Exploring Oscillators and Indicators: Introduction|
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
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
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.