Forex Oscillators: How to use them for profit
RSI
RSI is perhaps the most common and popular of all oscillators. Developed in 1978 by J.Welles Wilder, it has remained a fixed item in the toolbox of a technical trader after its quick adoption by the community. J.Welles Wilder was also the inventor of a number of other indicators, including the Average True Range, Directional Movement, and Parabolic SAR (Stop and Reverse) indicators.
The indicator generates buy signals when the RSI value is above 30 and rising, and a sell signal when it is below 70 and falling. The reason for seeking a value between these numbers is the need to avoid being caught in rapid reversals or whipsaws that are frequent when the oscillator is registering too high or too low values. Thus, an RSI reading of 95 would indicate a highly overbought market in danger of a severe reversal, but the highly volatile nature of such a market would making successful exploitation a task for the gambler, rather than a trader. In sum, we seek calmer, consistent patterns that exist in the middle range, between 30 and 70 in order to profit from them smoothly, instead of making conjectures about reversals in the extreme range where RSI is greater than 70, or less than 30.
RSI is highly unreliable in a trending market, and should be used in trading range patterns.
Williams Percent Range Indicator
The Williams %R Indicator is a creation of the renowned Larry Williams, the first and the most successful winner of the World Cup Championship of Futures Trading in 1987. Larry Williams was able to turn $10, 000 to more than $1,000,000 in a single year in this contest, using tools that he had improvised and developed personally. His daughter succeeded in the same contest some years later, attaining first place.
The Williams %R indicator subtracts the high of a previous period, determined by the trader, from today`s closing price, and compares the difference with the total range of the period. The numerical output of the computation then becomes the value of the oscillator.
The main property of this oscillator is its volatillity. It tends to exaggerate fluctuations in the price, and makes the identification of any profitable pattern easier by focusing on it, if only with a little less precision that with other indicators. Larry Williams advised traders to use this indicator by confirming its signals over a longer time period than usual, and divergence/convergence patterns are probably suited best to this type of usage.
An interesting point to keep in mind is that the fast component of the stochastics oscillator is identical to the Williams %R oscillator. There is no information gained from plotting these two indicators on the same price pattern.
Stochastics
Another oscillator suitable range trading conditions, the stochastics indicator was created George Lane, an Elliot Wave theorist in the 50s. The indicators is used to identify reversal potential in existing range patterns.
The oscillator is constructed from a fast and a slow component. The fast (%K) indicator is the Williams %R oscillator developed by Larry Williams with the sole modification that the indicator takes values between 100 and 0. The slow component (%D) is the simple moving average of the %K. Trade signals are generated when the %K indicator rises above, or falls below the %D component. In addition, oversold/overbought levels are thought to exist at 20 and 80, respectively.
The stochastics oscillator essentially subsitutes the Williams Oscillator for the price action, and plots an SMA on it to obtain trade signals.
Nice Articles
Nice articles.. 
Re : Forex Oscillators How to use them for profit
Article on Forex Oscillators How to use them for profit is very nice. Divergence and Convergence Patters explanation is good. Thank you for providing useful information.
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Regards,
Nirmala,
Great explanation for the divergence trading system. I also like to trade divergence due to its reliability.
Good stuff.
Momentum Indicator
The two formulae for the momentum indicator are seen below. Both are valid methods for obtaining a value for the indicator, but they yield different numbers.
M1 = Price of the last bar – price of the (last -n) bar, with n determined by the trader
M2 = (M1/price of the (last-n) bar)*100
This indicator is evaluated as follows:
1. If M<100, a sell signal is obtained
2. If M>100, a buy order is anticipated
The momentum indicator, as its name implies, is used to establish the direction and strength of a trend. A more bullish trend will yield higher indicator values, and as a bear trend decelerates, the indicator value will increase,and vice versa.
The weakness of the momentum indicator is its lagging nature. It is also somewhat imprecise and can be misleading in a highly volatile market. The strength of the indicator lies in its simplicity and clarity.
