Understanding the oscillator in forex trading.
If simply Oscillator can be interpreted as a momentum indicator. This is because many of the technical analysis tools in the Oscillator are useful for measuring whether or not the momentum of rising and falling prices.
Lots of traders who use Oscillator as one of the indicators. A unique and interesting thing is that many of them do not understand the use of Oscillator.
We will give you an explanation of the Oscillator in a very simple way to make it easy for everyone to understand.
Here’s a further explanation.
The trend that is happening in the market is the general direction of the current price movement. While market momentum can be interpreted as the acceleration rate of price movements that are happening. Oscillator will measure the momentum that is in the market based on mathematical calculation.
The decline in momentum during the uptrend or downtrend and this is an indication that indicates that the trend will change soon. When the Oscillator starts showing a decline during a good trend, then this is an indication that the trend will stop and the price will start moving sideways or reverse direction.
So also when there is a downward trend, where as the Oscillator shows a decline in mimentum from a downward trend, then this could be an indication of the end of a downward trend.
Overbought and Oversold Conditions
Oscillators will also provide insights relating to overbought and oversold benefits to provide added value to market participants.
Overbought occurs when the Oscillator moves up to extreme highs and Oversold occurs when the Oscillator goes down to the lowest level drastically. The market that is experiencing Overbought and Oversold conditions is expected to start experiencing a trend of future direction.
Nevertheless, traders and investors involved in the market do not immediately make a sales position when the market overboght and open a buy position when conditions Oversold. Though such a strategy could have been successful when market conditions are moving down within a limited range.
The thing to watch out for is when market conditions are in a state of major trends. The thing you need to understand well is that the Oscillator is usually in Overbought or Oversold conditions only 10% of the movement period, while the remaining 90% moves in the Overboght and Oversold range.
Another feature that is important for your attention in Oscillators is the presence of devergence between new highs or lows in price. Bullish divergence occurs when prices make new lows and Oscillators are perceived as failing to make new lows. Similarly, Bearish Divergence can happen when the price makes new highs and Oscillator fails to make new highs.
Simply Divergence is an early indication of tran changes in the market. When the indication of divergence in Oscillators turns out to be true, it allows traders to make long positions near the lowest price and make the sales position close to the highest price.
The unfortunate thing is that Oscillators-Divergence is often wrong. The signals provided by Oscillator-Divergence are opposite to the trend.
Momentum Oscillator occurs when you compare the last closing price with the closing price in the specified period. For example, you would calculate the momentum line using a 9 day period, then all you can do is reduce the closing price 9 days ago to today’s closing price. You can also increase or decrease the desired period if you want a faster or slow Oscillator.
The formula you can use is M = C – Cn, C is the current closing price and Cn is the closing price of the day specified in this example we use 9 days.
The result when the momentum line is moving flat, then it means the price movement is stable and tend to sideways. While Oscillators start moving down from values above zero, the price increase for 9 days is smaller than the day before the last closing price.
Conversely, when the momentum above is below the zero line, the current closing price is below the closing price of 9 days ago. As the downtrend becomes bearish, the momentum line will move down further away from the zero line. The oscillator direction of the negative direction indicates a deceleration of the descending trend.
Rate of Change
Furthermore there is also ROC forex indicator which is another Oscillators to compare the last closing price with the closing price in the past period. When viewed, the ROC indicator is very similar to the momentum of the Oscillator to be interpreted in the same way.
In order for you to calculate the ROC for a period of 9 days, you can divide today’s closing price to a closing price 9 days ago. When today’s closing price is equal to nine days ago, the ROC will be at a value of 1. On the other hand when today’s closing price is above the closing price of 9 days ago, the ROC will be above 1.
The formulas you can use are as follows,
ROC = C / Cn, C is the current closing price and Cn represents the closing price in the specified period.
When you use ROC and Oscillator momentum, you can easily see if a trend is losing momentum or gaining momentum. Both indicators that we convey above can also produce divergence either bullish or bearish.
That’s the simple explanation we can tell you about Oscillator and the many useful features you can use to make informed decisions in the current trading.
Overall, this will greatly assist traders in making decisions especially for those who use technical analysis techniques.
If you still feel confused by the above simple explanation, please just ask us through the comments field below.
Hopefully the above information can help you all.