Two Rules For Trading With Oscillators

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Forex Fundamentals: Using Oscillators in Your Trading

The term “oscillators” describes histograms that swing in a repetitive fashion between two states or points. These high and low states typically indicate overbought and oversold market conditions, allowing traders to use trendline movements to determine when to enter and exit a trade and what position to take.

In forex trading, the most popular oscillators are momentum indicators. Because changes in momentum are directly correlated to changes in price, traders also use momentum indicators to gauge trend strength and determine the likelihood of a divergence.

Banded vs. Centered Oscillators

Banded oscillators typically have a designated upper and lower graphic range. This allows traders to easily identify overbought and oversold conditions as the trendline moves between two “banded” extremes. The lower band of range-bound indicators typically extends from 0 to 20 or 30 (depending on the oscillator), and the upper band spans from 70 or 80 to 100. Trendline movements that touch or breach the upper band are considered overbought, producing a bearish (sell) signal, while trendline readings that fall within the lower band are considered oversold, or bullish (buy) signals. With the exception of the RSI, banded oscillators are often lagging indicators, meaning that trendline movements follow changes in price rather than precede them. The stochastic oscillator is an example of a lagging, banded indicator.

In contrast, centered oscillators have no upper and lower bounds. Instead, trendline fluctuations are read in relation to a central point. Although their unbounded nature makes them less ideal for identifying overbought and oversold levels, centered oscillators are more adept at identifying the prevailing strength and direction of the price trend. On a centered oscillator, readings above the centerline are considered bullish, and dips below the centerline are interpreted as bearish. Centered oscillators such as the MACD are typically used to confirm the current trend and anticipate reversals.

The most widely used oscillators in forex trading are the stochastic oscillator, RSI, and MACD. All three are momentum indicators that are charted on separate graphs adjacent to that of price action .

Stochastic Oscillator and RSI

Both the stochastic oscillator and RSI are banded, range-bound oscillators, but they use different formulas to calculate price momentum. The stochastic oscillator looks at current prices in relation to previous highs and lows, while the RSI looks solely at recent gains and losses. In addition, the stochastic oscillator uses a three-day simple moving average as a second signal line to help identify divergences.

As a general rule, the stochastic oscillator is better suited for use in volatile, or “choppy,” markets, and the RSI is ideal for trending markets. That said, both indicators can be used in tandem to serve as checks and balances in a comprehensive trading strategy.

Stochastic Oscillator

RSI

What to Look For

Because the stochastic oscillator and RSI are both banded indicators, be on the lookout for trendline movements that traverse the upper and lower bands. To decrease your vulnerability to false signals, always trade in the direction of the trend, and don’t act on trend-defying signals until a trend reversal can be confirmed by price movement (when price continues to make higher highs or lower lows in the reverse direction).

When using the stochastic oscillator, keep an eye out for divergences (when price reaches a higher high or lower low and that same extreme isn’t mimicked by the oscillator) that indicate that the price trend may be primed for a reversal. If a price reversal is indeed imminent, you’ll see confirmation in the form of crossing signal lines and trendline movements that break outside of the current overbought/oversold range and continue toward the graph’s median (50).

MACD

As a centered oscillator, the MACD is used to gauge trend strength, direction, and momentum. The MACD histogram is created by taking the difference between a slow (26-day) exponential moving average (EMA) and a fast (12-day) EMA. The position of the MACD line relative to the centerline indicates trend direction, and the distance away from the centerline represents momentum. An additional 9-day EMA is plotted onto the MACD to serve as a signal line.

What to Look For

When the MACD crosses below the signal line, it produces a sell signal. When it crosses above the signal line, it’s considered a buy signal.

In addition to trading crossovers, look for divergences between the MACD and the price action graph, as this can signal a price reversal. As with other oscillators, it’s important to confirm a trend reversal before acting so you don’t fall victim to false signals. When using the MACD in your trading strategy, you might also look for a dramatic rise that results when the two moving averages that make up the MACD drift farther apart. This precipitous rise suggests that the market is overbought, but this signal should be confirmed using a banded indicator for the most accurate overbought/oversold readings.

