Both indicators and oscillators are used in technical analysis to predict price movements, trends, volatility and the momentum of an underlying asset.
What are indicators?
Indicators measure various aspects of an underlying asset such as momentum and trends based on the volume and price of an asset. Indicators only offer additional or secondary information to the technical analysis of the asset. They are essentially used to determine buy and sell signals, to measure the quality of trade patterns, and to analyze price movements.
The two types of indicators include the lagging indicator and the leading indicator. The leading indicators are largely used to predict price movements while a lagging indicator confirms the movement of the price. Lagging indicators are particularly applicable in trending ranges while leading indicators are more useful in choppy or sideways market trends.
It is noteworthy that oscillators are derived from indicators. Oscillators are a type of indicator construction that is bound in a range. They are the most common forms of indicators. Oscillators are bound within a range that could start between 0 and 100. These ranges are simply buy and sell signals that indicate the point at which the asset has way too many buyers, which is close to the 100 point, and the point at which there are too many sellers of the asset; this point is close to the zero point.
How are indicators used?
Indicators are particularly helpful in developing buy and sell signals as part of a trader’s technical analysis. Indicators use divergence and crossover to form these buy and sell signals. In divergence, the price movement goes in the opposite direction of the indictor. This is an indication that the prevailing price movement is ending. A crossover happens when the price of an asset moves across the indictor trend. This could also happen in the event that two moving averages intertwine.
How do oscillators work?
Oscillators are essentially technical indicators that are helpful in forming buy and sell signals based on the consistency of an asset’s movement the price movement of the asset. Traders usually use these indictors to identify price reversal especially when an asset is overbought because the value of the asset is likely to decline and increase in value when the asset is oversold.
While there are various types of oscillators, they generally fall into two categories: banded oscillators and centered oscillators. Banded oscillators do not have a center level. Instead, they oscillate between a high and low point to indicate an overbought asset at the highest end and oversold asset at the lower point. One of the most popular banded oscillators is the Relative Strength Index, which is an indicator of overbought assets beyond the 70 mark and an asset that have been oversold below the 30 mark.
The centered oscillator ranges between points that are over and under a center point. This type of oscillator is used in identifying how strong or weak an asset is. If the oscillator goes beyond this center point, then it is an indication of a strong asset and when the indicator goes below the centerline, it is an indication of a weak asset.
Both oscillators and indicators are very useful in binary trading as they enable traders to leverage price movements and to swiftly execute trades when the buy or sell signals are appropriate.