1. Exploring Oscillators and Indicators: Introduction
  2. Exploring Oscillators and Indicators: Leading And Lagging Indicators
  3. Exploring Oscillators and Indicators: On-Balance Volume
  4. Exploring Oscillators and Indicators: Accumulation/Distribution Line
  5. Exploring Oscillators and Indicators: Average Directional Index
  6. Exploring Oscillators and Indicators: Aroon Indicator
  7. Exploring Oscillators and Indicators: MACD
  8. Exploring Oscillators and Indicators: RSI
  9. Exploring Oscillators and Indicators: Stochastic Oscillator
  10. Exploring Oscillators and Indicators: Market Indicators
  11. Exploring Oscillators and Indicators: Conclusion

By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

Indicators can be separated into two main types - leading and lagging - both differing in what they show users.

Leading Indicators
Leading indicators are those created to proceed the price movements of a security giving predictive qualities.

Two of the most well-known leading indicators are the Relative Strength Index (RSI) and the Stochastics Oscillator.

A leading indicator is thought to be the strongest during periods of sideways or non-trending trading ranges, while the lagging indicators are regarded as more useful during trending periods. Users need to be careful to make sure the indicator is heading in the same direction as the trend.

The leading indicators will create many buy and sell signals that make it better for choppy non-trending markets instead of trending markets where it is better to have less entry and exit points.

The majority of leading indicators are oscillators. This means that these indicators are plotted within a bounded range. The oscillator will fluctuate into overbought and oversold conditions based on set levels based on the specific oscillator.

Note: An example of an oscillator is the RSI, which varies between zero and 100. A security is traditionally regarded as overvalued when the RSI is above 70.

Lagging Indicators
A lagging indicator is one that follows price movements and has less predictive qualities. The most well-known lagging indicators are the moving averages and Bollinger BandsĀ®. The usefulness of these indicators tends to be lower during non-trending periods but highly useful during trending periods. This is due to the fact that lagging indicators tend to focus more on the trend and produce fewer buy-and-sell signals. This allows the trader to capture more of the trend instead of being forced out of their position based on the volatile nature of the leading indicators.

How Indicators Are Used
The two main ways that indicators are used to form buy and sell signals are through crossovers and divergence.

Crossovers occur when the indicator moves through an important level or a moving average of the indicator. It signals that the trend in the indicator is shifting and that this trend shift will lead to a certain movement in the price of the underlying security.

For example, if the relative strength index crosses below the 70-level it signals that security is moving away from an overbought situation, which only will occur when the security declines.

The second way indicators are used is through divergence, which occurs when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. This signals that the direction of the price trend may be weakening as the underlying momentum is changing.

There are two types of divergence - positive and negative. Positive divergence occurs when the indicator is trending upward while the security is trending downward. This bullish signal suggests that the underlying momentum is starting to reverse and that traders may soon start to see the result of the change in the price of the security. Negative divergence gives a bearish signal as the underlying momentum is weakening during an uptrend.

On the other hand, assume that the relative strength index is trending upward while the security's price is trending downward. This negative divergence can be used to suggest that even though the price is lagging the underlying strength, shown by the RSI, traders could still expect to see bulls regain control of the asset's direction and have it conform to the momentum predicted by the indicator.

Indicators that are used in technical analysis provide an extremely useful source of additional information. These indicators help identify momentum, trends, volatility and various other aspects in a security to aid traders when making decisions. It is important to note that while some traders use a single indicator solely for buy and sell signals they are best used in conjunction with price movement, chart patterns, and other indicators.

Exploring Oscillators and Indicators: On-Balance Volume

Related Articles
  1. Investing

    The Top Technical Indicators For Commodities Investing

    Traders can use "the usual suspects" (standard indicators for trend trading) when it comes to choosing indicators for investing in commodities. Here's how.
  2. Trading

    Exploring Oscillators and Indicators

    Find out how to use these technical analysis building blocks.
  3. Insights

    What is a Leading Indicator?

    A leading indicator is a measurable economic factor that tends to change right before the economy starts to change.
  4. Trading

    The Four Most Common Indicators in Trend Trading

    Here are the top indicators and tools trend traders use to establish when trends exist and find entry/exit points.
  5. Trading

    Using Technical Indicators To Develop Trading Strategies

    Unfortunately, there is no perfect investment strategy that will guarantee success, but you can find the indicators and strategies that will work best for your position.
  6. Trading

    The Top Technical Indicators For Options Trading

    Options traders have to pay attention to more indicators than your average stock trader does, including volatility, direction, and duration.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center