TECHNICAL ANALYSIS WITH INDICATED

[Igor Pereira]

Forex and Gold Oscillators Indicators (XAU/USD)

How to Interpret Momentum and Direction with Institutional Precision

By Igor Pereira
Financial Market Analyst
Founder of ExpertFX School

---

When we talk about professional technical analysis, oscillator indicators occupy a strategic position in momentum reading and directional force.

They're not just for overbuying or overselling. When used correctly, they help measure:

• Intensity of movement;

• Trend speed;

• Possible structural exhaustion;

• Relevant differences.

Exclusive analysis for ExpertFX School – Igor Pereira:
“Oscillators do not anticipate the market alone. They measure the pressure behind the movement.”

---

What Are Stirring Indicators?

Oscillators are indicators that vary within a fixed (or semi-fixed) interval, usually between two limits.

They:

• They oscillate around a midpoint;

• measure price acceleration or deceleration;

• indicate extreme conditions;

• They assist in the identification of reversals or continuation.

Unlike trend indicators, oscillators are more sensitive and react more quickly to momentum changes.

Stochastics
The Stochastics indicator measures the relationship between the closing price of an asset and its price range over a given period, since the closing price of the asset would probably remain at the upper limit of the one-day range during a high trend.

Likewise, it would be close to the minimum during a downward trend.

Keeping this principle in mind, the Stochastics indicator measures whether the asset price has presented trend, lost momentum or simply traded on a track.

Any experienced trader can discover the directional movement of a market just by looking at a chart. However, the stochastic oscillator makes it much easier to interpret the price share.

Stochastics oscillates between two fixed values, 0 and 100.

When it is negotiated above level 80, some traders believe that this indicates that the upward trend will probably lose momentum. However, an analysis of the stochastic formula confirms that a high stochastic does indeed show a probable continuation.

Therefore, the best way to find an entry into the market with the Stochastics indicator is to look for long entries after a temporary downward retraction during a high trend and a short entry after a high retraction during a downward trend. It may seem very complicated at first. Especially if you are new to technical analysis and have little experience with commercial differences. But let's take a look at an example and you'll realize it's a pretty simple concept to understand.

Figure 1: High stochastic divergence

Figure 1 shows that EURUSD remained in a sustained upward trend and respected a trend line. But from the second week of June 2020 until the end of the month, the high dynamic faded and the price gradually declined towards the trend line. At the same time, the Stochastics indicator was falling and reading reached as low as 22 at the end of June. This constituted a perfect high divergence and an opportunity to buy as a pullback negotiation.

CONTENTS OF FORCE REGARDING (RSI)
Like Stochastic, the Relative Strength Index (RSI) oscillates between values 0 and 100. However, over-purchase and oversale levels are generally set at 70 during a high trend and 30 during a low trend. In addition, the way to interpret Stochastics is almost identical to that of the Stochastics indicator.

Although both Stochastics and RSI are considered momentum oscillators, RSI works better during a trend market, as reading above 50 signals a general trend of high and vice versa.

The trick with RSI is to first look for the potential level of support and resistance and then find opportunities to enter the market. To do this, instead of focusing on level 50, we can draw two additional lines, 40 and 60 in the RSI window.

Figure 2: RSI finds support and resistance near levels 40 and 60

In figure 2, we can see that GBPUSD found support and resistance when RSI reading reached close to levels 40 and 60, respectively. If you did not know where the levels of support and resistance will probably form, observing the action of the price when RSI readings of an asset are close to those levels can help you confirm a change in the existing direction of the price. Armed with this information, you can observe the sail patterns or breakup of trend lines to find an entry into the market.

INDEX OF GOODS CANALS (CCI)
The Commodity Channel Index (CCI) has the appearance of the RSI indicator. But the underlying mathematical formula, as well as the application, are completely different.

While RSI oscillates between 0 and 100, the ICC has no upper or lower limit.

