As a forex trader, you need the right skills to succeed. The right skills are gained by learning how to use the right tools. Technical analysis and technical indicators are some of the tools to succeed as a forex trader.
Technical indicators are price patterns of a currency pair in the course of a trade. Traders use indicators to make profitable trading decisions.
One of the most common technical indicators used is oscillators. Oscillators indicate high and low price positions on a currency pair. At the indicated positions, the price is likely to change. At a high position, the price is expected to godown. While at a low position the price is expected to rise.
Types Of Forex Oscillators Every Trader Should Know
Relative Strength Index (RSI)
Relative Strength Index is one of the most popular forex oscillators. It is used to identify overbought and oversold points of a currency pair. Oversold means the lowest point or price of a currency pair. Overbought positions are the highest price points.
The RSI as an indicator is a leading indicator. Its predictions or results help you to identify when a price change is about to take place.
At the oversold position identified by RSI, a price correction is likely to take place. The price of the currency pair will start rising. Traders will then take a buy position at this point to take advantage of a rising price. Conversely, on the overbought position, traders will take a sell position. The trader will profit from a fall in the price.
On your preferred forex trading platform, the RSI is a straight line scaled from 0-100. When it indicates a point below 30, that is an oversold position. The price is now likely to rise. When it indicates a point above 70, that is an overbought position. The price is likely to start dropping from here.
As a trader, it is advisable to combine the RSI analysis with other analysis tools to make the best decision.
Stochastic oscillators are similar to RSI. They also indicate overbought and oversold positions on a currency pair.
They are best used with other technical analysis tools and indicators. Compared to the RSI, stochastic oscillators have a much lower oversold position at 25 and a much higher overbought position at 80. If you are using the stochastic oscillator, these are the numbers to look out for.
You can use RSI or stochastic oscillators interchangeably. Do not use them together to make your trading decisions.
Moving Average Convergence/Divergence Indicator (MACD)
The Moving Average Convergence/Divergence indicator or MACD has been used in forex trading for decades. It is suitable for use in trending markets. MACD isn’t favored for use in ranging markets.
MACD is made up of three separate time series curves. The results of MACD indicators show the strength of the trend.
Many traders prefer MACD for its simplicity. When using MACD on your trading platform, you are looking at a straight line across your screen. When applied to a longer time frame, the MACD offers a good view of the market trend and a proper basis for a trading decision.
When the MACD line travels in the same direction as the price, this is known as convergence. Divergence occurs when the MACD line and the price move in opposite directions.
If the MACD line is above zero, you are in a bearish market. This means that you should take a buy position. When it is below zero, you are in a bullish market and should take a sell potion.
MACD is a lagging indicator based on another lagging indicator. The forex trading market is highly volatile. Price changes occur in seconds and can affect your positions. Use MACD with other tools to avoid losses.
There are many other forex oscillators at traders’ disposal. The MT4 trading platform has over ten oscillators that one can use. Since oscillators help to indicate the market trend, they cant be used on their own or together. To make a good decision on your trade, combine oscillators with other technical analysis tools. However, they are an important weapon in your arsenal as a forex trader striving for success.