Oscillators are technical indicators banded between two extreme points indicating overbought and oversold market conditions. Their intention or aim is to help traders identify the pivotal points of a trade, which means that traders use the market movements to know the best trading position to take or when to enter and exit a trade. Oscillator trading bases its principle on recurrence.

After an oscillator indicator hits an extreme value, it returns to a central reading. However, price and oscillator dynamics exhibit different proportions even if they move in tandem with each other. Prices do not return to the same point even as the oscillator moves to its normal value.

Unlike some other indicators, oscillators are more effective with prices moving sideways, and since they have the same purpose, adding more than one oscillator to a chart is unnecessary. It is advisable to use oscillators alongside other technical tools.

The most popular oscillators in forex trading are momentum indicators. Changes in momentum correlate directly to price changes, which is why traders gauge the strengths to determine divergence likelihood by using momentum indicators.Read the article to find out more.

Most Popular Forex Oscillators

The most popular moment indicators used in forex oscillators are RSI, Stochastic oscillator, and MACD. All three are adjacent to the price action but charted on separate graphs.

1.   Stochastic Oscillator

The Stochastic oscillator predicts the continuation of a current trend by measuring the degree of change between prices in a closing period. The indicator, scaled from 0 to 100, shows when a market is overbought or oversold. If the stochastic goes above 80, then that is an indication of an overbought market. If the line is below 20, then it is an indication of possible market oversold.

Generally, the best time to buy into the currency market is when the line is below 20, indicating oversold. When the line is above 80-overbought, that is the best time to sell. One of the things to note, though, is that the stochastic indicator can remain below 20 or above 80 for a while. If this happens, it does not mean that you should sell or buy blindly just because the indicator suggests that you do.

With time and enough practice, you learn how to use the stochastic indicator to suit your trading preferences. A stochastic oscillator is best suited for the more volatile markets.

2.   RSI (Relative Strength Index)

The Relative Strength Index is another popular forex trading indicator that helps to evaluate the current market strengths. RSI, scaled from 0 to 100, shows oversold or overbought market conditions just like the stochastic oscillator. In RSI, readings below 30 indicate oversold, while readings above 70 are an indication of overbought.

While everything else between RSI and stochastic remains the same, traders using RSI also look for centerline crossovers besides the overbought and oversold indicators. The centerline is 50, and if there is any movement from below going upwards above 50, they know it is an indication of a rising trend and a bullish signal.

If the movement is in reverse, from above 50 to a downward trend, which indicates a weakening market and a bearish signal. RSI helps to confirm possible UPTREND and DOWNTREND, making it one of the most popular indicator tools.

3.   MACD

Moving average convergence divergence or MACD is another technical analysis tool that helps to identify new trend moving averages. They help to indicate whether the trend is bullish or bearish. The setting on a MACD chart shows three lines that represent the following:- faster-moving average, slower moving average, the difference between faster, and slower moving averages.

The vertical line that shows the difference is the histogram. MACD chart uses moving averages of 12 and 26 trading periods and a 9-period signal line.

If the signal line crosses ABOVE the zero line, that indicates an UPTREND and a sign to BUY. If it goes BELOW zero, that is an indication of a DOWNTREND and a sign to SELL.

Wrapping it up

One of the best trading secrets is to know when to sell and when to buy. Going at forex, trading blindly, or taking chances to make profits might put you in situations that will lead to losses and disappointments. Besides helping traders discover overbought or oversold conditions, oscillators also help to forecast price movement breaking points.

Using oscillators as your technical analysis tools make a lot of difference in your trading patterns. They help you to know when to strike and when to let go.