Momentum Indicators

• Momentum indicators are used to spot trends. One of the more popular momentum indicators is the Moving Average Convergence Divergence (MACD). The MACD calculates the difference between the 26-day and 12-day moving averages. Then a nine-day moving average of the MACD itself is plotted. This nine-day line is known as the "signal line." A bullish indication occurs whenever the MACD crosses above the signal line, and a bearish signal is generated when the opposite occurs. The biggest caution in using momentum indicators is that they are lagging indicators. By nature, they are used to confirm trends after they have already started. They are most effective in trending markets and should be used cautiously in sideways markets that are range bound.
  
  

Oscillators

• Another type of technical indicator traders use are known as oscillators. These tools are used to spot potential reversals in current trends and allow traders to locate tops and bottoms of price patterns. One popular oscillator is the relative strength index (RSI), an indicator used to identify overbought and oversold conditions. The RSI generates a value between 0 and 100 which is plotted on a chart. When the RSI line crosses above 70, then an overbought signal is generated and traders should consider selling. Should the RSI line fall below 30, then an oversold condition is created, which may be a bullish signal. Oscillators are leading indicators that are more reliable in choppy sideways markets.
  
  

Volume Based Indicators

• Volume based indicators combine volume trends and momentum trends to determine the quality of a given price trend. A very popular volume based indicator is the on-balance volume (OBV) indicator. The OBV provides a running total of trading volume and is used to determine if volume is flowing into or out of a given trading instrument. An upward slope in the OBV line indicates that volume is gaining; a downward slope indicates the opposite. Volume based indicators provide lagging signals and work best in trending markets. Also, high volatility conditions can make these indicators unreliable.
  
  

Using Indicators

• One of the biggest mistakes among new traders is using too many technical indicators. This leads to stress and information overload. The best approach is to use and master just a few indicators. Ideally, a trader should use only one of each indicator type.