Combining Oscillators With Other Tools

Because even the most accurate reporting tools can produce false signals, it’s important to have a means of confirming and comparing price trends across different analytical models. Using a trend indicator such as Bollinger Bands can help you determine the volatility of a currency pair and confirm a price trend before acting on a buy or sell signal produced by your oscillator. If you understand the trend direction, strength, and volatility level, you’ll be able to identify what signals are worth acting on.

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How to Trade with Stochastic Oscillator

Using Slow Stochatics to Trade Talking Points:

  • Slow Stochastic provides clear signals in a forex strategy
  • Take only those signals from overbought or oversold levels
  • Filter forex signals so you are taking only those in the direction of the trend

Stochastic is a simple momentum oscillator developed by George C. Lane in the late 1950’s. Be ing a momentum oscillator, Stochastic can help determine when a currency pair is overbought or oversold . Since the oscillator is over 50 years old, it has stood the test of time , which is a large reason why m any traders use it to this day.

Though there are multiple variations of Stochastic, today we’ll focus solely on Slow Stochastic.

Slow stochastic is found at the bottom of your chart and is made up of two moving averages. These moving averages are bound between 0 and 10 0. The blue line is the %K line and the red line is the %D line. Since %D is a moving average of %K , the red line will also lag or trail the blue line.

Traders are constantly looking for ways to catch new trends that are developing. Therefore, momentum oscillators can provide clues when the market ’ s momentum is slowing down, which often precede s a shift in trend. As a result, a trader using stochastic can see these shifts in trend o n the ir chart.

Learn Forex: Slow Stochastic Entry Signals

(Created by Jeremy Wagner)

Momentum shifts directions when these two Stochastic lines cross . Therefore, a trader takes a signal in the direction of the cross when the blue line crosses the red line.

As you can see from the picture above, the short term trends were detected by Stochastic. However, traders are always looking for ways to improve signals so they can be strengthened. There are two ways we can filter these trades to improve the strength of signal.

1 – Look for Crossovers at Extreme Levels

Naturally, a trader won’t want to take every signal that appears. Some signals are stronger than others. The first filter we can apply to the oscillator is taking cross overs that occur at extreme levels.

Learn Forex: Filtering Stochastic Entry Signals

(Created by Jeremy Wagner)

Since the oscillator is bound between 0 and 100, overbought is considered above the 80 level. On the other hand, oversold is considered below the 20 level. Therefore, cross downs that occur above 80 would indicate a potential shifting trend lower from overbought levels.

Likewise, a cross up that occurs below 20 would indicate a potential shifting trend higher from oversold levels.

2 – Filter Trades on Higher Time Frame in Trend’s Direction

The second filter we can look to add is a trend filter. If we find a very strong uptrend, the Stochastic oscillator is likely to remain in overbought levels for an extended period of time giving many false sell signals.

We would not want to sell a strong uptrend since more pips are available in the direction of the trend. (see “ 2 Benefits of Trend Trading ”)

Therefore, if we find a strong uptrend, we need to look for a dip or correction to time a buy entry. That means waiting for an intraday chart to correct and show oversold readings.

At that point, if Stochastic crosses up from oversold lev els, then the selling pressure and momentum is likely alleviated . This provides us a signal to buy which is in alignment with the larger trend.

Using Stochastic Oscillator in Trading

The Stochastic Oscillator is a momentum-type indicator that determines overbought and oversold positions. In other words, it can provide a trader with information on when they could possibly enter or leave the market. The indicator is also used to predict future performance of the underlying asset. It was created and introduced by George C. Lane in the 1950s.

The Stochastic Oscillator on the IQ Option trading platform

How does it work?

According to Lane himself:

The indicator doesn’t follow price, it doesn’t follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price.

This indicator, therefore, can help traders predict trend reversal points, which is always of great importance in trading.

The Stochastic Oscillator returns the ratio between the last closing price and the high-low range during a set period of time. It is based on the premise that during the uptrends, prices will be above the previous period closing price . Alternatively, during the downtrends, prices will likely be below the previous closing price.

During the uptrend the SO is likely to stay above the green line

The oscillator consists of two horizontal and two moving average lines (the fast and the slow ones). The fast moving average line by default has a period of 3, while the slow MA has a period of 13. The oscillator ranges from 0 to 100. Both levels, by default set at 20% and 80% respectively, coincide with two horizontal lines.

