Technical analysts employ trend following and oscillating indicators to convert price data into easy signals on stock charts that will end up being understood effortlessly. As the names macd indicator suggest, the trend following indicator tracks stock prices which are trending in a particular direction. An indicator that oscillates comes in handy whenever the stock selling price is boxed within a specific range.
This type of indicator may either oscillate above and below a baseline, or in between lower and upper limits. Representative and popular examples for each variety include the MACD that oscillates around a baseline, and the RSI that includes a 0-100 range. RSI is short for Relative Strength Index and MACD stands for Moving Average Convergence Divergence.
Let’s examine these in more detail, in addition to others that are also well-known. Gerald Appel created MACD to help inform traders about bullish trends which were about to reverse and plunge right into a bearish one, and vice versa too. The way it functions is that 2 moving averages (generally 12 & 26 periods) over different intervals are charted for comparison.
MACD can equally efficiently be a histogram where the bars shrink in proportions as a trend starts slowing down and afterwards starts reversing. Once it hits the baseline, the bars start expanding and the trend gains intensity. Thus, MACD may particularly assist investors in predicting a crossover point for price reversals. Best benefit is that it will do so before the moving average is capable of doing it on its own.
RSI can have a value in between 0 and 100. A trader using RSI gets signals whenever it extends to 30 and 70. 70 indicates an over-bought state and 30 suggests an over-sold state. When it is 50 and heading higher, that can be viewed as an upward trend. If it’s 50 and dropping, it could be regarded as a downward trend.
Stochastic, like RSI, have a 0-100 range. The difference is the fact that it works by using 20 and 80 to indicate oversold and overbought conditions, respectively. The CCI (Commodity Channel Index) features a 0 baseline and oscillates from a +300 and -300 range. It signals overbought or oversold on +200 and -200.