Oscillators, if used well, are one of the most valuable tools for a trader. Very few tools help traders see significant risk, which is one reason that makes them tools of value. Risks are mostly eminent with the reward set-up for when price action corrections come to an end.
Oscillators will help a trader see the exhaustion of a move, leaving them room to enter near the trend’s exhaustion point. With most trend pullbacks, there is just enough climax that can make you wonder if the trend is ending. This can trap the trader out of joining on the pullback. This is why trend reversals are the easiest way to attract then trap many countertrend traders.
Countertraders are gamblers; even though they tend to win and have fun, the math is always against them, making them slowly and surely go broke. However, we don’t advise traders to believe that stretched oscillators are a great entry. When new traders learn of oscillators’ benefits, they think they found the golden key to forex trading profits and start selling high and buying low.
Why Trading Against a Trend Can Hurt You
Trading against the trends can cause you pain because it works every once in a while. According to John Maynard Keynes, Markets can remain irrational longer than traders can say solvent. We see this when a trader thought he had sold the top, only to realize he entered against a strong trend that doesn’t have the intention of stopping soon. Some reasons people trade against the trend include:
- The assumption that a trend is overbought and is due for a deep set-back
- Assuming they are right and everyone else is wrong
- Expecting the biggest money to be made on a big turn
Though there is no harm in feeling this way, it is not profitable for traders to trade like this because they fall prey to their mental biases instead of good analysis. Entering into a trade emotionally is what makes countertrend unprofitable because you also exit emotionally. This leaves the trader exiting after most of their capital has been eaten up on bad trades from the beginning.
How Oscillators Alert Trend Ends
Oscillators can move from extreme highs to extreme lows. Anything below 20 is considered extreme lows, and anything over 80, extreme highs. Overbought markets ready for a turn lower are deemed extreme highs, while oversold markets due for a bounce higher are considered extreme lows.
With oscillators, you can realize the price action is disproportionally correcting the oscillator tool when you are trading against the trend. If the oscillator unrolls back in the overall trend’s direction, you can get steam-rolled if you hold on to that type of trade.
When momentum slows down, that’s when the oscillator indicator works. It will signal trade when fewer sellers are in a downtrend or fewer buyers in an uptrend. It gives signals of changes in momentum, which indicates the trend could be weakening. Hence, oscillator indicators signal the possibility of a trend reversal, where the price is ready for direction change when the previous trend goes.
Hence, in Forex analysis, indicators can be used as a measurement tool for examining things that underlie further price movements. The goal is to:
- Forecast future price movements
- Combining other tools to confirm Forest analysis results
- Receive an alert when the momentum strengthens or weakens
Hence the indicator can also confirm the position of the current price and the basis for sell or buy signals. Examples of oscillator indicators include:
- Stochastic Oscillator
- RSI (Relative Strength Index)
- Momentum (Rate of Change)
- MACD (Moving Average Convergence Divergence)
- Parabolic SAR
- Commodity Channel Index (CCI)
- Williams% R (Williams Percent Range)
- Money Flow Index (MFI)
By reading the value of the indicator, the user will know that a trading instrument’s price has entered the Overbought area and at a high-level reading. It will do the same when a trading instrument’s price has entered the Oversold area because it has been sold too much at a low price.
Forex Oscillators will often indicate before trends start to form. Because it signals you early, you can get maximum profit. However, because it appears before the price, there’s also a high possibility of getting fake signals. It can be a beneficial tool for those doing Forex analysis to get alerts when the trend is about to end.