Oscillators and momentum
Leading and lagging indicators, overbought and oversold readings, and how to read momentum.
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Lessons
- 01Leading and lagging indicators.A leading indicator tries to signal a turn before it happens, usually by measuring when a move is slowing, as RSI and the stochastic do. A lagging indicator, such as a moving average, confirms a move after it starts. Leading tools give more false alarms; lagging tools miss the start of each move.
- 02What are oscillators?An oscillator is an indicator that moves back and forth inside a fixed range such as 0 to 100, or around a centre line such as zero. It compares the latest price with recent prices. A high reading means price is near the top of its recent range, and does not mean price must fall.
- 03Using oscillators when the market trends.In a strong trend, an oscillator such as RSI can stay overbought or oversold for a long time, so a reading above 70 is a weak reason to sell on its own. In a trend you flip the reading: wait for the oscillator to dip during a pullback and turn back with the trend, and still use a stop loss.
- 04Momentum indicators and how to read them.A momentum indicator measures how fast price is changing by comparing the latest close with the close a set number of bars ago. When the line is above zero, price is higher than it was. A falling line means the move is slowing. It warns of a weakening trend but does not tell you when, or whether, price will reverse.
- 05Oscillators and momentum cheat sheet.RSI and the stochastic run from 0 to 100 and are read at fixed levels such as 70 and 30. MACD, momentum and CCI have no fixed range and are read around a centre line. All are built from past prices, so an overbought reading can last through a strong trend and is not a sell signal by itself.