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Oscillating Indicators are defined in one of two ways. They either oscillate around a zero line, or oscillate between 0 and 100. Popular examples of both are the MACD that moves around a 0 line and the RSI which moves between 0 and 100. Neither is better than the other, both can be used to find profitable trades and both have limitations.MACD: Arguably the second most popular indicator used by traders, the MACD is easy to understand and can be used in a number of ways. The indicator utilizes two lines, the first is a line calculated using the difference between two moving average, usually the 12 EMA and 26 EMA.
The second is a moving average of the first line. They both move to either side of the zero line with out any outside boundaries.The importance of the MACD is that it removes some of the lag seen by using a simple moving average. Viewing the MACD link at the bottom of the article you can clearly see that the MACD usually crosses over before the moving averages do.RSI: The Relative Strength Index was originally designed to measure a corresponding price actions momentum in a given direction. The RSI, unlike the MACD, is constrained between zero and one hundred.
When the indicator moves above 70 the currency pair is considered overbought, while a reading below 30 is considered oversold. The overbought and oversold conditions can persist for long periods of time, so simply selling at 70 and buying at 30 will not produce long term profits. The most effective way to trade the RSI is to utilize swing failures. This is simply when price moves higher but the RSI remains below a previous high, or price moves lower but the indicator remains above a previous low.Stochastics:Like the RSI, the Stochastic is bound by an upper and lower limit.
The two lines of the Stochastic are the %K line and the %D line. The %K line is a function of the high and low prices over a given period of time, while the %D line is a moving average of the %K line. The most common period for the %K line is 14 and 3 or 5 for the %D line. There are actually three different types of Stochastic indicators, but their differences are outside the scope of this article. However, the prevailing theories are to sell at 80, buy at 20 and alternatively to sell when the D line crosses down the K line and vice-versa for a buy signal.
Though this is just a brief introduction into the use of the MACD, RSI and Stochastic oscillators, you can use these descriptions to begin using them in your Forex testing. Remember that it is important that you spend a great deal of time testing your understanding of these indicators before you being trading them with a live account. Whether you are trading the RSI or one of the other indicators you can use them trade for a profit. It’s all in your thorough understanding of the smallest intricacies that will make the difference.
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