How to use oscillators to time your trade entries and exits
Oscillators in trading, belong to a group of technical indicators that are usually displayed in the sub window of your trading charts. If you have been trading for a period of time, you might have come across some of these oscillators.
Some of the most used trading oscillators include the MACD, also known as the moving average convergence divergence indicator, the stochastics oscillator, the relative strength index indicator, and so on.
Although many traders treat oscillators as the same way as any other regular indicator on the price chart these trading oscillators offer something vital for your trading. When it comes to trading the financial markets, you will notice that price action does not always move in the same direction. Even within a trend, prices tend to retreat before moving in the direction of the trend.
As a result, when you want to buy or sell within the trend knowing where to place your buy or sell orders is very crucial. For example, although the trend in the price action may be to the upside, if you blindly place a long order, there is a very good chance that price action will start to retreat. This is the normal function in the market.
Even if you use a regular indicator such as the moving average indicator or even a Bollinger band indicator, you will not be able to tell when the markets are going to retreat. This is where a trading oscillator can come to your rescue.
What are trading oscillators?
Trading oscillators are nothing but technical indicators. They work similarly based on certain mathematical derivations. However, they are quite unique compared to the regular indicators that you would see on a price chart. As you would have normally noticed, a trading oscillator is situated in the sub window of the price chart.
One of the things that is common to all trading oscillators is the fact that they move either within fixed values, or they move above and below the zero line, also known as the baseline. Trading oscillators typically measure the momentum in the market. Depending on the trading oscillator you use, they can also measure the strength of the price action itself.
As a result, the trading oscillators offer something unique for the traders. For example, while the typical moving average will show you what the general trend is, trading oscillators can drill deeper into the markets and tell you when prices are retreating.
As a trader, it is essential that you learn to pick the turning points in the price. This is possible by using trading oscillators.
Example of the Stochastics oscillator
If you look at the above picture, focus on the area around the rectangular box. If you look at price action merely from the moving average perspective one would usually think that they could go long because the market is in an uptrend. However, if you did this without utilizing any other indicators you will see how sharply prices retreated from the recent highs that were formed.
Now, if we add the stochastics oscillator to the picture you will see how the market movement was aptly reflected by the movement in the stochastics oscillator. What we see here is that price action moved from what is called as an overbought area to correct itself. This correction led to price action making an interim swing low.
At the same time what you can see is that following the law that was formed prices then started to resume the broader uptrend. This can be clearly seen with the stochastics oscillator also moving out from the oversold level.
Thus, utilizing the stochastics oscillator we can deduce that the short-term corrections in the price action are accurately captured by the trading oscillators. Therefore instead of buying near the swing high that formed when you make use of a trading oscillator such as the stochastics indicator you would rather be waiting for price to make a swing low and then placing your long order around this level.
What you have as a result is a trading system which is although simple becomes a lot more robust because you also utilize the power off trading oscillators. As demonstrated in this article trading or oscillators can greatly help you benefit from your trading system. If you haven't been using trading oscillators much or giving them much importance, then it is about time that you research a bit more into how these indicators work.
One of the keys to success in trading with oscillators is that they will allow you to enter and exit a trade at the most optimal levels.