The terms “Indicator” and “Oscillator” are often found in strategies and trading advisors. Their common name is technical analysis tools, some of which are built into the platforms, some you need to search for yourself on the Internet or order the writing of your own tool. Independent strategies can be built on oscillators, but most often they are used as an additional tool.
Types of technical analysis tools
The mistake that is common among novice traders is a lack of understanding of the essence of the instrument used and the inability to analyze the results of its work. Indicators and oscillators are not used in accordance with their purpose. The consequences of the error:
- incorrect signal interpretation;
- later or early opening (closing) of a position, which leads to loss or short-received profit;
- wrong combination of technical tools that do not fulfill their function and clutter up the schedule;
- misunderstanding of the principle of the tool prevents the correct adjustment of its settings. Setting mutually exclusive settings on two different tools makes the strategy non-working.
Indicators and oscillators have the same display on the chart, but they contain different code, different formulas that are based on historical data.
Types of technical tools:
- trend indicators. Track the current situation and allow you to assess the direction of the trend, its strength. They are used to analyze the current situation, but to get a signal to open a position, they are combined with other tools. There are the largest number of trend indicators in the base set of any platform. Examples of indicators – Parabolic SAR, Scalper MA;
- volume indicators. Allow to track the market of large players. The movement of quotations depends on supply and demand. And if in some cases the drivers are fundamental factors, then the movement can be set artificially by large players who move the market in one direction or another. Volume indicators allow the trader to determine whether the trend is moving under the pressure of real capital or a false move (correction, price noise). Examples of indicators – Volumes, OBV;
- oscillators. Indicators used to confirm a signal to open a position. If the trend indicators are leading (they predict the situation), then the oscillators are lagging indicators that confirm the signal that has appeared. They show a possible reversal of the market, the moment when the market is saturated with either buyers or sellers. The confirmation is a reversal of the indicator in the upper or lower part of the chart and its movement in the reversal direction. Examples are RSI, stochastic oscillator;
- graphic indicators. Candlestick analysis, graphic figures – are warning indicators. The origin of the graphic figure tells how the trend will behave in the future. Examples – pin bar, hammer, shoulders.
Conclusion: indicators and oscillators are a group and a subgroup of technical tools. Professional traders recommend using one instrument from the first three groups in the strategy, while simultaneously checking the accuracy of the signal by graphical analysis. If the graph seems too cluttered, you can use combined tools (set in MT4). An example is Trend Magic, built on the ATR trend indicator and the CCI oscillator.