What Are Oscillator Indicators & How To Trade Them

Oscillator Indicators

An oscillator is a type of technical analysis tool that moves between two values. These values, when built on an indicator to measure the strength and weakness of a trend. These types of indicators are also called momentum indicators.

What are the Oscillator indicators?

Oscillator indicators have specific characteristics. In technical analysis, a trader gauges oscillator usually from 0 to 100.  They mention price fluctuations in overbought or oversold conditions.  When the oscillator’s value reaches upward, it’s an overbought condition, and when the oscillator reaches downwards, it’s an oversold condition.

Oversold and overbought conditions are an indication of a possible trend reversal. If the oscillator indicator reaches beyond its level, this means traders may start to prepare for a market reversal.

The traders can use oscillator indicators as a part of trend trading. This is because the price moves between two values creating a trend indicator. When the price rises, the oscillator rises above its level. Conversely, when the price drops, the oscillator declines below its level.

How to use Oscillator indicators?

When the price moves in a particular range, oscillator indicators follow these movements and signify an overbought condition when it reaches beyond 70 or 80. The trader may then look to take short positions. On the other hand, when price moves lower than 30 or 20, it’s an indication of an oversold condition, and traders may look to take long positions.

It’s important to note that the signals produced by oscillator indicators are sometimes most useful when the price moves in a certain range. When the price breaks these levels, a breakout occurs, and this is when a new trend starts to emerge.  This can damage a trader’s position because a trend can go against his/her positions. This is the reason why many traders combine oscillator indicators with other forms of technical analysis.

Besides this, oscillator indicators works in ranging markets, rather in trending markets.

Types of Oscillator Indicators

The most common types of Oscillator includes:

1. MACD

The MACD or moving average convergence divergence signifies price movements by combining two moving averages. It is commonly used for trend trading by swing and intra-day traders.

The MACD combines two moving averages: the 26-day EMA (exponential moving average) and the 12-day EMA. For calculations, it subtracts the 26-day EMA from 12-day EMA. There is also a 9-day EMA that acts as a signal line.

When the 12-day EMA crosses above the 9-day EMA, it’s a buy signal. On the other hand, when the 12-day EMA crosses below the 9-day EMA, it’s a sell signal.

MACD on a chart
MACD on a chart

2. RSI

The RSI is a momentum oscillator and measures the ratio of upward and downward price movements between the range of 0 and 100.

If the RSI is above 70, it’s an overbought condition; this means there is a strong buying pressure, and the currency pair is trading beyond its usual level. Conversely, when the RSI is below 30, it is an oversold condition.

RSI on a chart
RSI on a chart

3. Stochastics

The Stochastic indicator is a type of oscillator indicator and works similar to the RSI. Stochastics are mostly used in trending markets instead of ranging markets.

On the MT4 platform, the Stochastics illustrates two lines %K and %D. K% represents the Stochastics’ current value, while D% is the 3-period moving average of K%.

The Stochastics range between 0 and 100. If the value is below 20, it’s an oversold condition, and if the value is above 80, it’s an overbought condition.

Stochastics on a chart
Stochastics on a chart

Oscillator Indicators conclusion

Oscillator Indicators can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. The Oscillator indicators are great for finding the strength or weakness of a trend. However, traders may wish to combine these indicators with other forms of technical analysis as a part of their forex trading strategies.