Oscillators as a Trading Tool
The 7BO Binary Options Education already dealt with the issue of when markets are not trending. Trending is not the dominant factor and occurs only 35% of the time, and the other 75% of time fall back onto prices which remain steady within the levels, i.e. in consolidation and does not come close to break either resistance nor support. As an advanced trader, you do not need to wait for the trends, but you can equally use the ranges to your advantage if you know how to track them down. You may buy at the lows and sell at the highs and still be on the right track.
One of the perks of trading options is that the time when prices are in consolidation is not necessarily wasted time. traders should not only wait for intensive trend movement to make a move, but they can also make profitable trades as long as the price is higher than the striking price within the expiry period (when they placed a call option), or when the price is below the striking price within the timeframe when they traded a put option.
In a consolidated market, an oscillator can help you significantly to pull through the period by identifying ranges. The oscillator RSI (the Relative Strength Index) is one of the best-known oscillators and we have already mentioned it in our previous lessons, and hope that you already started to use it from time to time. As the binary options market is booming, many platforms offer a series of oscillators and many traders select them by their own preference or based on knowledge they have acquired so far.
Oscillators imitate or copy price movements, and moreover, they are even more accurate than the prices itself (regarding many false price displays), and traders can simply use the oscillator to avoid false prices by not looking how the prices move, but the oscillator.
Use Oscillators When Trading
Oscillators are characterized by their skill to make divergences usable when the market moves within the levels, as opposed to an aggressively moving market when divergences are better to be left out. Oscillators are a kind of automated little helpers and that is what launches them to the top of the most desirable trading tools.
A trader needs to reach a certain level of trading experience in order to know when the oscillator is of use and when it should be avoided. Traders need to know that there is no universal tool which is so diversified to cover all market conditions. All of the tools are good for some situations where they would be a complete failure in others. Oscillators too, have two sides and sometimes even combining multiple oscillators will not bring the desired results. It is more about estimating the right situation for the right tool.
They are good to indicate oversold and overbought markets, and by the time it reaches one of these two points, all of them show the same. The signal must be obtained from other indicators or by something else.
The Oscillator as a Strategy Tool
The greatest benefit of trading with an oscillator is certainly the hint when to enter a trade, which is not the case with trend indicators. A strategy with using an oscillator can be presented as follows: one may buy a call option on a dip of the Relative Strength Index into the 40 level, but only when it reaches 50 level.
The many trading platforms feature the oscillator indicator almost by default, and you can find it mostly on the menu. But, it might be put in other places as well, like on the Meta Trader platform, which is used by millions of traders, where you can find the oscillator options by clicking the Insert button, after which you click indicators after which the oscillator indicator can be accessed.
Another renowned platform, the JForex trading platform calls the oscillator a momentum oscillator, drawing on the association that prior to oscillators’ breaking, there is always a momentum.
Trend indicators differ from oscillators in the same technical and fundamental analysis differ. There is no successful trading if one only focuses on one part. Both have to be taken into consideration as fundamental factors of a strategy. Still, may traders focus on one or the other, but they usually mismatch the price and timing which results in losses. Similarly, technical analysis serves to predict where the price is moving, its direction, but fundamental analysis explains the reason behind the price movement.
How Much Can You Rely on the Oscillator?
The above-given example does not allude that one cannot be performed without the other, sure it can, in practice and theory, but the point is that more optimal trading results can be achieved by combining the two strategies, as well as combining oscillators and trend indicators.
When it comes to the reliability of oscillators, they are considered more reliable than prices. The secret lies that oscillators analyze more candles before displaying a level on the graphic. The RSI (14) is most commonly used, and offer more accurate hints than trend indicators sometimes.
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References and Further Reading:
- Theory of oscillators (Andronov, Aleksandr Aleksandrovich ; Khaikin, S E ; Vitt, Aleksandr Adolfovich)
- A Study of Locking Phenomena in Oscillators (R. Adler)
- From Phase to Lag Synchronization in Coupled Chaotic Oscillators (Michael G. Rosenblum, Arkady S. Pikovsky, and Jürgen Kurths)
- Oscillators tradingTrading with Oscillators: Pinpointing Market Extremes — Theory and Practice (Mark Etzkorn)
- Technical analysis and the London stock exchange: testing the MACD and RSI rules using the FT30 Terence (Tai-Leung Chong & Wing-Kam Ng)