Instead, the indicator, under normal market conditions, fluctuates between levels -100 and +100. When it remains within this normal range, it means that a strong market trend is missing and signals that the asset price will probably remain within the range.

On the other hand, a reading above +100 indicates a strong upward trend and when it falls below level -100, it signals a strong downward trend.

Figure 3: Trend identification with the KIC oscillator and market entry with breaking trend line

The easiest way to find opportunities to enter the market with the JRC would be to combine it with technical analyses based on price shares such as breaking trend lines.

In figure 3, you can see that when EURAUD CCI readings were above and below levels +100 and -100, this signaled strong trends. In both cases, the ICC eventually returned to the normal range between -100 and +100. However, when trends were resumed and their trend lines were broken, some considerable profits were made.

To further refine this strategy, you can also combine it with multiple-term analyses that would help you identify entry opportunities much earlier.

MIDDLE MIDDLE CONVERGENCE (MACD)
The first three oscillators we discussed use line graphs to represent reading. But the Convergence Divergence Indicator of Mobile Mediums (MACD) is a completely different beast, as it combines two crosses of moving averages with histogram to evaluate impulse strength.

The two MACD lines represent a 12-period AME and an exponential mobile average (EMA) of 26 periods . When the shorter-period AME crosses the longer-period AME, this signals a change in the trend, as well as a typical intersection of the MA. But what really highlights MACD is the histogram that measures the distance between these two EMAs. When the histogram is above line 0 and increasing, it signals a high trend that is gaining momentum. On the other hand, when the histogram is below line 0, it means that the downward trend is gaining strength.

Unlike Stochastics, RSI or ICC, there are no predetermined levels of overbuy or oversale in the MACD oscillator. However, the trick is to compare MACD maximums and minimums with the share of the price in relation to the previous maximums and minimums. By doing so, you can easily find convergence and divergence.

Figure 4: Entrys into the market of opposing divergence MACD

The best way to use MACD to find an opportunity to enter the market is to be against it. It means looking for long opportunities when the signal line MACD is well below level 0 and produces a purchase sign. On the other hand, you should look for a sales signal when the MACD signal line is being traded well above level 0. And if you find a divergence, it will only increase the chance of unexpected gains as shown in Figure 4.

INCREDIBLE OSCILATOR (AO)
The Awesome Oscillator (AO) was created by the famous trader Bill Williams to measure the difference between the Simple Mobile Average (SMA) of the last 5 periods and the SMA of 34 periods. It's plotted like a histogram, like MACD. Simply put, when the histogram is above the zero line and increasing, it signals that the high impulse is increasing. When the histogram is below line 0 and decreasing, it signals that the low momentum is increasing.

Most traders use the crossing of the zero line AO when the histogram goes above or below line 0 on the other side as a sign of change in the predominant trend. But if you use the AO as an independent indicator in this way, you will likely find many false signals. The best way to use the AO indicator is called the Twin Peak strategy, which is a sophisticated term that basically describes commercial divergence.

It is important to remember that low Twin Peaks occur above line 0 and high Twin Peaks occur below it.

Figure 5: Incredible entry into the low market of the Twin Peak oscillator

To enter the market with a low Twin Peak AO, you need to expect two consecutive peaks to form above the zero line, where the second peak is lower than the first. As we can see in figure 5, make a short order when a red line appears in the histogram. On the other hand, to negotiate a high Twin Peak AO, you need to wait for two consecutive peaks to occur below the 0 line. On this occasion, the second peak should be higher than the first. So when the first green bar appears in the histogram, enter the market with a long order.

TAKE NOTE
The oscillator indicators are great for finding direction and measuring the dynamics of directional movement of asset prices. But using a single oscillator to find inputs in the market would be very aggressive even for the most experienced technical traders. Instead, we recommend you combine one of the top 5 oscillators that we discussed above with the price action, either breakouts or candle patterns, to confirm before making any order.