When the fast and the slow moving averages remain above the 80% level, the asset is in the overbought zone. When both lines remain under the 20% level, the asset is in the oversold zone. It should be noted, however, that the decrease in prices is not necessarily a signal to buy, as securities can remain in the oversold zone for quite some time without leaving it. Similarly, an upward price rally does not always indicate an urge to open a “Buy” position. Securities can remain overbought for relatively long periods of time during a strong uptrend.

How to set up?

Setting up the Stochastic Oscillator indicator in the IQ Option platform is easy.

  • Click on the “Indicators” button in the bottom left corner of the trade room. Go to the “Popular” tab and the Stochastic Oscillator from the list of available options.
  • Go to the “Set up & Apply” tab and, if you want to use the indicator with standard parameters, simply click on the Apply button.

Or you can adjust the indicator to your liking, changing %K and %D periods and levels for higher accuracy (alternatively, more signals).

The indicator will appear in the bottom part of the screen, right below the price chart.

How to use it in trading?

The indicator’s main purpose is to reveal the overbought and oversold levels and give traders a hint on when to open a position. There are several ways to determine such cases with the help of the Stochastic Oscillator, of which the following two are the most commonly used.

1. Overbought and oversold levels

Sell signals

When both slow and fast moving averages are above the overbought level, the trend might be expected to become bearish. The fast MA crossing below the slow MA might be an additional signal of an upcoming downtrend.

Reversal of the SO moving average lines above the green light is an indication of a beginning downtrend

When both slow and fast moving averages are below the oversold level, the trend might be expected to turn bullish. The fast MA crossing above the slow MA might become an additional signal of an upcoming uptrend.

Reversal of the SO moving average lines below the red line is an indication of a beginning uptrend

2. Divergence

When the indicator and the price action start moving in different directions, it might be perceived as a signal of an upcoming trend reversal. Divergences might be both bullish and bearish, as well.

Divergence as a harbinger of a trend reversal

It should be noted, however, that as any other technical analysis tool, the Stochastic oscillator cannot be expected to provide accurate signals 100% of the time. From time to time it can — and will — provide false signals that should not be used as an invitation to open a corresponding position.

Conclusion

The Stochastic Oscillator is a useful and interesting technical analysis tool. For maximum efficiency, it can be combined with other momentum indicators and trend-following indicators. Caution may be needed when working with the indicator, as different levels do not necessarily correspond to an upcoming trend reversal.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

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Trading System using Awesome Oscillator

I have been been using a simple trading system using the Awesome Oscillator and Accelerator/Decelerator Oscillator for four weeks now and was hoping I could get some help and ideas on making it better and setting SL and TP’s.

I use the Awesome Oscillator (AO) and the Accelerator/Decelerator Oscillator (AC) indicators on a 4hr, MetaTrader chart with GBP/USD.

I enter a trade on the close of a 4 hr candle when I have change of color on the AO and two consectutive and same colors on the AC. I exit trade on the close of a 4 hr candle when I have the same opposite colors on both AO and AC. (ie if the AO changes from red to green with the AC being green and having a previous AC 4 hr green, I buy. I close when the AO and AC are both red at the same time on a 4 hr close).

I enter with two equal lots, both set at SL of -70 pips. At +50 pips I move one lot to break even. At +100 pips I move the first lot to 50 pip trailing and move the second lot to BE. at +150 pips I move the second lot to 100 pip trailing.

Since I use Oanda , I have to manually move the SL for trailing stops, which mean I miss the exact point sometimes.

System total for week of Jan 7-12 was +564 pips, Jan 14-19 was -191 pips, Jan 21-26 was +70 pips. This was the total pips for two lots. For this week I entered two lots Monday morning at 1.9574. The first lot was stopped out at +70 pips and the second lot is currently +54 pips with the SL at BE.

The first three weeks I did not get anywhere close to the system totals as I kept second guessing the system.

Any insight on the system, stop losses, take profits, ect. would be appreciated.

  • Post # 2
  • Quote
  • Jan 31, 2007 8:11am Jan 31, 2007 8:11am

The AO changed back to red on the close of the candle at 2 am EST. The AC had been red since the close of the Tuesday 10 am EST candle. This closed the second lot for +47 pips.

