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oscillators in trading
Market terminology

Oscillators in trading: advantages and disadvantages of instruments

23.01.2021
2 min read

How useful are oscillators in trading for market analysis?

Oscillators in trading are one of the types of technical analysis indicators, which are in a certain numerical or percentage range. These tools can be used in almost any trading terminal, they are not difficult to use. Maximum efficiency is shown in the period of non-trend market.
Oscillators help to predict the price turn, showing its probability. According to statistics, the period of the trend market is about 30%, and the rest of the time it is in a flat or corrective stage. This ratio allows a trader to use these instruments in a variety of situations.
When the oscillators are in the overbought zone, it means that you can start selling, you should buy when they occupy the oversold zone. In addition, one of the main values is divergence.
The most common use of oscillators is ROC, which shows the rate of change, Stochastics and RSI show the relative strength index. Instruments have both positive and negative characteristics.
Advantages include ease of use. Signals of oscillators are quite easy to decipher. It is worth remembering that any steps after the received data should be done only when analyzing all conditions, otherwise the tools may show false values.
By their nature, oscillators are leading indicators, which means that the results obtained by a trader with their help have an effect on market forecasting. In this case, when the signal from the oscillator is received, there are no changes in the price yet, but after a while its chart starts to change as the instrument showed.
Oscillators are suitable for almost any trading strategy. Flexible settings are used here, which makes the tool universal.

oscillators in trading

Despite its obvious advantages, there are disadvantages as well. First of all, this includes false signals, which can exist not only during the period of the market trend, but also when it is being formed. Therefore, when using oscillators, experts recommend supplementing the analysis with other indicators to exclude errors.
Another disadvantage is that there are no ideal settings for oscillators. The same parameters for different financial instruments cannot be used here. The settings change depending on what conditions are observed in the market. However, the current moment is observed not only for oscillators, but for all technical indicators.
Signals coming from the indicators are divided into 4 types:

  • admission to the overbought and oversold areas;
  • zero line intersection;
  • price chart divergence;
  • mutual intersection of a fast and slow oscillator line.

Thanks to this, oscillators are a useful tool for traders, but it should be remembered about the correct use and analysis of related factors that are carried out in the market.

Tags: Market terminology
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