Oscillators are used in the Forex market to determine the strength of currencies over a given period. There are many oscillators, but this article will focus on four of the most popular types of oscillators:
- KST (Kagi), MACD,
- Stochastics and
These may sound complicated at first, but after reading this article, you should understand everything about them, including how they’re used for trading opportunities. Before we get into each oscillator, let’s discuss what an oscillator is.
What is an Oscillator?
An oscillator is simply a line that fluctuates around a set point. If I asked you to think of your car’s speedometer, chances are it shows speeds between 0-100km/h and fluctuates between those two points now; if your speedometer hit 100km/h and stayed there without fluctuating – that would be an oscillator.
Not only does it fluctuate around a set point, though, but it also can move above and below the set point. If you’re still confused as to what an oscillator is, then think of your car’s rev counter.
What are Oscillators Used For?
Oscillators are often used as signals to help traders make better decisions regarding their investments. Since Forex trading is highly volatile, it can be hard to tell which currencies are solid or weak during specific periods.
Think of a market scenario where one currency, for example, has recently increased in value against another. Traders may assume this trend will continue – making this currency attractive for investment purposes. However, by the time they’ve bought and sold, the trend has reversed, and their investment is now in trouble. It is where oscillators come in.
These are just two examples of how oscillators can improve trading strategies; there are many others.
Kagi Charts (KST)
The Kagi chart is one type of oscillator created in 1960’s Japan by Tushar Chande. It uses an algorithm to track price movements upwards and downwards over a given period then draws these changes as lines. The price bars at the top or bottom of the Kagi indicator act like support or resistance levels. When they’re touched without reversing – this line becomes stronger/harder for the currency in question to break through.
Kagi Charts are suitable for Forex trading because they indicate buy/sell points by tracking past stock price movements. It means if the currency has increased in value over a period, then there’s a high chance it will do so again – meaning now is a good time to invest.
The lines on the graph, though, highlight how much fluctuation is occurring and where support/resistance levels exist, which can help traders predict future movements more accurately.
Nominal Group Technique (NGT) Charts
The Nominal Group Technique was also developed by Tushar Chande and worked as an average of different people’s opinions about how long traders should hold their assets for. This technique is used as an oscillator because it can indicate buy/sell points.
Nominal Group Technique Charts are suitable for Forex trading because they take a variety of traders opinions into account, giving a more stable indicator than if just one person’s opinion was considered for the same period.
The chart below represents NGT levels over two weeks. Despite some fluctuation in price, we can see that it eventually returned to the average value that the indicators were based on – making this an accurate oscillator to use!
A moving average is a trickier oscillator to explain, but I’ll do my best! It basically calculates the average price of a currency over a set amount of time and moves along, so each point contains the average value of a different period. If we look at an indicator for a certain amount of time and see that it changed dramatically, then we can assume it will change again soon – so now would be a good time to buy.
Moving Average Charts are great for Forex trading because they clearly show market trends over long periods. If there is an increase in price over these longer terms, moving averages make it easy to spot by displaying this as a significant peak on the graph. It helps traders analyse how long trend changes are likely to last before reversing, making more investment decisions accessible.