The system also gave signal to sell two lots at 1.9622 at 2 am EST. Around 4:30 am EST it bottomed out at 9511 then rose to 9556 around 5:45 am. At +100 pips a 50 pip trailing stop was initiated on the first lot which would have have stopped out the first lot at +61 pips. The second lot is at BE and currently is at +95 pips.

I woke at 2 am to check to the close of the candle and closed the second lot on earlier trade, however I second guessed the system again and did not enter the sell trade .

  • Post # 3
  • Quote
  • Jan 31, 2007 10:23am Jan 31, 2007 10:23am
  • Post # 4
  • Quote
  • Jan 31, 2007 1:40pm Jan 31, 2007 1:40pm

Deathpan, I’ll try to add a screen attachment.

I started manually back testing from last January and got up to June, but I’ve since changed some the rules and have not had a chance to go back and apply them or finish out the year. I started out looking for raw gains and losses, then added a SL of -70. The TP I based on change of color at the close. These numbers are one lot only, whereas I am now trading with two lots.

Jan 06 +594
Feb 06 +114
Mar 06 +446
Apr 06 +460
May 06 +185
June 06 +607

Half yr total of 2406

  • Post # 5
  • Quote
  • Jan 31, 2007 1:52pm Jan 31, 2007 1:52pm

Deathpan, I’ll try to add a screen attachment.

I started manually back testing from last January and got up to June, but I’ve since changed some the rules and have not had a chance to go back and apply them or finish out the year. I started out looking for raw gains and losses, then added a SL of -70. The TP I based on change of color at the close. These numbers are one lot only, whereas I am now trading with two lots.

Jan 06 +594
Feb 06 +114
Mar 06 +446
Apr 06 +460
May 06 +185
June 06 +607

Half yr total of 2406

  • Post # 6
  • Quote
  • Jan 31, 2007 1:56pm Jan 31, 2007 1:56pm

The second lot was closed out at break even when the GBPUSD climbed above 9622 after 11 am EST.

So far this week in two trades the system is +178 for two lots (with a spread of 12 pips on four trades it is +166).

Trade 1
Lot 1 +70
Lot 2 +47

Trade 2
Lot 1 +61
Lot 2 +0

  • Post # 7
  • Quote
  • Jan 31, 2007 2:34pm Jan 31, 2007 2:34pm

can u post an photo example Please

  • Post # 8
  • Quote
  • Jan 31, 2007 3:36pm Jan 31, 2007 3:36pm

Interesting timing on the post, as I was about to put a call out to see if anyone was using the “Profitunity” system as it is known.
First, apologies if you know all this already, but maybe it will open up the conversation,and since you asked.
There is actually a codified system for using the so-called Awesome Oscillator and Accelerator. If you haven’t already, I would suggest reading Bill Williams’ “Trading Chaos” and “New Trading Dimensions” a few times. There is more to it than just the AO & Acc- a whole system of directional signals, fractal buy/ sell orders, moving averages (Alligator), trailing stops, and money management, all there in black and white. Your technique is called “Trading in the Zones”- just a small part of the system. One of the first methods in the system involves filtering out choppy market signals and making sure you are in a “trend”.This is one problem I see with the system- many of his examples are of the futures and commodities markets where the prices are going only in one direction for MONTHS at a time- the AO doesnt even cross to the upside at all. In my tentative forays into actually using the system I have found nothing better for sucking the pips from big trends, but if you don’t follow the system exactly it will hand you your ass on a plate just as fast, and if you try to trade it in a choppy market you can kiss your account goodbye. Also, in some ways I don’t believe this system lends itself to a 24 hour market cuz a lot can happen while you are sleeping that you would need to micro-manage. As far as stop losses go, he doesn’t get into them much because of course his system barely needs them but in general a stop below the nearest Fractal is what I recall. Okay enough of my 2 pips worth- it’s time for the wit and wisdom of Bill himself. Here’s a money quote about stops from the “Tying it all Together” section of “New Trading Dimensions”:

Step 4- Placing our first protection against loss:

“My choice generally at this point is to place a stop to get out of the market (go flat) on the first close of above(/below) the Alligator’s teeth (Red Line). If the mouth does not open immediately and the Red line stop is closer than I want, I will place a stop and reverse at the first fractal in the opposite direction that is outside the teeth.

