Forex Basics- Using Oscillators in Your Daily Trading

Forex Basics- Using Oscillators in Your Daily Trading

If you are an experienced online trader, you have heard phrases such as “plan your trade” and “keep your losses to the bare minimum. But when you are new, you fly by the seat of your pants and want to rush things so that you can make money quickly.

But hold your horses’ buddy. Things don’t work that way. To be a successful trader, you have to play by the book. Otherwise, your pockets will always be empty. 

One of the most critical rules to follow strictly is using the available technology to gain the upper hand and never trade based on impulse.

Always understand that if you fail to use technology, other people on the other side of the trade are taking advantage of new technology and making good money.

Apart from following trading rules, it would be best to use all the tools at your disposal to help inform your trading.

And one of the most effective tools you can use is technical oscillators.

What are technical oscillators?

An oscillator is a price chart indicator that moves between two levels. Oscillators are used to detect when a security has been overbought or oversold. Often, they are used as a barometer to assess pricing momentum in terms of trend exhaustion, extension, and market reversal.

To help make informed trading decisions, most traders use charting platforms. The most popular charting platforms in forex are

  • Candlestick
  • Line
  • Bar

Most traders use candlestick charts due to their multiplicity.

Charting platforms offer traders endless methods of analyzing and viewing markets. Backtesting a plan using historical information fends off costly mistakes.

Let’s do away with charting platforms and get back to oscillators.

As already discussed earlier, oscillators tell of histograms that keep swinging in a repetitive manner between two states.

These low and high points usually stipulate overbought market conditions enabling traders to utilize trendline movement to decide when to exit or enter a trade and what position they need to take. 

The most popular oscillators in forex trading are momentum indicators. These momentum indicators are

  • Average Directional Index (ADX
  • Moving Average Convergence Divergence (MACD)
  • Relative Strength Index (RSI)

Most analysts and forex traders use these momentum indicators as changes in momentum often correspond to changes in price.

Also, traders use them to measure trend strength and decide the possibility of divergence.

Centered vs. Banded Oscillators

Banded Oscillators

Typically, banded oscillators have an upper and lower graphic range. As the trendline moves between two “banded” extremes, traders can quickly identify overbought and oversold conditions.

The lower band of range-bound indicators is typically 0 to 20 or 30 (depending on the oscillator). The upper band is 70 or 80 to 100.

You consider the trendline movement that breach or touch the upper band overbought, and will produce a sell signal. 

You consider the trendline readings that touch on the lower band oversold and will give a buy signal. 

Apart from RSI ( relative strength index), banded indicators are routinely lagging indicators meaning that trendline fluctuations accompany rather than precede price shifts.

Other examples of banded indicators include a stochastic oscillator and Moving average convergence difference ( MACD)

Centered Oscillators

On the other hand, centered oscillators do not have lower or upper bounds.

Instead, you read centered oscillators concerning a central point.

Even though their unbounded nature causes them to be less suitable for recognizing overbought and oversold market conditions, centered levels are more appropriate at identifying the strength and the direction of price changes. 

When using a centered oscillator, consider the readings above the centerline bullish, and interpret the dips down the centerline as bearish.

 A great example of centered oscillators is MACD and used to certify the existing trend and forecast reversals.

Closing Thoughts

Always combine oscillators with other valuable tools when trading forex.

It’s crucial to understand that even the most error-free reporting tools can give you false signals. So, it’s critical to have a way of certifying and comparing price changes across various analytical models.

Use Bollinger bands (trend indicators ) to help you ascertain the volatility of a currency pair and certify price changes before acting on a sell or buy signal your oscillator gives you. If you know the trend, strength, direction, and volatility level, you’ll quickly recognize which signs you need to act on.