Summary on Oscillators

Moving Average Convergence Divergence (MACD)

MACD is a moving average convergence divergences indicator.

MACD is used by traders to identify reversal points in a trend and for trend confirmations.  The moving average convergence divergence detects momentum change and signals over bought and oversold conditions.

It has a histogram which represents the difference between the MACD line and the signal line. The histogram is a bar chart plotted around the zero line indicating the relationship between the MACD and the signal line.

When the MACD crosses the signal line, the histogram crosses the zero line this gives a signal that a trend is likely to change.

If the MACD is above the zero line, prices are trending higher, when below zero prices are falling.

The MACD can also be used to identify possible reversal signals in form of the bullish convergences and bearish divergences.

When market prices forms the lower low of the previous low and the MACD forms the higher low of the previous low, is an indication that the low is fake( bullish convergences).This can result to a trend reversal(bullish reversal)

Likewise when the market price makes a higher high of the previous high and the MACD makes a lower high of the previous high (bearish divergence) then the high is fake. Probable signal for a bearish reversal.

 

Stochastic indicators

Stochastic indicator is a momentum indicator that indicates overbought and oversold conditions.

It fluctuates from 0 – 100% and it is based on an assumption that closing prices tend to concentrate in the higher parts of the period range in a strong uptrend and near the extreme of low of the period range for a downtrend.

The stochastic calculator has two lines, %K and %D used to indicate the overbought and oversold conditions on the chart plotted on the horizontal axis and 0 –100% plotted on the vertical axis for a given period.

The default setting for stochastic indicator is 14 periods; it can be hours, days weeks or months.

When the readings are above 80%(overbought), %K line crosses over %D line as both lines are pointing down, it indicates a sell signal.

When the readings are below 20%(oversold), %K line crosses over %D line as both lines are pointing up, it indicates a buy signal.

 

Relative strength index (RSI)

 It is used to measure the strength of all upward and downward movements and identifies the overbought and over sold conditions on the market chart.

It also compares the higher and lower closing prices.

Its scale ranges from 0 to 100% giving overbought and over sold signals.

When the RSI reads 70% and above shows that the market is overbought (bearish reversal) and indicates oversold conditions when the RSI is below 30% (bullish reversal)

Above 70% shows that price is likely to fall and at 30% and below indicates that price is likely to rise.

When the RSI reads greater than 50, it indicates that the upward force is greater than the downward force so it is an uptrend and when it goes below 50 the downward force is stronger than the upward force therefore a downtrend.

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