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Oscillators and Momentum Indicators
These indicators measure the speed and change of price movements, helping traders determine the strength of a trend or the likelihood of a reversal.
One of the most widely used momentum indicators is the Relative Strength Index (RSI). Ranging from 0 to 100, the RSI helps identify overbought conditions (typically above 70) and oversold conditions (typically below 30). Traders often use the RSI to signal potential entry and exit points; for instance, when the RSI crosses above 30, it may indicate a buying opportunity, while crossing below 70 could signal a selling opportunity.
Another important oscillator is the Stochastic Oscillator, which compares a security's closing price to its price range over a specified period. This tool is particularly useful for identifying potential reversals in market trends. Like the RSI, the Stochastic Oscillator ranges from 0 to 100 and can indicate overbought or oversold conditions, offering signals for potential market entries and exits.
The Moving Average Convergence Divergence (MACD) is both a momentum indicator and a trend-following tool. It uses the relationship between two moving averages to identify potential buy and sell signals. When the MACD line crosses above the signal line, it may indicate a bullish trend, while a cross below the signal line suggests a bearish trend. Traders often look for divergence between the MACD and price action, as this can indicate potential reversals.