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In the last lesson we the Bollinger bands, in the current lesson we are to take a peak in oscillators.
Oscillators are momentum indicators. In a sense, they measure the “speed” of the price action, how fast prices are going up or down.
There are three situations when an oscillator is most useful at three points:
- When its value reaches an extreme level, near the upper or lower end of its boundaries
- When we have divergence between the oscillator and the price action
- When the oscillator crosses a zero line or a midpoint
The stochastic oscillator is a momentum indicator based on where prices close within their high-low range. It ranges between 0 and 100, and alerts traders for overbought or oversold conditions. Readings above 80 are considered overbought, and below 20 oversold. The crossovers between the filled line and the dashed line are used in a similar manner as MA crossovers.
The relative strength index, RSI measures the speed and change of price movements, usually over the past 14 periods. It ranges between 0 and 100, and alerts traders for overbought or oversold conditions, as the Stochastic does. Readings above 70 are considered overbought, and below 30 oversold. Many use the 50 midpoint to distinguish between bullish and bearish momentum.
The moving average convergence divergence, MACD takes two trend-following indicators, the 12-period and 26-period EMAs, and turns them into a momentum oscillator by subtracting the shorter EMA from the longer one. When the MACD crosses above zero, it signals positive momentum, and when it falls below zero, it indicates negative momentum. The trigger or signal line is a 9-period EMA of the MACD. Crossovers between the trigger line are used in a similar fashion as crossovers between two moving averages.
Divergence between the oscillator and the price action signals that the trend is losing momentum. Positive Divergence is when the price forms lower lows, while the oscillator prints higher lows. Negative Divergence is when the price forms higher highs, while the oscillator prints lower highs.
We hope that you found the cycle on technical analysis useful and were able to acquire an understanding of how technical analysis works.
JA 
