Oscillators

Oscillators
An oscillator is any object or information that moves between two points. In other words, that is always going to fall somewhere between A and B.

Think of our technical oscillators as if they were on or off. More specifically, an oscillator will always give a signal of purchase or sale, with few exceptions.

 

[caption id="attachment_642" align="aligncenter" width="422"] Oscillators[/caption]

 

Stochastic, Parabolic SAR and RSI are oscillators. Each of these oscillators is designed to detect a reversal in the current trend.

Examples of Oscillators:

In the 1-hour USD / EUR chart below, we use the Parabolic SAR, as well as the RSI and Stochastic. As you have learned so far, when the stochastic and the RSI start to leave over-selling region, it is a signal to buy. We find sales signals between 3:00 am and 7am on 8/24/05. Each of these signals occurred 1 or 2 hours apart from each other.

[caption id="attachment_643" align="aligncenter" width="525"] Oscillators[/caption]

We also obtained sales signals for these three indicators between 2:00 am and 5:00 am on 08/25/05. As can be seen, the Stochastic has remained in the overbought region for about 20 hours.

Generally when an oscillator is maintained at over-purchase or over-sale levels over a long period of time, there is a strong trend.

In this example, as the Stochastic stayed in over-purchase, you can see that there was a strong upward trend.

Now let's look at the same messy oscillators, just so you can see that these signals are not perfect. Looking at the graph below, you will quickly realize that there are many false signals; You'll see how one indicator tells you to bandage while another tells you to buy.

[caption id="attachment_644" align="aligncenter" width="525"] Oscillators[/caption]

Around 1:00 am on 08/16/05, both the RSI and the Stochastic gave signs of purchase, while the Parabolic SAR continued to show a sell signal.

The Parabolic SAR gave a signal to buy 3 hours later at 4:00 am, but then it became a signal to sell a candle later. If you were looking at the parabolic SAR underneath, you will see a strong red candle with short shadows, too, see how the next candle closed underneath it. This would not have been a good long-term operation.

In the last two over-sell signals (buy) given by the Stochastic, look as there are no signals at all for the RSI, but the Parabolic SAR is still giving signals of sale.

What's going on here? Both indicators are giving you different signals.

The answer lies in the way each of them is calculated.

The stochastic is based on a time range (which in this case was 1 hour), but does not record changes between one hour and another.

The RSI uses the change between one closing price and the next. And the Parabolic SAR has its own unique calculations that can lead to conflict.

That is the nature of oscillators, they assume that a particular pattern on the graph always results in the same inversion, which is clearly not true.

Being aware of why an early indicator may be wrong, there is no way to avoid them. If you are having contradictory signals, do not do anything before playing with luck. If a chart does not fit all your criteria, do not open an operation by force.

Remember that patience is a vital tool if you want to become successful when trading in Forex.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.