(ok the coffee is wearing off- I will now quickly paraphrase how profit is taken. )

1. a close below /above Alligator’s teeth
2. Five consecutive bars of the same color moving stop below each bar
3. Green Line (Lips) stop
4. a “reversal” signal ( divergent candle. )

phew. There is MUCH MORE that bears discussion here but now Taters is tired.
GOOD LUCK to you sir!

  • Post # 9
  • Quote
  • Jan 31, 2007 6:11pm Jan 31, 2007 6:11pm

Well gblair you put a bee in my bonnet. I made a pic of the same timeframe with many (not all!) of the signals of the Bill Williams system.
Net result? Normalized @ 1 lot ip, approximately 897 pips not including slippage,spread, etc etc etc.
Part of the genius (and scary danger) of this is the money management aspect.
BW recommends a pyramid of entries:
First entry= 1 lot. If this goes your way and your signal is right, then.
Second entry= 5 lots,
Third entry= 4 lots
Fourth entry= 3 lots
Fifth entry = 2 lots
Sixth entry = 1 lot.

So laid out at the equivalent of 1 lot/ pip you get many more $ per pip than the 184 pip move would suggest. It would stink to have 5 lots go against your first entry though :surprised:flushed: !

I don’t think BW trades “at market”. Orders are placed 1 “tick” (the equivalent in Forex is a pip but this is too small I think. ) below the signal. This way, the market has to be continuing in your direction for a signal to be taken, whereas if you just bought or sold at market price on the next candle- who knows? It might go against you and you’d be losin mad $.

PS: stop loss for first entry would be above the high of the highest candle.
Red horizontal lines show approximate entry bars. If you were more conservative these would be farther from the bottom of the candles; less signals, less draw down, less profit.

Just for the record this post is for informational purposes only. I’m not an expert using this system. I just read a book is all. I don’t necessarily advocate using these techniques, and your mileage may vary.

  • Post # 10
  • Quote
  • Feb 5, 2007 12:35pm Feb 5, 2007 12:35pm

I found a page on the Alpari web site that has a roundup of so-called “Chaos Theory” trades, including Zone trades that were the point of this thread.
Puts things more simply than I probably did!
Cheers,
Taters

  • Post # 11
  • Quote
  • Feb 6, 2007 9:33am Feb 6, 2007 9:33am
  • Post # 12
  • Quote
  • Feb 6, 2007 11:39am Feb 6, 2007 11:39am

Tater and Dlftrader, thanks for the responses and advice.

I’ve decided to shelve my trading stradegy using the AO and AC unitl I’ve had a chance to read up on the William’s books you guys suggested.

I like the indicators and think I can someday get them to work for me.

  • Post # 13
  • Quote
  • Feb 6, 2007 12:14pm Feb 6, 2007 12:14pm
  • Post # 14
  • Quote
  • Jun 22, 2008 7:02am Jun 22, 2008 7:02am

Any news for t system??

  • Post # 15
  • Quote
  • Jun 22, 2008 9:11am Jun 22, 2008 9:11am

I’ve been trading the system in the gold market, i use alligator, fractals, zigzag, AO, AC and Gator. average moves i get with his pyramid system, give on average 1000+ pips a day. losses usually incurred on 1st contract only. you have to sit there and monitor it. this is an active trading strategy, but the results are phenomenal when you really know what you’re doing.

To improve your chances of success i also use 2 more windows, with over 10 indicators: MA’s, rsi over ma crosses, stochs, macd, agx, bollinger, pSAR, alligator. USED Together they give accurate trade signals. when you’re in trend, give it all you’ve got. i would be happy to risk around 10% of the account on the combined margins of Pyramid contracts. on the 19th i’ve downed around 1000 combined pips on gold, with a combined of 1.5 lots. Happens quite often nowadays with gold. a 200 pip move one way is achievable around every other day. gotta be in to win it.

Little discouragement though – dont think you’ll make a killing. you have to study the system very carefully, practice until you are comfortable, then play small with micro lots until you feel safe. One day i will move to 1 lot, 5 lots, 4, 3, 2, 1 – thats a goal of mine. once i have couple of mills stashed away.

