5 Oscillator Indicators You’re NOT Using (But Should Be)

Are you tired of making decisions based on gut feelings and hot tips from your uncle’s cousin’s best friend’s barber?

Well, fear not because I have a solution:

Oscillator indicators!

These nifty little tools can give you a leg up in the market by providing valuable insight into the strength and direction of a currencies price.

We’ve scoured the internet and tested out a ton of different oscillator indicators to bring you the cream of the crop: the top 5 oscillator indicators that you absolutely need in your trading toolkit.

Whether you’re a seasoned pro or a beginner just starting out, these indicators are sure to up your game.

So, grab a beverage of your choice (we won’t judge if it’s a green smoothie or a beer), sit back, and get ready to become an oscillator pro.

If any indicator deserves a place on this list, it’s the Stochastics.

Developed way back in the 1950s, Stochastics was one of the first ever oscillator indicators created for financial trading. The indicator functions by comparing the closing price of a currency to several prior prices over time.

Typically used to identify the direction and momentum of the current trend, the Stochastics can also indicate overbought and oversold signals market conditions.

To provide data, the Stochastics fluctuates between 0-100.

Generally, the 20 and 80 levels are considered key points.

• If the line breaks below 20, it indicates the market’s oversold.
• If the line breaks above 80, it suggests the market is overbought.

Both signal impending reversals, but it’s best to wait for further confirmation.

Markets can stay overbought and oversold for a long time, so check for other factors before taking action. Chart patterns that form under OB & OS conditions are usually high quality signals, as is price entering a supply or demand zones.

Here’s a quick example…

A day before price entered this supply zone on Gbp/Usd, the Stochastics blew above 80, indicating the market was overbought and price could reverse.

And where’s a prime point for a reversal?

Our supply zone, of course!

The supply has formed due to the banks entering major sell positions.

If they want to protect these positions or initiate any leftover positions, they’ll enter now price is inside supply. And, if we look closely, we can see a large bearish engulf has just formed. That’s a strong signal the banks want price to reverse from the zone.

If we look later on…

Yep, we were right – price soon reverses and a significant new upmove begins.

All in a days work, really ????

Few indicators garner more respect than the Relative Strength Index (or RSI, for short).

The RSI is a momentum oscillator, which means the indicator gauges the price momentum to determines the strength and direction of the current trend. The indicator displays the momentum via a line which oscillates between 0 – 100.

If the RSI is above or below 50, it suggests price is in an uptrend or downtrend, respectively.

The most common way to use the RSI is to identify when a trend might be ending via overbought and oversold signals.

• If the line move below 30, a downtrend is considered oversold.
•  If the line moves above 70, an uptrend is considered overbought.

Both signals indicate a potential price reversal, though price can easily stay overbought and oversold for a long time before reversing.

Here’s a quick example…

In the image above, the RSI has just crossed above the 70 level, indicating the uptrend is now overbought i.e., too many traders are long. A great signal for sure, but let’s look for additional confirmation to enhance our odds.

Wait, what do we have here… 

A large bearish pin bar has formed at resistance.

Combined with OB signal, this indicates price is about to reverse.

And, as we can see…

Soon after the bearish pin bar forms, price reverses, and a major new down move begins.

Simple, eh?

Looking for an indicator that provides leading signals on when and where price may reverse?

Introducing… The Momentum Indicator!

As its name suggests, the momentum indicator determines the speed price is falling or rising by comparing prices across time. The indicator displays a graph with a line and 100 in the middle. The relationship between the line and 100 provides info on the current price momentum.

• The further price climbs ABOVE 100, the stronger the upside momentum.
• The further price declines BELOW 100, the stronger downside momentum.

The calculate the momentum, the indicator uses a formula: take the most recent closing price on one timeframe and compare it with the price on another timeframe.

Together, that reveals the momentum of the current price move.

There are a few different ways to use the Momentum indicator, aside from monitoring the strength of the current price move.

My favourite? Checking for divergence…

Here’s the Momentum indicator added to a long up-move on Eur/Usd.

See how the indicator line is printing lower highs while price is making higher highs?

In trading, this is called divergence.

The indicator shows the momentum behind the rise is falling, despite price still pushing to new highs. It reveals bears are beginning to push back on the bulls, making a reversal to the downside likely.

