Effective way to know Forex Trend is Ending is Oscillators is by observing the extreme movements on these indicators.
An oscillator moves between the two predetermined points or level. Moves from one extreme point to another, more of a pendulum bob on a string when released.
It oscillates from one point to another.
When we talk of oscillators, i suppose you already know what they are and how to use them.
We discussed this in our previous lessons but if you are still not sure about them, we encourage you to read through the previous lessons again.
Technical oscillators show the over bought and oversold levels on the market chart on the scale of 0 – 100.
When in an uptrend, the overbought conditions signify a fall in price momentum hence weak buying pressure. Similarly, the oscillators show oversold conditions when there is a fall in momentum in a downtrend.
This is as a result of weak selling pressure in the market.
Every time there is a fall in price momentum after a long fall or rise in prices, it is possible that a trend is coming to an end. This is How you Know Forex Trend is Ending using Oscillators.
The technical oscillators are here to help you to know when momentum falls. When they signal overbought or oversold conditions.
In this case, we shall only concentrate on the 3 traders’ favorite oscillators.
The Relative Strength Index (RSI), the Stochastic,Oscillator and the parabolic SAR
How do you use the oscillators to identify trend reversals
If you are in a buy position, and boom, your indicators shows overbought conditions, something may be happening.
In case you are using the RSI, the indicators crosses the 70% level.
The stochastic indicator crosses the 80% level.
Take a look at the EURUSD 4-Hour Chart below;
Combining 2 indicators can minimize the risk of false signals .
Since you already know that these indicators measure price momentum.
To Know Forex Trend is Ending using Oscillators, Look at price movement on your chart as soon as your indicators shows overbought conditions.
When there is a fall in momentum in the market, price will start forming smaller candlesticks after the previous large candlesticks.
This means the currency or stock has been overbought and this is a signal that a trend is coming to an end. You should get ready for a reversal of the trend or a strong pullback in the trend.
Two decisions to make, exit your running long position or prepare for a short position.
The reverse is true for a short position.
If an oscillator for example the stochastic is at 20%, this indicates a trend coming to an end. So you should watch out for a change in trend upwards or a strong congestion.
Exit your short position or prepare for a long position.
Parabolic SAR with Stochastics To Know Forex Trend is Ending using Oscillators
The AUDNZD daily time frame, shows how we can combine two oscillators to show when the trend ends and trigger a buy/sell signal
The parabolic stop and reverse(SAR) indicator is one of the direct indicators that can show you that the trend is changing direction.
From the above chart, you can easily tell how it actually follows price perfectly and good at identifying reversal points.
When we combined it with the stochastic indicator, it matched perfectly for each other. So let’s see how these two worked a long.
Following the 2 indicators,
As the stochastic signals the overbought conditions (1st Sell), the parabolic SAR indicated reversal point.
The dots changed from the downside to the upper side showing that an uptrend is coming to an end as a downtrend begins.
This gave us a confirmation signal to sell the pair. So when using these indicators and you notice such a scenario, it would be good time for you to sell.
On the other hand
when the stochastic indicator touched the oversold conditions (1st Buy), the parabolic SAR changed course.
The dots shifted from the upper side of the price to the downside.
This is an indication that the downtrend is coming to an end. As the two correspond to each other, we get a strong buy signal.
In conclusion
Having overbought and oversold conditions on the indicator does not really guarantee a valid buy or sell signal.
We shall always remind you that none of these indicators is perfect. Therefore, the readings are not a complete accurate indications of a reversal all the time.
So just because the indicator says “overbought” doesn’t mean you should blindly sell or buy when you see oversold.
You will encounter times when the oscillator signals overbought or oversold but the trend does the opposite.
Consider other indicators that may signal trend reversal such as price action and reversal candlestick patterns in combination for confirmations.
Use a stop loss for your trades, that way you will minimise losses.
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