A tool of technical analysis - the oscillator
Do not confuse this concept with other similar terms. The oscillator is a technical indicator of the financial market, showing any deviation from the standard trend movement. Thus anticipating the situation with these kinds of indicators can most accurately guess in what state is the market in General, and the status of individual work items.
Graphically, these technical analysis tools are depicted as a classic line graph. It is located, as a rule, in the lower part of the working area.
In the event that a situation is formed when assets are in an overbought condition, this signals the possibility of their correction and approaching the highest point of the price range. In the “oversold” position, assets fall to the minimum point of the price range, respectively, it is possible to predict their ability to raise their price.
In order to work successfully in the financial market, you can use a variety of different tools that have their own obvious advantages, but they are also not without drawbacks.
If you are interested in trading not so long ago, then you probably heard such a thing as Stochastic. However, not all even experienced traders know that this is an oscillator. Having read this article to the end, you will get acquainted with such indicators and will be able to work productively, rationally using the indicators of oscillators in practice.
What is this technical analysis tool?
If the state of the market is a situation where stock prices are slightly changeable (we are talking about the lateral movement of the market), then you should pay attention to the oscillators. If the trend is not clearly expressed, then on the basis of signals from such indicators it is possible to predict certain situations.
Such indicators, as a rule, are depicted as curves in the extraneous from the main working area window. They have their own settings, fluctuate in a certain range and allow traders to receive reliable signals.
How to work with such indicators? The work of oscillators is aimed at finding certain signals. It can be said that this information signals a reversal from the standard trend within a limited framework of the general range movement. In practice, this is not as difficult to understand as to understand in theory.
In order to understand the work of such tools in more detail, one should depict a rather classical situation. Take for example the ratio of EUR / USD, for example, the price of this ratio varies within certain limits (for example, from 1.1550-1.1800). What is the further algorithm of the trader's actions? Firstly, it is reasonable to purchase a currency pair at the lowest price and resell at the maximum.
It looks quite simple, but you should pay attention to certain nuances:
- It is impossible to predict the price movement, therefore it is impossible to guarantee its growth above the indicated levels;
- The range can change its position (change the side to the inclined channel).
It is in these situations, you must use the tools that will signal the possibility of a reversal.
What is the principle laid down in the work of oscillators? They are designed to analyze the overbought and oversold areas in order to predict a market reversal.
The image shows a standard tool called Stochastic, most traders prefer it. Two straight lines correspond to two levels - overbought (located above) and oversold (located below).
As a rule, the graphical image of this indicator is unevenly located within the above levels. And if a situation arises when the curves fall outside the range, a clear signal is automatically generated.
The other principle of operation of oscillators is to search for oscillation of curves in the indicator and value charts. We will talk more about this work principle later.
Pros and cons of using oscillators
All pros and cons should be considered when using such tools in their work.
Sufficient advantages of oscillators:
- The speed of the signals. As a rule, such technical analysis tools indicate the completion of a certain local trend in advance. A significant advantage in time allows traders to analyze the situation in detail and make a reasonable decision.
- Easy to use. All that is required of you when working with this tool is to observe the position of the curve in a separate window relative to other work items.
- Different types of signals. You can use oscillators throughout the entire work activity. Open trades in different market situations, as even when working with the Stochastic indicator, you can work with 3 different signals.
- Flexible settings. Any trader can customize this indicator to fit their requirements.
Significant cons of oscillators:
- The presence of unreliable indicators in the transition to the trend. Since such indicators are configured to turn only within the limited framework of the flat, they are not able to rebuild at the right time. Oscillators are not able to show you the changes in the market situation, as they continue to send signals about reversal even when the situation begins to standardize and a more stable trend is formed.
- No specific settings. This deficiency is characteristic of all indicators. Despite the fact that they have a fairly flexible system of settings, this does not eliminate the fact that the indicator cannot give only positive signals. Based on this, it is necessary to select various options for each situation on the market.
Frequently used oscillators
In order for traders not to waste time searching for their ideal indicator, we looked at the most popular ones further.
This indicator oscillator, which represents two curves, is located in a separate window from the working area. Stochastic indications fluctuate in percents. Also additionally lined up two levels, the location of which can be customized.
We should also consider the types of Stochastic signals. The graphic image can intersect at the bottom, respectively, a signal is received for purchase, if the curves intersect at the top and tend downwards - this is a sell signal. A downtrend is signaled by an exit from the overbought area.
In order to successfully work with this indicator, it is necessary to study in detail the principle of working with it. However, you can confidently say that this oscillator is preferred not only by beginners, but also by fairly experienced traders.
Relative Strength Index RSI
This indicator was developed and used for the first time back in 1978. Over time, he has not lost popularity with many traders. The principle of operation of this tool is to calculate the closing prices. Such an oscillator works on the basis of the number of “positive” and “negative” closures. And the main type of signal is exit from overbought and oversold areas.
This tool has only one curved line, which greatly simplifies the work with areas, since the relative strength index is simpler in perception.
Another sure indicator that appears less often is the divergence of the RSI curve and price. In case he came to you, then you should perform various actions and activate the activity.
The third confident indicator is breaking through the trend on the indicator. As a rule, this happens earlier than the main trend changes on the price chart.
Williams percentage range
This oscillator is an inverted version of another indicator. The basic principle of the work is an analysis of closing prices. A similar indicator was created to work with overbought and oversold areas, which may be the main signal when traders work.
In order to get clear and accurate signals, you should monitor the achievement of the indicator certain marks. What is complicated by the rare occurrence of such situations.