Let’s see what happens later…

The indicator was right!

As expected, right after the divergence shows, price reverses.

The bears have regained control from the bulls and are back in the driving seat. The indicator line has also now fallen under 100, telling us the momentum is now with the downside.

Next up, the Commodity Channel Index.

Originally created for use in commodity markets, the CCI indicator provides overbought and oversold trend signals.

So, just like the RSI and Stochastics then?

Well, not exactly…

While the CCI functions similarly to the other oscillators we’ve looked at, the math behind the indicator is different. The indicator evaluates the current price in relation to a simple moving average. The goal is to determine how far prices have deviated from the average over time.

The bigger the deviation, the more “out-of-wack” the market is getting.

Unlike the RSI, the CCI has no upper or lower limit.

Basically, price can move above 100 and below 0 indefinitely.

The overbought and oversold levels are not defined by the indicator itself. Rather, we determine the levels by looking at where price has reversed historically e.g., if multiple reversals originated near the 150 level, we’d consider that as overbought.

Compared to the other oscillators, the CCI is limited in its uses. We can use it to find overbought and oversold conditions but not much else.

For me, I’d combine the OB and OS signals with price action.

For example, once the CCI printed an overbought signal, we saw a large pin bar form at resistance. These aren’t great signals on their own. When they are combined, however, they become powerful indicators that the price is about to reverse.

Key Point: In my experience, the CCI tends to provide more accurate overbought and oversold than the RSI. Whether this is down to the underlying math behind the CCI or the OB & OS levels being defined by historical points, I’m not sure.

But overall, the signals are usually more accurate.

Something to consider, if you’re not sure which to pick.

Finally, we have the Awesome Oscillator.

As a fan of Larry Williams, I LOVE this indicator.

Created by Larry Williams, the awesome oscillator provides insights into the momentum of the current trend. The indicator measures the difference between two simple averages: one long-term, the other short-term.

In short, it compares the near-term price momentum with the longer-term momentum.

Together, that provides key insights into the current trend.

Like the MACD, the AO displays as a histogram.

The red and green coloured bars indicate whether the momentum for that candle was up or down. The zero line in the centre acts as a reference point for the trend.

• If price is above the line, it indicates an uptrend has begun.
• If price is below the line, it suggests a downtrend is underway.

Simple stuff, but how can we use the AO in our trading?

While there are a few ways…

My favourite method, however, has to be using it to find the Twin Peaks signal.

Twin peaks, what’s that?

Think MACD divergence, but with momentum instead.

When the Awesome Oscillator makes two consecutive peaks, with the second peak being smaller than the first, that’s a Twin Peaks signal. Divergence exists between price and the current momentum. Thus, a price reversal may soon begin.

Here’s the two signals…

• Two peaks BELOW the 0 line = bullish twin peaks.
• Two peaks ABOVE the 0 line = bearish twin peaks.

Above, we can see a bearish twin peaks signal on Eur/Usd.

First, the AO produced a deep peak when price was falling quickly. But, as price slowed, we saw another, smaller peak form. Since price is BELOW the 0 line, this is a bearish twin peaks signal. It indicates the momentum has changed and that we may see a reversal soon.

With the signal present, we should now look for a short entry.

If I move the chart forward…

The signal was correct – after the 2nd peak formed, price broke lower. And what formed right before the reversal – a long-tailed bearish pin bar!

This gave us a sweet low-risk short entry into the new reversal.

Neat, right?

Key Point: Always combine the AO with other indicators and techniques for higher probability signals, as with most indicators. The AO is quite accurate on its own. However, false signals will continue to appear and throw traders off.

To avoid these, confirm the signals using other tools/techniques.

In my case, I like to use AO with supply and demand zones.

If I see a twin peaks signal form as price is moving into a zone, I know that signal is probably accurate. The banks are more than likely going to use the zone to cause a reversal.

So, each signal confirms the other, albeit in a slightly different ways.

Oscillator indicators are a great tool for quickly identifying the strength, direction, and momentum of the current trend.

Just remember: NEVER use oscillators in isolation.

Always combine them with price action techniques for more accurate signals. Support & resistance levels and other points of interest work well with oscillators, as do common price action patterns, such as pin bars and engulfing candlesticks.

Together, these will help get you into some mega trades.