“Leading Technical Indicators“
> Explanatory Article by Marios Kyriakou, MSc Economics
About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.
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<Last updated 18.04.2020>
Dear reader,
Hi! If you are interested in Forex please read carefully the below article that shows how you can make use of the various analysis tools developed for trading platforms and specifically technical indicators in this case.
Leading versus Lagging Indicators
By analyzing historical data, technical analysts use indicators to predict future price movements. It involves identifying trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
Leading indicators attempt to predict where the price is headed while
lagging indicators offer delayed feedback, which means they give a signal once the price movement has already passed or is in progress.
Oscillators
Leading indicators or oscillators. A leading indicator gives a signal before the new trend or reversal occurs.
An oscillator is any object or data that moves back and forth between two points.
> Oscillators are based on the idea that: As momentum begins to slow, fewer buyers (if in an uptrend) or fewer sellers (if in a downtrend) are willing to trade at the current price.
A change in momentum is often a signal that the current trend is weakening.
Relative Strength Index (RSI)
The relative strength index (RSI) is a momentum oscillator that compares the magnitude of recent gains and losses over a specified time period to measure the speed and change of price movements.
It is primarily used to attempt to identify overbought or oversold conditions.
Indicator Points:
- Compares average price change of advancing periods with declining periods.
- Overbought is an RSI value greater than 70%
- Oversold is an RSI value less than 30%
- The RSI will rise as the number and size of positive closes increase, and it will fall as the number and size of losses increase.
Only near 100% or 0 means that it lies in a strongly trending market.
Example:
The RSI falls into overbought territory (close to 70%).
> RSI goes back below 70%.
> RSI then breaks its most recent high.
As you can see in the following chart, the RSI indicator was overbought formed the rejection high that triggered the signal when it bounced lower.
Relative Strength Index (RSI) – Divergence
As you can see in the following chart, a bullish divergence was identified when the RSI formed higher lows as the price formed lower lows.
The RSI is signaling upwards. This was a valid signal, but divergences can be rare.
RSI and MACD
These indicators both measure the momentum of an asset. The MACD measures the relationship between two EMAs, while the RSI measures price change in relation to recent price highs and lows.
These two indicators are often used together to provide analysts with a more complete technical picture of a market.
Stochastic oscillator
The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period. Used for generating overbought and oversold signals.
Stochastic oscillator charting generally consists of two lines: one reflecting the actual value of the oscillator for each session, and one reflecting its three-day simple moving average.
Indicator Points:
1.Closing levels that are consistently near the top of the range indicate accumulation (buying pressure).
2.Closing levels near the bottom of the range indicate distribution (selling pressure).
3.Overbought = > 80
4.Oversold = < 20
Because the price is thought to follow momentum, the intersection of these two lines is considered to be a signal that a reversal may be in the works, as it indicates a large shift in momentum from day to day.
Stochastic Oscillator and RSI
The relative strength index (RSI) and stochastic oscillator are both price momentum oscillators. However, the RSI was designed to measure the speed of price movements, while the stochastic oscillator formula works best during consistent trading ranges.
In general, the RSI is more useful during trending markets, and stochastic more so in sideways or choppy markets.
Commodity Channel Index (CCI)
Commodity Channel Index indicator is a very common tool for traders to identify cyclical trends not only in commodities but also in equities and currencies.
It is a momentum-based oscillator used to help determine when an asset is reaching a condition of being overbought or oversold. It is also used to assess price trend direction and strength.
- Calculates the distance between a price and its historical average over 20 days.
- High readings of 100 or above, for example, indicate the price is well above the historic average and the trend has been strong to the upside.
- Low readings below -100, for example, indicate the price is well below the historic average and the trend has been strong to the downside.
Indicator Points:
1.Calculates the distance between a price and its average over 20 days.
2.Overbought is a CCI value greater than +100
3.Oversold is a CCI value less than -100
Going from negative or near-zero readings to +100 can be used as a signal to watch for an emerging uptrend.
Going from positive or near-zero readings to -100 may indicate an emerging downtrend.
The indicator is unbound. Overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from.
CCI and Stochastic
One of the main differences is that the Stochastic Oscillator is bound between zero and 100, while the CCI is unbounded.
The CCI is lagging, which means at times it will provide poor signals. A rally to 100 or -100 to signal a new trend may come too late.
Accelerator Oscillator
Acceleration/Deceleration Technical Indicator (AC) measures acceleration and deceleration of the current driving force. This indicator will change direction before any changes in the driving force, which, in its turn, will change its direction before the price.
It detects early changes in momentum – that is when momentum is accelerating or decelerating. It was built based on the idea that the direction of momentum will always change before the price.
The bars in the histogram have 2 colors: red indicating a fall in price and green indicating a rise in price.
If you are buying above zero or selling below zero, the momentum is with you.
You only need two successive bars for deciding to open a trade.
The zero line is the place where the momentum is balanced with the acceleration.
This means that when the indicator is above the zero line, it is easier for acceleration to continue to increase.
“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.
Thank you for reading my articles and watching my videos.”
Marios Kyriakou