If you’re looking to do some investing in a market, any market, and if you’re serious about it, you won’t be going in blindly. No matter if you’re a rookie or an experienced trader, you’ll take a look at the chart, see what’s going on at the moment and then decide what to do. In other words, even if you’re not fully aware of it, you will be conducting an analysis. Technical analysis, to be exact. There are many tools that can help you to conduct a more efficient technical analysis, though, and oscillators are one of the most important ones. So keep reading if you’re not using them because they can help you improve your profits a lot.
How do Oscillators work?
As mentioned above, oscillators are tools that can help you conduct technical analysis. They will usually have a separate chart below your main screen because the main principle they are based on is showing you overbought and oversold levels. The value of an oscillator is expressed in percentages, and their chart contains two distinct lines showing you the threshold of the aforementioned levels. And while oscillators will broadly follow the market movement, these two lines are what makes them special because when the market crosses one of the thresholds you can expect a shift in its trend.
It is to say that you are able to change the overbought and oversold thresholds yourself (they are usually set to 70% and 30%, respectively), which can certainly make these tools a lot more helpful. Moreover, they are usually used to make predictions that are more short-term in nature. However, oscillators are not a homogeneous group and there are plenty of them to choose from, depending on what you’re interested in.
Also Read: Awesome Oscillator Excel Sheet with Scanner
Which are the most popular oscillators?
Oscillators can usually be found in the indicator tab of your trading platform’s UI, and there can be quite a few of them, depending on where you’re trading. So, which one to choose? Well, over the years, a few of them have managed to make quite a name for themselves, so you’d do well to give them a shot. A couple of most popular ones are:
- RSI (Relative Strength Index)
Perhaps the best-known oscillator across the board, the RSI was developed in the late 1970s. It is pretty much everything we’ve already discussed, as it compares bullish and bearish momentum of an asset and then plots the result on its own chart. The 70% and 30% thresholds apply here and if you want to start using an oscillator, this one is your best bet.
- Stochastic Oscillator
This type of oscillators takes the closing price of an asset and then compares that to a range of prices, again to present you with overbought and oversold areas. However, the thresholds, in this case, stand at 80% and 20%, respectively. The idea is that, as a market trend, the price will close near a high if the market is bullish and near a low, if it’s bearish.
Where to use oscillators?
Well, a good platform is pretty much a necessity for this, preferably one that offers a lot of tools so that you can test out multiple oscillator types. IQ Option has one of the best trading platforms in the trading industry, and they have created it themselves. From a technological point of view, it is very advanced, but you can still use it and utilize all its features quite effortlessly. All the information you need is just a click away, all kinds of tools can be used, and you can even test things out with a demo account which is completely free and doesn’t even require you to open an account with the broker.
But most importantly, if you want to trade for real, you can do so with very small amounts (trades can be opened with a single dollar), so you don’t have to risk a lot if you don’t feel like it. This is one of the best online trading places because of that, but these features are just the tip of the iceberg. Check the company out, you won’t regret it.
What to use with oscillators?
While it is true that oscillators are great trading tools, more experienced traders will not use them just by themselves. They will use other tools alongside them so that the results of one can be corroborated by the other (of course, you can use several tools this way, too). So what to use in combination with oscillators? Well, another oscillator is often a good idea because it can solidify your belief that an asset is entering overbought/oversold territory. For example, stochastic oscillators can go well with the Klinger Oscillator, MACD is also a good par to stochastic oscillators and so on. Feel free to mix and match to find the one that works best for you, all with the goal of providing you with the most reliable info.
Oscillators are also used to spot divergences. For example – The chart below shows a scenario where price makes a new high but RSI oscillator didn’t. It is an indication that the bullish market phase is going to end soon.
Oscillators are among the most important tools you as a trader can use, so it’s important to know how they work and what they can give you. They are by no means clairvoyant and shouldn’t be viewed as a guarantee of a market outcome, but they can provide you with a very strong indication of things to come, particularly in a short period of time. To maximize their efficiency, try to use them in pairs or in coordination with other tools for technical analysis you have at your disposal. The more you can verify a certain prediction, the better your chances are. So don’t be afraid to go over that chart again and again if you have the time and keep analyzing it. It could pay off in a big way. Good luck!