As their name suggests, oscillating indicators are indicators that move back and forth as prices rise and fall. Oscillating indicators can help you decide how strong a current trend is and warn when that trend is in danger of losing momentum and being reversed.
When an oscillating indicator moves too high, the share or CFD is considered to be ‘overbought’ (too many people have bought it and there are not enough buyers left in the market to push the price higher). This indicates the upward trend is at risk of losing momentum-causing the trend to reverse or the price to stagnate.
When an oscillating indicator moves too low, the share or CFD is considered to be ‘oversold’ (too many people have sold it and there are not enough sellers left in the market to depress the price). This indicates the downward trend is at risk of losing momentum-causing the trend to reverse or the price to stagnate.
The following oscillating indicators are worth examination:
- Moving average convergence divergence (MACD)
- Slow Stochastic
- Relative Strength Index (RSI)
Moving Average Convergence/Divergence (MACD)
The moving average convergence/divergence (MACD) is an oscillating indicator developed by Gerald Appel. It can indicate when trading momentum changes from being bullish to bearish and vice versa. The MACD can also indicate when traders are becoming over-extended, which usually results in a trend reversal for the share or CFD.
The MACD is usually plotted below the price movement on a chart.
It is worth looking at the following three aspects of the MACD:
- How the MACD is constructed
- MACD trading signal
- Strengths of the MACD
How the Moving Average Convergence/Divergence (MACD) is Constructed
The moving average convergence/divergence compares a series of moving averages and their relationships. The standard MACD looks at the relationship between the 12-period and 26-period exponential moving averages of a share or CFD. When the 12-period moving average is above the 26-period moving average, the MACD line will be positive. If the 12-period moving average is below the 26-period moving average, the MACD line will be negative (see Figure 5).
The MACD line is accompanied by a trigger line. This line is a 9-period exponential moving average of the MACD line.