Tue. Apr 6th, 2021

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How to use oscillators to warn you of the end of a trend?

2 min read

Oscillators work under the premise that as momentum begins to slow, fewer buyers (if during an uptrend) or fewer sellers (if in a downtrend) are willing to trade at the present price. The Williams %R, Stochastic, Parabolic SAR, and Relative Strength Index (RSI) are oscillators.

The problem with trading against the trend is that it works every now then. The problems one often faces while trading are:

a. Trying to right every time

b. The thought that the trend is overbought and due for a deep set-back

c. The feeling that the most important money are going to be made on the large turn

It’s not profitable to trade in this manner and they are falling prey to mental biases as against good analysis. The reason that countertrend trading are often unprofitable for several to trade is because if you enter emotionally, you regularly exit emotionally. Exiting emotionally may be a nice way of claiming that you simply exit after tons of your capital has been devoured on a nasty trade from the beginning.

In the chart given, the oscillator is moving from extreme high to extreme low. Extreme lows are usually below 20 and extreme highs are usually over 80. Extreme highs are deemed to be overbought markets ready for a turn lower and extreme lows are deemed to be oversold and due for a bounce higher.

How Oscillators Can Show You If You’re Trading Against The Trend

When you trade with an oscillator, you can see that the price action is not adjusting equally to the oscillator you’re trading against the trend. If you try to grip this type of trade then you will get steam-rolled when the oscillator unrolls back within the direction of the overall trend. Given the recent 500+ pip move in AUD/USD higher, if price unwinds disproportionally to the oscillator, then it’s going to be best to urge out of a brief trade or consider rejoining the AUDUSD trend higher while managing your risk.

 

 

 

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