The indicator is used to determine the trend. If the indicator is moving above the 50 levels, it is an indication that the trend is an ascending/bullish market. Therefore, you should be looking to buy. This means you can use the indicator as a trade filter by opening a long position when the indicator is above the 50-value level and a short position for lower values.
Overbought and oversold positions
You can use the indicator to identify when the price is on oversold and overbought positions. Therefore, when the indicator surpasses the 70 levels, it is a sign of a strong market perfect for a long position. Similarly, you can take a short position if the indicator goes towards negative values.
Divergence
The indicator can help detect price and momentum divergence. For instance, a bullish divergence occurs when the Qqe indicator sets higher lows, but the prices form lower lows. This is a signal of impending bullish reversal.
Contrastingly, a bearish divergence occurs when the Qqe is farming lower highs, but the prices set higher highs indicating a potential bullish reversal.
Also, when the bold line crosses the trailing line, it is an indication of changing momentum. When the bold line crosses above the slow trailing line, it is a tell-tale sign of bullish momentums. Similarly, when the smooth line crosses below the trailing line, it indicates short-term downside momentum.
Trading Example
The picture above shows price movement for the euro against the dollar on a daily frame. The green line (smoothed RSI) gives a clear picture of the price movement. When the price is rising, the green line rises with negligible lagging. It also falls in line with downward price movement. Note how the price reverses after reaching the overbought and oversold areas.
The indicator provides a sell signal when the green line crosses below the lagging red line, as shown by the red arrows. Similarly, the green line crosses the red line when the price starts to rise. The price experiences a strong trend immediately after the lines intersect.
