Home Financial Trading Blog What are Oscillators and how can be used in trading online?

What are Oscillators and how can be used in trading online?

oscillator trading

When trading online there are a number of indicators that we should consider and that eventually will make our life much easier when trying to understand where the market is likely to go. Oscillators are a group of indicators that try to contain the theoretically infinite range of the price action into more visible limits. The reason why they were created was due to the difficulty of establishing a high or low value during trading. Surely we all have a concept of what is high or low in a daily price action however especially in volatile markets this can become challenging. So prices in themselves are not a good guides in understanding what is an extreme value in the market: oscillators address this problem by establishing indicator levels that help us during the decision process.

oscillator trading

Why should use I oscillators when trading online?

There are generally two ways that you can use oscillators when trading online. The first one is to try to establish the turning points, tops and bottoms. This is particularly useful if you are trading ranges. Oscillators however are also used in trending markets but in this case only when we are trying to establish if joining the trend or not. So highs or lows, tops or bottoms are useful for entering a trade in the direction of the main trend.

What are the Types of Oscillators?

There are many different oscillators that can be used by a trader and even if each of them have different names and also different purposes in reality there are just a small differences that determine which group an oscillator falls into and when and where it can be used.

The first way to categorise oscillators is on the basis of their price sensitivity. For example Williams Oscillator are very sensitive to the price action: those oscillators will reflect in details market movements but will not give simpler and clearer signals to traders. Other oscillators like the RSI are much less volatile and do provide a better signals but on the other hand are far less sensitive to the price action which can be a problem in spotting trends early on. Some oscillators also provide some limit values to help establishing various oversold/overbought levels while others will create their signals by basing only on the divergence/convergence phenomenon alone. Normally oscillators that do give oversold/overbought levels are particularly used in range patterns while the others are more used in trend analysis.

But let’s take a step back now and let’s take a look at few examples so that you can see what are the different types of oscillators that are commonly used by traders:

  1. MACD: The MACD is one the most common indicators. It is particularly useful to spot a trend but it is useless in ranging markets. MACD have no upper or lower limits however do have a centerline and traders use it to generate trade signals.
  2. RSI: RSI is also very popular and it is normally used by range traders. It is basically useless in trending markets.
  3. Williams Oscillator: this is very useful to analyse trending markets especially if those are very volatile. This oscillator however requires commitment and work as it takes some time to master but it is very popular also because it was used by trading legend Larry Williams
  4. Commodity Channel Index: The CCI is very useful when analysing commodities and currencies that tend to move in cycles. It has been around for longtime which is a good sign however it is not as popular as the other oscillators we have seen above.

How to use the Oscillators when trading online

As we have seen every oscillator is different and each of them has a precise purpose. Some will give a good understanding of overbought/oversold levels while others are used by traders to generate the desired signals. It is generally agreed that the best way to use this type of indicator for the divergence/convergence method. Sometimes this will generate some false signals but the risk is pretty low compared with other technical events like crossovers or the breach of overbought/oversold levels and this is the reason why it is preferred over other type of analysis.

Conclusions

So in conclusion we can say that oscillators are useful both in ranging and trending market and ultimately since even a range pattern can be separated into smaller trends, it can be possible to use trend oscillators in range trading as well. Experience and also a touch of creativity are very important to use well those type of versatile technical tools. If you decide to start using them in your own trading it is important that you do extensive testing and also do some demo trading to familiarise yourself with the parameters and generally to get a good idea of what is working and what doesn’t. By developing your trading style you will be able to determine which are the indicator types that work best for you and that you find most useful. Generally oscillators are a very important tool but they do require sometime to get used to as can be used for many different needs within trading.