What Is An Oscillator?

Forex indicators are technical tools used for predicting future price movements of different currencies against each other. There are two types of indicators and they are classified according to how fast they identify trade signals. The two types of indicators are leading indicators and lagging indicators.

Leading indicators are also commonly known as oscillators and are mainly used when the market does not display any obvious price trends. Oscillators are particularly useful in determining market extremes and in the identification of market overbought and undersold levels. The reason they are referred to as leading indicators is because they lead the analyst even where there are no definable market signs to show potential price support and resistance levels or price reversals.

Weakness of Oscillators

The main problem faced by analysts using oscillators is they tend to provide lots of incorrect trade signals particularly when the market is undergoing a trend. Therefore, they do not provide reliable signals when used on their own. For more accurate results, it is advisable for a trader to combine oscillators with lagging indicators.

Commonly Used Oscillators

A few examples of the most widely used oscillators in the Forex market include:

• Moving Average Convergence Divergence (MACD)
• Stochastics
• Kairi Relative Index (KRI)
• Average True Range (ATR)
• Rate of Change Momentum Indicator

Use of Oscillators

As mentioned previously, the best market conditions for using oscillators is when the market is range-bound rather than when it is trending. Additionally, due to the high possibilities of generating incorrect trade signals, it is best an oscillator is used in combination with a trend indicator.

Trading Strategies Using Oscillators

There are many different kinds of Forex trading strategies that widely employ the use of oscillators in generating market signals. For instance, the basic Bollinger band trading system uses stochastic oscillators to identify market oversold and overbought conditions when the market is range-bound and in instances when the market is consolidated. Another trading strategy that uses oscillators is the Moving Average MACD combo strategy. It makes use of the MACD oscillator in combination with the simple moving average which is a trend indicator. It is used for identifying trend reversals.

Understanding Oscillators

Every oscillator reacts differently to market conditions and this is the reason why it is very easy to generate fake outs or widely variant signals when using them. Once you have understood how to use oscillators, you get to realize that it is much easier to generate very accurate results if you find the right oscillator-trend indicator combination and know which market situations to apply it on. For better trading success, the trader should use them with proper money management strategies in place to ensure minimization of losses while profits are maximized.