Heeding Indicator Signals as an Investing Strategy - dummies

Heeding Indicator Signals as an Investing Strategy

Trending indicators related to investments are designed to give buy and sell signals, although in many instances, the signal is more like a warning and doesn’t have a black-and-white embedded decision rule. The following list introduces signals to pay attention to.

  • Crossovers: The term crossover refers to one line crossing another line. Crossovers include:

    • The price crossing a fixed historic benchmark.

    • The indicator crossing the price or the price crossing the indicator.

    • One line of a two-line indicator crossing the other.

    In most instances, the price crossing an indicator is named a breakout, one of the most important concepts in technical analysis. When a price rises above a long-standing resistance line, for example, technical traders say it broke out of its previous trading range and now the sky’s the limit — until the new range is established.

    In an upside breakout, bullish sentiment triumphed, but bearish sentiment can win out as well. A breakout doesn’t necessarily imply a trend reversal; sometimes a breakout is a confirming factor that the existing trend is gathering new momentum or passing new benchmarks.

  • Range limits: Oscillators describe where today’s price stands relative to its recent trading range. They’re usually based on 100, so they range from 0 to 100, or minus 100 to plus 100, or some other variation using the number 100.

  • Convergence: Convergence refers to two indicator lines coming closer to one another, as when a support line and a resistance line converge to form a triangle or two moving averages get closer together, indicating less difference between their numerical values. Convergence generally means that the price action is starting to go sideways or has a narrower high–low range, or both. A sideways move, in turn, generally leads to a breakout.

  • Divergence: Divergence refers to two indicator lines moving farther apart, as when the spread between two moving averages widens. Divergence also refers to an indicator and the price going in different directions.