Oscillating indicators get their name from their tendency to oscillate within a range of values. They can also signal when a price is at extreme levels and due for a reversal.
Here are some oscillating indicators:
Stochastics consist of a fast and slow line and oscillate between 0 and 100. Levels above 80 are said to be over-bought and levels below 20 are considered as over-sold. When the red line crosses over the blue this means that the bulls are overpowering the bears. When the red line crosses below the blue we know that the bears are beginning to overpower the bulls.
When stochastics first cross above 20, returning from over-sold conditions - it is the best time to enter long positions. This indicates a great amount of “room” left for an upward move. As stochastics near 80, we know that we are closer to the end of the move rather than the beginning of it, and may consider staying out of the trade (if not already in it). As the stochastics begin to turn and cross, we are given a signal to close any remaining long positions.
As they cross back below 80 and return from over-bought conditions, we may look to enter short. If the stochastics are closer to 20 than to 80, we may wish to think twice about entering into any new short positions. Once they cross, we would also look to close any short positions already open from before. Then, as the stochastics break above 20, the cycle repeats and we begin looking to enter long once again.
RSI or Relative Strength Index is similar to the stochastics indicator with the difference that it uses 30 to indicate over-sold conditions and 70 to indicate over-bought.
RSI signals a potential long when it breaks above 30 and a potential short if it comes from above and breaks below 70. In addition, levels above 50 confirm an uptrend, while levels below 50 indicate a downtrend.
CCI or Commodity Channel Index is another oscillator that is unlike the others. In the middle it has 0 and ranges from -300 to +300. Levels above +200 are thought to be over-bought, while levels below -200 are considered as over-sold.
An fx trader can consider entering long when the CCI hooks up from any level that is below -200, or short when it hooks down from above +200. In addition, if the CCI drops towards 0 but bounces back up from it instead of crossing below you should look to enter long. Likewise, if the CCI is rising up towards 0 from underneath it and then bounces back down without crossing above, that usually signals a potential short. These are known as continuation patterns.
Fractals and the Alligator Indicator
Fractals are simple markers highlighting candles that are extremes; i.e. candles that make a new high but have lower ones on either side, or candles that make a new low but have higher candles surrounding them. Fractals indicate likely reversal points and are even more powerful when filtered with the alligator indicator.
The alligator is made up of three lines, forming its mouth and tongue. When the alligator opens its mouth, a new trend is emerging and we can continue to trade this trend until we see signs that the alligator’s jaw is about to snap shut. After the alligator eats, he sleeps, but the longer he sleeps the hungrier he gets again. It is because of this sleep and hunger cycle that the alligator indicator is sometimes considered part of the oscillator family.
Longs should be kept open if a fractal appears but is below the alligator’s tongue. Short positions can remain open if the fractal is higher than the alligator’s tongue.