Explaining what oscillators are in general and how they work


In general, an oscillating means a move or a swing that goes back and forth at a regular speed, just like how an electric fan would oscillate. The same idea is true with trading and oscillators. An oscillator is something that moves back and forth or up and down between two points. In short, it is something that can go anywhere between a point and another.

Oscillators explained

A few popular oscillators include the Williams percent range (Williams %R), Stochastic, Parabolic stop and reverse (Parabolic SAR), Relative strength index (RSI), and more. How do they work? Lesser buyers in an uptrend or lesser sellers in a downtrend will not want to trade at the current price if the momentum is slowing down. Why? When the momentum is getting slower, it also means that the current trend is most likely getting weak.

The indicators that we mentioned are made to help us become aware of when trend reversals might be imminent soon. The prior trend is done, and the price will most likely change direction soon.

Let us cite an example.

Let us assume that this is the month of January, and you used three indicators: stochastic, parabolic SAR, and the RSI for a trade. You are expecting a total of 500 pip gains. These three all gave you a buy signal. In the chart, you saw a decline that has been happening for three months already. If only you went short, you already gained profits. Around May, the oscillators gave another buy signal. The price massively declined again.

These oscillators may sometimes give conflicting signals. They can even provide the wrong and exact opposite signals. Now, you are more confused about which oscillator to follow. The parabolic SAR provided a sell signal in March, the Stochastic gave a buy signal, and the RSI did not bother to provide any.

Around May, the stochastic and RSI signaled “sell” while the parabolic did not give any. The price continued to rise, and if you went short, you could have lost a lot.

Indicators made you more confused than ever?

Suppose you think that instead of helping, the indicators made you more confused since some are obviously giving wrong signals, and some do not even bother to show any signal. You might think that these are terrible signals. However, have you ever thought about their calculations?

For instance, stochastics depends on the high to low range of that given time frame. The relative strength index maximizes the change of one closing price to the other one. Parabolic SAR has a more complex calculation that might be confusing to some, leading to conflict of oscillators.

Oscillators are just indicators.

These indicators are not perfect. They are only indicators at the end of the day, and one trader should not rely everything on them, let alone in one indicator or plain luck. If the signals are too hard to interpret or are too confusing, it might be better to back off for a bit than guessing. It is not wise to force trades!