Non-Trend Following Indicators or Oscillators

The weakness of the moving average method is related to the calculation of buy/sell opportunities by working on past data. The slow prediction of buy/sell chances that are available is attributed to the problem of time lag that occurs as faster average (short-term average) takes longer to cross the slower average (long-term average) than the time taken by the actual price to cross one moving average.

The time lag is directly proportional to the number of periods. So, a 10-period moving average will predict a pair’s price slower than a five-period moving average. On the other hand, if a lesser number of periods is considered for reducing the time period of prediction, the resulting sensitive data will result in several money-losing signals (whipsaw). A short-term average will produce more inaccurate buy/sell signals, reducing the overall effectiveness of the method for technical analysis.

In order to improve the accuracy of the moving averages method and confirm its buy/sell predictions, it should be used in conjunction with other indicator(s), such as:
Non-Trend Following Indicators or Oscillators
Moving Average Convergence & Divergence Indicator (MACD)

Non-Trend Following Indicators or Oscillators:
• Momentum: This oscillator was designed to measure the change between a day’s closing price and the old closing price. That is, Momentum (M) = Current Closing Price (CCP) – Old Closing Price (OCP). ROC is a ratio expressed in percentage of M. Momentum and Rate of Change (ROC) measure the price change and not the price level. The strength of the price trend depends upon what the level of high and/or low is achieved.

• Relative Strength Index (RSI): Introduced in 1978 by Welles Wilder in his book “New Concepts in Technical Trading Systems,” this oscillator is a Momentum indicator that measures the relative difference between closing prices of the higher and lower range. Thus, RSI = 100 – [100 / (1 + RS)]; where RS = Average of X day’s up closes / Average of X day’s down closes ( Average of N days up closes, divided by average of N days down closes), N = Predetermined number of days. This method indicates whether a market is oversold or overbought by measuring the internal strength of the forex market. The RSI clocks between 0 to 100.

To know about the Moving Average Convergence & Divergence Indicator (MACD), click here.