Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 1: Principles of financial trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 2: Principles of Financial Planning and Cash Flow in Financial Trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 3: Understanding financial trading techniques

OSCILLATORS & MOMENTUM INDICATORS

As opposed to the measuring the magnitude of price changes, oscillators work by measuring the speed of these changes and so provide an indication of market momentum. In the following section, you’ll learn about the wide range of oscillators used by trading professionals, how they are calculated, and how they are applied.

Search on any trading software package or application, and you will be confronted with dozens of different types of oscillators. Some of the most commonly used include:

  • Relative Strength Index (RSI)
  • Stochastics
  • Rate of Change (ROC)
  • MACD

However, although each oscillator is calculated slightly different, they all work along the same line or principle – through the measurement of market momentum by comparing prices at two different points in time. The best way to think about this is to image a car going at 30 mph. While the speed of the car is important, what may be more vital is whether the car is accelerating or decelerating – especially if you were in its path! Similarly, oscillators are used indicate whether markets are speeding up or slowing down.

The irony of momentum indicators is that they are intended for use in sideways tending markets, as leading indicators as they tend to incorporate moving averages. Remember though that moving averages are not much use in such markets because they then become lagging indicators.

Momentum indicators are secondary indicators in that they are always sub-ordinate to what is happening to price, therefore a strong trend should always dominate. It’s good to understand therefore that momentum indicators measure the speed of the change in prices. i.e. the rate of ascent or descent.

The three main ways to use momentum indicators:

  1. Direction – signal which way the market is trending
  2. Overbought/oversold levels – which signal that the market is overextended
  3. Divergence – to warn of a potential turn in prices
Scroll to Top