Using Oscillators Together with Figures of Technical Analysis
November 22, 2019
Oscillators are great technical indicators to spot Forex market entry points. Depending on their type, oscillators also have a trending component.
The most famous oscillator is the RSI (Relative Strength Index), developed in the 1970s. To this day, no trader didn’t use the RSI at least once.
One of the main advantages of using oscillators when trading the Forex market is that they give traders confirmation for a possible outcome. Therefore, the best possible way to trade with oscillators is in conjunction with classic technical analysis reversal patterns.
Such patterns are:
- head and shoulders
- double and triple top
- triangle as a reversal
- falling or rising wedges
The market typically forms a top or a bottom when such patterns appear. However, due to the automated trading, many times the price action invalidates them.
However, if traders use oscillators in their Forex analysis, they find confirmation of the possible reversal to come. Such a confirmation is enough to reinforce the reversal pattern, and it gives trust and conviction to follow such a trade.
Oscillators with Rising and Falling Wedges
Wedges are reversal patterns forming at the end of trends. The price during a wedge formation hesitates a lot.
Two types of wedges exist:
Rising wedges are bearish reversal patterns. They appear at the end of a market rally, and the price action sees the market forming only marginal highs. In other words, while advancing, it fails to make meaningful new highs.
The opposite happens during a falling wedge formation. The price makes new lower lows, but only marginal ones.
A Forex trading system based on interpreting wedges needs discipline and requires two trendlines. The trendlines are the ones that give the shape of a wedge, just like in the chart below.
The chart shows the EURCAD cross pair forming a falling wedge. The market forms three marginal lower lows, while the oscillator, the RSI, doesn’t confirm them. Instead, a beautiful bullish divergence forms, coming to complement the bullish scenario presented by the falling wedge.
The same thing is valid when using oscillators in combination with other technical patterns in Forex trading. For instance, when trading Japanese candlesticks reversal patterns, it helps if the candlestick pattern forms while an oscillator is in a divergence mode. Such Japanese reversal patterns are:
- the hammer and the shooting star
- morning and evening stars
- bullish and bearish engulfing
- piercing and dark-cloud covers
- tweezer tops and bottoms
Besides the RSI, other oscillators show impressive qualities for spotting powerful divergencies, like:
- MACD – Moving Average Convergence Divergence
- Ultimate Oscillator
- RVI – Relative Vigor Index
Trading Forex is risky as the currency market is in a continuous change. Because more and more traders join the market every day, it is difficult to find a strategy that continuously works.
For this, traders use money management rules in their trading, as the only way to keep things under control.
Oscillators come as an insurance or confirmation of a trade. Let’s just end up with the fact that traders feel safer if an oscillator points to the same direction as the initial trading idea.