Force Index
The force index is computed by multiplying volume with the difference between the closing prices of the latest two bars on a chart. Most often, traders will prefer to smooth out this indicator`s behavior by taking the SMA or EMA of it.
The index was created by Alexander Elder, one of the most famous technical traders of our time. According to his publications, traders should buy when the index has a negative value in a bullish divergence pattern, and sell when the index is positive, and a bearish convergence exists.
Final Word
Based on market conditions, and the trading style of the trader (range trader, trend follower, scalper etc), it is possible to use oscillators to create many different strategies. There are two important points to be kept in mind, however, to minimize losses, and optimize our results. One is that oscillators, similar to all indicators based on averages, lag the price action, and as such, can generate false signals which must be sorted out, or managed through the use of risk management methods, or additional technical tools. The other caveat is about the volatility of the market: instead of point decisions, it is a lot better to make use of the much discussed divergence/convergence patterns to create more effective, and `durable` strategies that can outlast market turmoil.
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Forex Oscillators: How to use them for profit
Article written by http://www.forextraders.com
Forex price action moves between the theoretical bounds of zero and infinity. Although we have the intuition that prive movements will be a lot less than what is implied by these bounds most of the time, and that there is a high, and a low price for each period under consideration justifying a sell and a buy order, respectively, we don`t possess any concrete means of putting that intuition to work unless we make use of certain technical tools. The toolbox of technical analysis supplies many choices towards this goal which are classified under the heading of `forex oscillators.
Divergence and Convergence Patters
In spite of their benefits, one major problem with forex oscillators is that the patterns, and signals created by them do not possess a lot of staying power in the hectic action of the markets. We can derive many overbought/oversold signals in different timeframes while trading, but most of them will prove to be bogus, so to speak, because of the tendency of the price action to fluctuate wildly at inflection points. In other words, even if the signals derived from the oscillators are well-placed and timely, (which is not very frequent anyway), volatility will invalidate many of them, or make them unusable in short-term trading.
To combat this problem, traders have been resorting to divergence/convergence patterns for a long time. The advantages of trading on this basis are numerous. Divergence/convergence signals are rarer than raw overbought/oversold signals since they are created by a multitude of the latter. They are easier to trade in contrast to a simple overbought/oversold value because of the ease of visual identification. With fewer signals, and more time to analyze them, better results can be achieved over the longer term.
A divergence pattern is created when a trend of price highs is contradicted by the oscillator, that is, as the price registers higher highs, the oscillator creates a succession of lower highs resulting in a `divergence` between the primary trend line on the price chart, and the secondary trend on the oscillator graph.
A convergence pattern, by contrast, would arise when lower lows, or bottoms on the price chart are contradicted by a series of higher lows on the oscillator. The series of higher oscillator lows and lower bottoms on the price chart lead to a converging formation, hence the name.
Finally, parallel lines between the oscillator and price charts indicate that the underlying trend remains valid, with no contradicting signals presaging reversal. This does not imply that the trend is solid, but that the trader should proceed with other aspects of analysis in order to deepen his examination before reaching a conclusion. Parallel lines exist when no divergence/convergence pattern is being observed.
Divergence/convergence patterns can arise in any type of oscillator, in any type of trend, and there is no specific oscillator especially suitable for use with this strategy. Regardless of the nature of the formation, these patterns always signal that the existing bull/bear pattern is weakening and in danger of reversal at some point.
As with all other aspects of technical analysis, there is no certainty that an emerging pattern will not be eliminated by a sudden development in the marketplace. The value of the divergence/convergence formation is in its rarity. Seeking them allows a trader to focus his activity to a particular technical configuration that is easily identified and analyzed, preventing confusion in decision-making, and indecisiveness in execution.
Now let`s take a look at the most popular oscillators in technical analysis, and discuss briefly the application of patterns that may arise in them.