Technical Analysis

We've explored momentum as a broad concept, reflecting the speed and direction of price movements. But just like the category "fruit" encompasses various types, momentum manifests in a variety of technical indicators, each with its own strengths and applications.

Here, we'll delve into three popular momentum indicators and their unique characteristics:

1. Relative Strength Index (RSI):

• Think of it as: A gauge that measures the magnitude of recent price movements, highlighting potential overbought or oversold conditions.

• Interpretation: Typically interpreted using a range of 0 to 100. Readings above 70 suggest overbought zones, while values below 30 indicate oversold territories. Additionally, RSI can be used to identify trendlines, although this is a less common application.

2. Moving Average Convergence Divergence (MACD):

• Imagine it as: A two-part indicator that combines trend-following elements with momentum analysis. It consists of a MACD line (difference between two moving averages) and a signal line (shorter-term moving average of the MACD line).

• Interpretation: Traders focus on crossovers between the MACD line and the signal line, as well as divergences between MACD movement and price action. These signals can hint at potential trend reversals or continuations.

3. Stochastic Oscillator:

• Visualize it as: An indicator that compares the current closing price to the price range over a specific period. It fluctuates between 0 and 100, similar to RSI.

• Understanding it: While trendline construction is not the primary use for Stochastic, it can be interpreted in a similar way to RSI, with readings above 80 suggesting overbought areas and readings below 20 indicating oversold zones.