Trend OscillatorsThursday, 6 July 2017 02:57
Trend oscillators are the tools of the Forex technical analysis, which help the trader to identify the overbought and oversold areas of the asset. The data of such tools is displayed in a separate window, below the price chart.
As soon as the price reaches one of these areas, the indicator gives a trader a signal about the possibility of opening a position.
Purpose of the Trend Oscillators
The main advantage of such tools is an ability to provide the advanced signals. Their indications change even before the price of the asset changes. It makes it possible to compile a short-term forecast.
The oscillator graph looks like a curve that moves in the range from 0 to 100. If the curve is in the zone of 0-30, this means the oversold area. The overbought area is in the range of 70-100.
The indicator signals at the moment when its curve leaves one of these zones. These signals help determine the beginning of the trend and its turn so that the trader could open the profitable positions.
Common Trend Oscillators
Just like with other technical tools, it’s difficult to name the indicator that is universal and the most reliable one. Each trader must choose the most suitable instrument, depending on the strategy and trading style used. We’ll focus on several indicators, which are the most popular among the Forex traders.
This oscillator is built into the MetaTrader4 platform by default. It serves as the basis for some trading strategies and is also used as an additional tool. The effectiveness of the Stochastic is approved by hundreds of traders around the world.
Its algorithm determines the oversold zone in the range from 0 to 20 and the overbought area within 80-100. When the indicator curve leaves the overbought zone, this serves as a signal for opening a purchase transaction. If the indicator leaves the oversold zone, it will be worth opening a deal for sale.
RSI is another favorite tool, which is also called the index of relativity. Its algorithm allows you to determine the strength of the trend and to predict an early change of the trend as well.
This indicator has two primary levels: 30% and 70%. If there is a maximum in the overbought area, or if there is a minimum in the oversold zone, this indicates a reversal of the trend.
MACD is a traditional oscillator based on the moving averages. It’s also built on the MetaTrader4 trading platform by default.
Often an additional exponential moving average is displayed in the indicator window, which is a smoothed indicator line. Since this way of displaying allows you to filter the noise, it’s easier to see the tendency of the oscillator curve on it. It’s also possible to show the difference between the signal line, and the first MACD curve, in the form of a histogram. If this value is negative, the bars of the histogram are shown below zero, and vice versa. The first case indicates the presence of a downtrend, the second one - an uptrend.
This tool shows the speed of the asset price movement, as well as the difference between the initial price and the closing price at the moment.
When the indicator curve moves above the zero level, it means an upward trend, in the opposite case - a downward trend. If the curve crosses the zero level, this means a change of the trend.
This trend indicator is also actively used for market analysis. Its efficiency is comparable with the MACD oscillator. Traders using this tool note the high accuracy of the forecasts. As a rule, its readings show a peak or a bottom in a few candles before the trend reversal.
Advantages of the Trend Oscillators
Among the many benefits of such a class of instruments, there are several main ones. Due to these qualities, the trend oscillators have become popular among the traders around the world.
- Ability to assess the strength of the trend at different time intervals.
- Ability to determine the profitable points for the positions opening.
- Ability to predict further price behavior at specific points of the timeframe.
Using the trend oscillators requires more preparation than working with the regular trend indicators. However, used correctly, they allow you to get the more accurate signals. Don’t forget that any technical indicator may give the false signals, so always check the oscillator readings with another tool.