------------- Arrow Forex Signal
Oscillators Explained
Oscillators are a group
of indicators that confine the theoretically infinite range of the price action
into more practical limits. They were developed due to the difficulty of
identifying a high or low value in the course of trading. Although we may have mental
concepts of what is high or low in a typical day's price action, the volatile
and chaotic nature of trading means that any high can easily be superseded by
another one that sometimes follows on the heels of a previous record, and
negates it swiftly. In short, practice and experience tell us that prices in
themselves are very poor guides on what constitutes an extreme value in the
market, and. oscillators aim to solve this problem by identifying indicator
levels that hint at tops or bottoms, and helping us in the decision process.
Why should use I
oscillators?
There are two ways of
using an oscillator. One is to determine turning points, tops and bottoms, and
this style is usually useful while trading ranges only. Oscillators are also
used trending markets, but in this case our only purpose is joining the trend.
Highs or lows, tops or bottoms are used for entering a trade in the direction
of the main trend.
Types of Oscillators
There are many kinds of
oscillators available for the trader's choice, and although they have different
names and purposes in accordance with the creators' vision, there are a small
number of distinctions that determine which group an oscillator falls into, and
where or how it can be used, as a result.
It is possible to group
oscillators first on the basis of their price sensitivity. Some, like the
Williams Oscillator, are very sensitive to the price action. They reflect
market movements accurately, but under the default configuration do not refine
movements into simpler, clearer signals for the use of the trader. Oscillators
like the RSI are less volatile, and are more precise in their signals, but also
less sensitive to the price action, which means that two different movements of
different volatility and violence may still be registered in the same range by
the RSI, while the Williams Oscillator analyzes it more accurately to reflect
its violent nature. Some oscillators provide limit values to determine various
oversold/overbought levels, while others create their signals through the
divergence/convergence phenomenon alone. In general, oscillators that provide
oversold/overbought levels are useful in range patterns, others are
mostly used in trend analysis.
Let's take a look at a
few examples to have an idea of the different types oscillators used by
traders.
1. MACD:: The
MACD is one of the most commonplace indicators. It is a trend indicator, and it
is useless in ranging markets. MACD has no upper or lower limits, but does have
a centerline and some traders use crossovers to generate trade signals.
2. RSI:
RSI is another commonplace and relatively aged indicator used by range traders.
It is almost useless in trending markets.
3. Williams
Oscillator: An excellent tool for analyzing trending markets, especially those
highly volatile, the Williams Oscillator requires some commitment and patience
to get used to, but it is popular, partly due to its association with the
trading legend Larry Williams.
4. Commodity
Channel Index: The CCI is particularly useful for the analysis of commodities
and currencies that move in cycles. It is not as popular as the others
mentioned above, but it has been around for some time, and has stood to test of
time.
The indicators are
examined in greater detail in their own article.
Using the Oscillators
Each oscillator has its
own how-to of trading the markets. Some provide the aforementioned
overbought/oversold levels for trade decisions, others are used by
traders through various technical phenomena to generate the desired signals.
But it is generally agreed that the best way of using this indicator type is
the divergence/convergence method. Although this method is also prone to
emitting false signals at times, it does not occur as frequently as the other
technical events such as crossovers or the breach of overbought/oversold
levels, and is therefore preferred over other styles of analysis.
Conclusions
Oscillators can be used in
ranging and trending markets, and since, depending on the timeframe, even a
range pattern can be broken down to smaller trends, it can also be possible to
use trend oscillators in range trading as well. Creativity and experience are
the main requirements for the successful use of these versatile technical
tools. If you seek to use them in your own trading, it is a good idea to do a
lot of backtesting, and demo trading just to get used to the parameters, and to
gain an idea of what works and what does not. In time, your own trading style
will develop which will determine the indicator types that you enjoy most and
find most versatile and useful for you. You can begin by studying the various
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