All I am going to do in lesson 5 is introduce you to two friends of mine, they are basic oscillating indicators, one is called RSI (Relative Strength Index) and the other is MACD (Moving Averge Convergance Divergance).
I have put RSI at the top of the chart, MACD is at the bottom.
RSI
The calculation for RSI is 100-(100/ 1+(U/D)) where U=avg upward price change and D=avg downward price change.
RSI is a oscillator that ranges between 0 and 100. The standard time period that you will find it set at is usually 14 days. Traders will often change this 14d period to make it suit their style of trading. Shorter term for daytrades, longer term (21-50days) for longer term trading.
Simply put, an RSI reading over 70 indicates an overbought situation, below 30 is an oversold situation. Some traders use the peak RSI as a buy or sell signal, others wait for a cross over back below or above the 70 or 30 level to indicate a buy or sell.
This indicator shows you the 'internal strength' of a security. There is also an important divergance signal RSI gives us, which I will cover in a later lesson.
Take a look at this chart. The green arrow shows the RSI touching 30, thats a buy signal. The red arrows show sell signals. You will also note that head n shoulders pattern, combined with the RSI gave a nice sell signal.
MACD
MACD is a momentum indicator that shows the relationship between two moving averages., it is best used in wide swinging trading. MACD is uses crossovers, overbought/oversold conditions, and divergences.
Using the same concept from our moving averages tutorial, when one line crosses above the other, note how the red line crosses the black like at the first green arrow, thats a buy signal. The opposite is true at the red signal.
Important note: No technical indicator is 100% correct. As you become more advanced, you will pick out and combine indicators which suit your trading style.
Important note #2: These are the basics of these indicators, things get increasingly complexed the more you get into it.
