Price Studies

Most charting services offer a variety of different price studies that can be used to supplement your interpretation of overall price movements. The price studies will typically display in a separate window below the main price chart. Many of the most popular price studies are based on some form of momentum analysis, which looks at the speed of price changes relative to prior price changes. The primary concept behind momentum is that valid price changes should be mirrored by similar changes in price momentum. For example, if a currency pair is moving higher, but higher momentum readings are beginning to stall or even decline, it suggests the price move higher may not be sustained. If momentum readings accelerate in line with the price changes, the underlying price move is confirmed.

Momentum studies are not reliable leading indicators, but only a relative measure of the speed of price changes now compared to prior price changes. Most momentum studies incorporate "Overbought" and "Oversold" conditions in their interpretations, with individual price studies having slightly different levels constituting overbought and oversold:

  • Overbought refers to a momentum reading that is too high relative to prior price gains. You can think of overbought in terms of a price having risen too far, too fast relative to prior price increases. But remember, just because a momentum reading shows an overbought condition does not mean that prices cannot continue to increase.
  • Oversold refers to a momentum reading that is too low relative to prior price declines. Think of oversold in terms of prices having fallen too far, too fast relative to previous price declines. Again, just because momentum readings may show an oversold condition does not mean that prices cannot continue to move lower.
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