There is a number of oscillators such as: Stochastic, RSI, or MACD. All of them show roughly the same thing, and most commonly used is Slow Stochastic on which I will focus in this post. It shows overbought and oversold regions, and two lines: fast and slow.
Please check out a video explaining Slow Stochastics. The Stochastics in this case are located at the top of the video. Although it's focusing on stock market, the same set of technical analysis rules do apply to FOREX.
Some tips on trading using stochastics:
- It is most useful in sideways market. In a trending market the indicator can stay in overbought/oversold areas for a while indicating a strong trend.
- a typical strategy is to buy/sell when the fast line crosses the slow one, and they both cross the overbought/oversold boundaries.
- when the two moving lines cross the oversold area down, but then come right back up, this most likely signifies a strong up-trend. In such a case it's good to keep a long position and ride the trend. Reverse applies to a down-trend.
- look for divergence. when there are two dips, the second deeper on the chart, but shallower on the oscillator, then it's a signal for a potential up-trend.
- do not enter a trade when oscillators are not at an extreme