Oscillator is a technical indicator to check momentum and volume in Forex and to find entry and exit points. Learn how to use Oscillator in Forex Trading.
Oscillator indicators in the Forex market, how is that possible? You may have been noticing that experts and well-known investors usually take studies of other disciplines different from investments or financials to try to make profits from multiple market conditions.
It happened with the Fibonacci sequence, a set of numbers discovered by Leonardo of Pisa in 200 BC, and it is happening also with the oscillation, a repetitive variation in a given time that measures the space between two or more different states.
Well, the oscillation is well represented in the investment industry, and especially in the Forex market. Traders love watching oscillators, and they use volume, stochastic, or momentum oscillators.
Why aren’t you doing it? Well, today we are going to talk about the oscillator technical indicator and its common uses in the Forex market. Keep reading and learn how to use oscillator indicators.
What is oscillator indicator
As oscillation is the repetitive variation of a body between two or more states, the oscillator technical indicator is a tool which measures the movement of a price between two extreme values.
It is used to discover short-term overbought or oversold conditions and possible changes in the price due to the exhaustion on movements. So, it is designed to show potential trend reversal points.
Another important use for oscillators is its ability to discover changes in direction when a pair is trading sideways or in a range. Also, It helps to identify entry and exit points as it shows the moment when a movement is losing steam.
The oscillator works following the idea that as momentum starts to slow, fewer investors will enter in the direction of the move. For example, in an uptrend with waning momentum, fewer investors will be willing to open long positions; furthermore, the contrary in a downtrend will happen, with fewer investors ready to go short.
Types of oscillators
Common oscillators in the industry are MACD, ROC, RSI, CCI. Also, there are variations from the Oscillator indicators such as Awesome Oscillator, Parabolic SAR, and ultimate oscillator, among others.
The difference between all indicators lies in the method of calculations and what they are focusing on signaling. Some tools are based on the high-to-low range of the time period, while others use changes from two consecutive closing prices.
We are going to talk about each oscillator technical indicator in other pages but let’s take a short vision of the most popular types of oscillators.
Relative strength index
Also known as RSI, the Relative strength index is a leading indicator that measures the strength or weakness of a pair by comparing its daily positive movements against its daily bearish moves in a given time, usually 14 periods.
Commodity channel index
The Commodity channel index, or CCI, is used to identify when a pair is overbought or oversold and to know the price trend direction and strength. It measures the difference between the current price and the historical average price.
Moving average convergence/divergence
MACD, the acronym for moving average convergence/divergence is a trend following indicator that shows the relationship between two moving averages of two forex pairs. MACD is calculated by subtracting the 26-period EMA from the 12-period EMA.
The Stochastic oscillator is an indicator that uses support and resistance levels to find overbought and oversold conditions. It refers to the relation of a current price regarding its price range over a time period. It tries to identify turning points by comparing the closing prices and price ranges.
How to use oscillators
Oscillator indicators as often used as tools to find potential turning points as well as entry and exit points. The idea is that the market is ready to turn back when the conditions are changing, and the movement is losing steam.
That being said, some oscillators are lagging indicators so that they will show you past price performance, and it gives you the signal when the price has changed. What to do at that moment?
Well, you should combine the use of different technical indicators for confirmation. Remember that as traders, we don’t know what will happen in the future, but we collect as many hints we can that show us the potential direction of a pair.
So, the use of one single indicator is never recommendable, but collect a set of three or more technical studies that work together where each one shows a different aspect of a potential trade. Then, when all of them are pointing in the same direction, you have a green light to act.
Watch for a set of leading and lagging indicators that also shows you potential support and resistance levels. That is common indicators but also an understanding of chart patterns.