Oscillator type indicators are among the most popular technical analysis tools. No matter which one you use, they all do virtually the same thing in a slightly different way. For trend traders they are very valuable as they provide easy to follow entry and exit signals. They act like X-rays for the market. Oscillators can tell you what's really going on with that bullish meeting or sale. Sometimes there's strength and sometimes there's not.
The most commonly used method with oscillators like Stochastic, MACD, or RSI, is to follow the trend. The trend can be determined in a large number of ways including multiple analysis time intervals, trend lines and moving averages. Once the trend is determined, signals based on its direction are filtered out. The strength of the trend is measured by convergence. If the oscillator is moving upward along with the prices it is said to be in convergence or according to the share price. If the stock price creates a peak and the oscillator peaks at the same time, and then both create a higher peak than the first, it is also said to be a convergence. Prices gain strength and so does the oscillator; this is a sign of a continuation in the market.
Note: Oscillators provide signals regardless of the trend. It is our duty as traders to discard false, bad or unlikely signals.
A divergence is when the stock price creates a new, and higher (or lower) peak but the oscillator peak does not coincide. In the event of an uptrend, prices will create a higher maximum, but the indicator will create a lower one. In the event of a downtrend, prices will make a lower minimum but the oscillator will create a higher one. This is indicative of underlying weakness in the market, the slow death of the trend in question and the possibility of a next investment.
Take a look at the chart below. This is the aspect that has a divergence: as the stock price rises, forming higher highs, the indicator itself descends. A new trend may soon be seen.
The most commonly used method with oscillators like Stochastic, MACD, or RSI, is to follow the trend. The trend can be determined in a large number of ways including multiple analysis time intervals, trend lines and moving averages. Once the trend is determined, signals based on its direction are filtered out. The strength of the trend is measured by convergence. If the oscillator is moving upward along with the prices it is said to be in convergence or according to the share price. If the stock price creates a peak and the oscillator peaks at the same time, and then both create a higher peak than the first, it is also said to be a convergence. Prices gain strength and so does the oscillator; this is a sign of a continuation in the market.
Note: Oscillators provide signals regardless of the trend. It is our duty as traders to discard false, bad or unlikely signals.
A divergence is when the stock price creates a new, and higher (or lower) peak but the oscillator peak does not coincide. In the event of an uptrend, prices will create a higher maximum, but the indicator will create a lower one. In the event of a downtrend, prices will make a lower minimum but the oscillator will create a higher one. This is indicative of underlying weakness in the market, the slow death of the trend in question and the possibility of a next investment.
Take a look at the chart below. This is the aspect that has a divergence: as the stock price rises, forming higher highs, the indicator itself descends. A new trend may soon be seen.
