Indicators and Oscillators in Forex Trading
Each trading platform has its own set of indicators but, roughly, they are divided into trend indicators and oscillators.
The first category is represented by indicators that are applied directly on the chart, and the second category is represented by indicators that are opened in a separate window, below the actual chart.
Oscillators are more representative than the price itself because they take into account a longer period than the actual price and, therefore a trader should always stay with the oscillator and not with the price.
The above represents one of the most important aspects of trading with an oscillator as usually the price is giving fake signals and it means that the trader should stay with the oscillator for the simple reason that more candles are considered when it is plotted on the screen. Oscillator will take in account period before and wont be fooled by current price uptick.
Understanding Oversold and Overbought Levels when Trading Forex with CFDs or Binary Options
Another advantage would be that in ranging markets the oscillator will always give overbought and oversold levels and this is important as we can trade PUT options/SELL contracts in overbought conditions and CALL options/ BUY contracts in oversold territory.
However, when trends are unfolding, the overbought and oversold strategy is not working anymore as the price has the ability to stay in those territories for quite some time before entering a range again. This would be the major drawdown of trading binary options with oscillators. Binary options have expiry time which complicates the exit. On the other hand, with forex CFDs there is no such issue because the position can be closed at any time.
Technical analysis should be viewed from two points of view: one is represented by trading with indicators (trend and oscillators) and another one is represented by trading with a chart trading theory, like Elliott Waves, Market Profile, Gann, Gartley, Jenkings, Fibonacci levels, etc.
In the first category, indicators are divided into trend indicators and oscillators and the last of the two have the big advantage of being visible and allowing divergences to be traded. The whole concept of a divergence cannot be used if there were not for oscillators and the way they are plotting values below the actual price window.
Advantages of Using an Oscillator when Trading Currencies
The biggest advantage is the fact that an oscillator is always taking into account multiple periods when compared with the price that is fixed or refers to a specific value in time. For this reason, staying with what the oscillator is showing is key.
Another advantage is that oscillators can be used in trend trading as well in the sense that in strong trends, small spikes or dips can be traded using oscillators. For example, in a strong bullish trend, the move of the oscillator close to the oversold area offers the perfect situation for picking the perfect striking price.
Oscillators are plotted at the bottom of the chart and the window can be maximized on the whole screen as well. This makes room for technical analysis on the oscillator itself, even counting waves or hunting series of higher highs and lower lows but again, on the oscillator. This is giving a totally different look and interpretation and it can be used in successfully trading binary options or CFDs.
Like any indicator, it is important to remember the time frame the oscillator is being plotted. It is pointless to use divergence on a daily chart and to trade short-term expiration dates as well as it is pointless to use oscillators on a single time frame. Multiple time frames are always welcomed as it brings bigger and smaller ones into analysis and the trading decision is easier to be taken.
Oscillators as Continuation Patterns
Last but not least, oscillators can be used as continuation patterns. This is possible by taking into account the fact that, like mentioned at the beginning of this article, oscillators show overbought and oversold levels. These areas are usually the extreme ranges the oscillator is traveling and the key here is to find out the neutral zone. The way to do that is to take the maximum and the minimum values the oscillator is traveling and divide the outcome in two to find out the middle of the range. Then right click on the oscillator window and choose to edit the indicator for adding a line or a new level in the middle of the range. The standard interpretation is that each and every time market is breaking that middle, neutral level, it means it still has room to go as a continuation pattern.
If market is traveling from the downside to the upside, a break of the neutral level is a sign for call options as the bullish trend should continue until overbought territory is being reached and in this way the oscillator is actually acting as a bullish continuation pattern.
On the other hand, if it is breaking the level from the upside to the downside, in a clear bearish move, then trading put options on the break of the neutral level for a bearish continuation pattern is recommended.