3 Different Oscillating Indicators Explained For Stock Market Traders

3 Different Oscillating Indicators Explained For Stock Market Traders

by

Mark Dearth

Technical analysts make use of trend following as well as oscillating indicators to convert price data into simple indicators on charts that can end up being comprehended very easily. As the titles would suggest, the trend following indicator tracks stock prices that are trending in a specific direction. An indicator that oscillates is useful whenever the stock price is boxed within a particular range.

This latter kind of indicator features a couple of sub-types. It can be of the sort that’s charted against a baseline or one which has an upper and a lower limit. MACD is a well-known indicator with a baseline, and RSI is one which has a 0 to 100 range. MACD is short for Moving Average Convergence/Divergence and RSI stands for Relative Strength Index. Let us analyze these in more detail, in addition to others that are also well-known. Gerald Appel created MACD to help enlighten traders about bullish trends that were about to reverse and plunge into a bearish one, and vice versa too. The way it functions is that two moving averages (usually 12 & 26 periods) over different periods are charted for comparison. The MACD can also be plotted as a histogram, so that the histogram bars grow smaller as the price starts turning around to move back in the other direction. The bars get longer right after hitting the baseline, when the trend is still increasing in strength. This shows visibly the strength (or lack thereof) of the downward or upward trend prior to the individual moving averages do it independently. RSI, as stated above, carries a value that will vary from 0 to 100. Traders will receive a signal once the RSI value is 30 or 70. Thirty means the stock is oversold whereas 70 means it is overbought. An upward trend is when the RSI reaches 50 and is increasing, while a downward trend is when it gets to 50 and is on its way down. Much like RSI, Stochastic also have a 0 to 100 value. But the indicators in this case are sent on 20 and 80 for over-sold and over-bought states, respectively. Commodity Channel Index (CCI) is a baseline indicator that varies from +300 to -300 using a 0 baseline in between. An indication for an over-sold condition is sent at -200 and for an over-bought state at +200. These are all oscillating indicators which need selling price information for input and mathematical equations to convert the data into the charts. The resulting display sheds light on historical prices, shows existing trends and assists investors forecast future trends. Practically speaking, they offer entry & exit points for trades. Put simply, the indicator tells the trader precisely when to buy a stock and when to sell.

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3 Different Oscillating Indicators Explained For Stock Market Traders