Momentum Oscillator Indicators – Relative Strength Index (RSI)
RSI work in a similar way to the stochastics they attempt to pick reversals in an existing trend. When the RSI is above 80, it is indicating an overbought market, while a reading below 20 indicates an oversold market. RSI’s should only be traded on when the reading either fall below the 80 or break above the 20 line, it is common in times of long term trends that the RSI can remain above the 80 or below the 20 for long periods of time.
Once again the analyst can decide to choose either a short (faster) RSI for faster trading or longer (slower) RSI for longer period trading with fewer signals.
Oscillator Indicators Moving Average Convergence Divergence (MACD)
MACD is a moving average study that displays as an oscillator. The MACD plots the difference between a 26-day and a 12-day exponential moving average. A 9-day moving average is generally used as a trigger line, meaning when the MACD crosses below this trigger it is a bearish signal and when it crosses above it, it’s a bullish signal.
The MACD is used for trend reversals, for example if the MACD indicator turns higher while prices are still falling this could be an exit point and a possible reverse trade.
Trend Reversals – Head and Shoulders, Double and Triple Tops.
Many analysts’ not only look for the underlying trend but look for the break of the same trend – trend reversals. Some of the best known trend reversals appear as formations such as the Head and Shoulders where two peaks (shoulders)are broken in the middle by a higher peak (the head) when the second shoulder doesn’t hold this is a signal for a trend reversal. The opposite is true with an inverse head and shoulders. The double top and triple tops act in the same way except that all the peaks or bottoms are the same and the neckline sits on the same support or resistance line before breaking through.
Fibonacci Retracements
Fibonacci retracement levels are not a trend reversal but simply a signifact pullback within an existing trend. The Fibonacci retracements levels are made up of a sequence of numbers that indicate the anticipated changes in the trend based on previous moves. After a significant price move, prices will often retrace a significant portion of the original move – this is also known as profit taking, during the retracement, support and resistance levels often occur at or near the Fibonacci retracement levels.
In the FX market, the commonly used sequence of ratios is 38.2%, 50% and 61.8%. The most significant pullbacks are the 38.2%, and 61.8% levels. Fibonacci retracement levels are drawn by joining a trend line from a significant high point to a significant low point. The pullback simply represents a correction in the trend and not an end to the trend.
