Currency prices fluctuate and there are several technical indicators which are employed to forecast these price movements. As we know from physics classes back in the days we were still in school, the term “oscillating” means that a line swings between an upper and a lower boundary. Forex oscillators represent another widely used group of technical analysis indicators. They are popular mostly because of their ability to draw attention to a possible change in the trend even before this change starts to manifests itself in price and volume.
Oscillator is a technical analysis tool that is banded between two extreme values and built with the results from a trend indicator for discovering short-term overbought or oversold conditions. As the value of the oscillator approaches the upper extreme value the asset is deemed to be overbought, and as it approaches the lower extreme it is deemed to be oversold. Oscillators are most advantageous when a clear trend cannot be easily seen in a currency pair such as when it trades horizontally or sideways.
Oscillators are together with moving averages the most commonly used indicators in technical analysis. They take the form of lines that are drawn under the price chart for the particular instrument. Oscillators got their name according to the fact that their values tend to oscillate in a certain range. We can analyze current market situation according to the indicator's position within this range. A typical oscillator moves in a manner similar to a sine curve between its two extreme values.
By their form oscillators in forex are advanced indicators. Basic concepts of using oscillators are the overbought and oversold conditions of market. The market is considered overbought when the price is near its upper limit, and its further improvement is unlikely. Oversold zone is characterized by such a low price, that at the given moment its further downturn is unlikely. Although the analysis and use of oscillators best of all are represented at the constant state of market, the time of trend reversal can also be determined by their help.
Some examples of forex trading oscillators are:
- the MACD,
- the Williams Percent Range Oscillator.
Each of these forex oscillators has a different mathematical calculation, but they all measure similar events in a similar manner, and as such, a majority of oscillators are useful in ranging markets. Due to the tendency of trending markets to easily exceed and break through the oversold and overbought levels of oscillators are generally not very reliable in such market conditions.