  • Post # 16
  • Quote
  • Jan 7, 2009 12:48pm Jan 7, 2009 12:48pm

Firstly I have to admit that I am a relatively new forex trader but I have been working hard on a personalised system for my own use to take profits from the trends on the 5 min charts. I chose this time frame and method because it requires a relatively small stop loss and once everything is closed your day is over and you can relax.

Secondly let me set out my understanding of trading on this time frame. In my view your best chance of turning a profit from these markets is to use a system that will give you clear entry signals at the start of a POSSIBLE trend, cut your losses short if you are wrong and ride your winners if you are right.

Ok, this is all fairly basic so far. This discussion sparked my interest because I use the AO and AC as the basis for my trading too.

I would greatly appreciate any constructive advice about the following system. It is a work in progress but I have been using and developing it on an ongoing basis and so far it is profitable. I am only trading a very small account but have increased it by 50% in the last month while risking 5-10% of my account per trade. I realise this is a large amount to risk per trade but obviously as my bank builds I am keeping my trades the same size so my risk per trade is getting smaller.

Pre trade I check the higher time frames for any major support/resistance/trendlines.

21, 55 and 89 EMAs applied to the close.
Parabolic SARs 0.01/0.1 and 0.05/0.5
Awesome and Accelerator oscillators
Momentum oscillator
CCI

* I know the last 2 do very similar things but I find one better for entries and the other better for exits.

There are some points to bear in mind when searching for an entry.

If the slow SAR is trending very, very slightly and the faster SAR started trending significantly before the slower one (ie more than about 4 dots) then this is a sign of weakness in the signal (though not always).
Take into account the direction of the higher MAs, it is always better to trade in the direction of the existing trend but you should be able to preempt the start of a change in trend by the angle the MAs are diverging (this is down to practice and trial and error unfortunately and I doubt anyone will always be right with trying to spot a change of direction!).
Also, it is possible for a strong up or down candle to give you an initial signal only for the confirmation candle to go the other way even though all the other indicators are screaming at you to buy/sell. Avoid.

The main rules for the entry are as follows.

When the price closes above/below the 21 EMA, the AO and AC are the same colour and trending in the same direction (at least 2 bars agree), both parabolic SARs are above/below the price indicating the same direction, the momentum oscillator is above/below the 100 level (ie in the direction of the trend) then enter a trade with 2 lots (or portions of lots that you can sell half of). You can also use the CCI move above/below the 100/-100 level as a confirmation indicator. As I said earlier it does a very similar job to the momentum oscillator but they do vary slightly and the MO is better for entries whereas the CCI is better for exits.

In trade management/Exits.

I have revised this part of the system more than any other. At the moment this is my best exit strategy that I can come up with but maybe you can suggest better?

Place the stop loss 2 pips above/below the high/low of the candle prior to the signal candle or 20 pips from the entry price, whichever is furthest. Your first profit target is +20 pips. As soon as the trade opens trail the stop loss along the middle of the fastest SAR (colour them differently) until you reach breakeven then trail the stop loss by the slower SAR or until the CCI moves above/below the 0 level against the trend (make sure it does cross as it can bounce back easily).

This is the basic system I have been using and it works just fine but if anyone can help me improve it I would really appreciate it. Thanks for reading this far.

I have attached a gif image of a trade screen on the GBPUSD.

A is the buy candle. You couldn’t have opened the trade on the previous candle as the parabolic SARs were against the previous candle. As they changed the setup became valid for a buy signal on the candle marked, note at the open of this candle, not at the top.

B is all the other indicators agreeing. Don’t forget they will have changed due to the movement of the price for that bar but they were still in agreement before that upwards move.

C is trailing the stop after the initial 20 pip profit has been taken. This move was happening a little slowly but was going up.

The second image is after the close of the trade. A is the parabolic SARs against the trade and B is the CCI crossing the 0 level.

This was a good trade which made me 66 pips on both lots combined but rest assured there will be many times that you are stopped out but I think using the 2 different SARs will prevent you from both losing too much at the start of your trade and from exiting too early at the end of your trade.

If you can see anything obvious in the way of an improvement then please let me know.

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