MOMENTUM INDICATORS AND OSCILLATORS

Another group of technical indicators available for forex trading are those that measure
changes in momentum by comparing extremes in value. These are also called oscillators.
The goal of using indicators from this group is to identify whether a currency pair is
approaching extremes of being overbought or oversold.
Moving average convergence divergence (MACD) is a popular indicator that gives
the trader a sense of a change in momentum by comparing two exponential moving
averages . The settings used are the 24-period exponential moving
averages and the 12-period exponential moving averages. So what we have is a moving
average crossover. MACD goes further and adds a 9-period exponential moving
average of the difference between these two. The result is a visual clue when there
is a turn in the sentiment from being bullish to bearish, and vice versa. When used
with other confirming indicators, MACD increases the confidence of a new trader for
high-probability trades. The MACD tool is a standard part of the set of indicators, but there are variations in how it is presented. The difference between the two exponential
moving averages can be displaced alone. Also, the MACD indicator can be presented
with bars (histogram) showing more clearly whether the momentum is changing. This
later version of MACD is also known as MACD Forest and is very agreeable and easy
to use.
Note that Figure 12.6 is an hour chart, and as a result the trader has to wait longer
to detect a shift in the MACD condition. However, we will see that by shifting to a
shorter time frame, this waiting period can be reduced. Figure 12.7 shows a 15-minute
chart, where the MACD histograms provide, in effect, permission to enter a trade on the
buy side.
An important observation for the trader is to spot whether there is a divergence
between the MACD indicator direction and the price. When this occurs, the trader
needs to be careful in assuming that the price will continue in its direction. Figure 12.8
shows the price’s being essentially flat while MACD is shifted down. Traders who are
already in a buying position would be looking to get out and sellers would be looking to
get in.




By ABE COFNAS