index is trending upward while the security's price is trending downward. This negative divergence can be used to suggest that even though the price is lagging the underlying strength, shown by the RSI, traders could still expect to see bulls regain control of the asset's direction and have it conform to the momentum predicted by the indicator.

Indicators that are used in technical analysis provide an extremely useful source of additional information. These indicators help identify momentum, trends, volatility and various other aspects in a security to aid traders when making decisions. It is important to note that while some traders use a single indicator solely for buy and sell signals they are best used in conjunction with price movement, chart patterns, and other indicators.

Momentum indicators in Forex records the speed of prices moving over certain time period. At the same time Momentum indicators track strength and weakness of a trend as it progresses over a given period of time: the highest momentum is always registered at the beginning of a trend, the lowest - at its end point.

How to read Momentum Indicators

With Momentum indicators Forex traders look for controversy between chart prices and Indicator suggestions:

A. directional divergence between the price and momentum signals of a trend's developing weakness.

B. price spikes that occur during weak momentum, are the last warning signals of the trend change.

C. also trend change should be expected during sideways moving prices and controversially strong momentum.

Momentum indicators, such as RSI and Stochastic, are favorite indicators for non-trending markets. Momentum indicators ideally gauge whether the market is overbought or oversold during its non-trending state, and highlight potential reversal points before those actually occur.


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