Learning about technical analysis in predicting price action very complicated as the important indicators can be categorized into two main kinds: oscillators and momentum indicators.
Oscillators are also known as leading indicators. This is because they give signals before a new trend or reversal takes place. In other words, they give early hints if price is about to bottom out or is making a top.
Some examples of oscillators are the RSI (relative strength indicator) and stochastic. These indicators fluctuate between two levels, namely the oversold and overbought area. When they reach the overbought zone, it means that the current rally is over and that the asset is about to sell off. When they reach the oversold zone, it means that the current sell-off is over and that the asset price is about to climb.
The weakness of using purely oscillators though is that some signals tend to be fake. This is why confirmation through the use of momentum indicators is important.
Momentum indicators are also known as lagging indicators. This is because they give buy or sell signals when the trend or reversal is already taking place. Simply put, they confirm if price is already making its way up or is making its way down.
Some examples of momentum indicators are moving averages and MACD (moving average convergence divergence). These indicators are usually used based on crossovers, as a downward crossover of the shorter momentum indicator means a sell-off while an upward crossover of the longer momentum indicator means a rally.
The weakness of using just momentum indicators is that you might be late to the sell-off or rally before it actually gives a confirmation signal. This is why it’s recommended that you combine the use of lagging indicators and oscillators so that the buy or sell signals will be confirmed by each other.
Of course technical analysis can also make use of inflection points, trend lines, or retracement levels for additional confirmation or for determining entry points. Some trading systems that go for trend plays often combine moving averages and Fibonacci retracement levels, along with stochastic for additional confirmation, to come up with trade setups.
In addition, it also helps to determine the kind of market environment in picking which technical indicator to use. For instance, most oscillators work better in a ranging market environment while most lagging indicators give more accurate signals in a trending market environment.
