Let’s continue our examination of trading with oscillators.
Each of these indicators is designed to signal a possible trend reversal, where the previous trend has run its course and the price is ready to change direction.
Let’s take a look at a couple of examples.
We’ve slapped on all three oscillators on GBP/USD’s daily chart shown below.
Remember when we discussed how to work the Stochastic, Parabolic SAR, and RSI?
If you don’t, we’re sending you back to fifth grade!
Anyway, as you can see on the chart, all three indicators gave buy signals towards the end of December.
Taking that trade would’ve yielded around 400 pips in gains. Ka-ching!
Then, during the third week of January, the Stochastic, Parabolic SAR, and RSI all gave sell signals.
And judging from that long 3-month drop afterward, you would’ve made a lot of pips if you took that short trade.
Around mid-April, all three oscillators gave another sell signal, after which the price made another sharp dive.
Now let’s take a look at the same oscillators messing up, just so you know these signals aren’t perfect.
In the chart below, you can see that the indicators could give conflicting signals.
For instance, the Parabolic SAR gave a sell signal in mid-February while the Stochastic showed the exact opposite signal.
Which one should you follow?
Well, the RSI seems to be just as undecided as you are since it didn’t give any buy or sell signals at that time.
Looking at the chart above, you can quickly see that there were a lot of false signals popping up.
During the second week of April, both the Stochastic and the RSI gave sell signals while the Parabolic SAR didn’t give one.
The price kept climbing from there and you could’ve lost a bunch of pips if you entered a short trade right away.
You would’ve had another loss around the middle of May if you acted on those buy signals from the Stochastic and RSI and simply ignored the sell signal from the Parabolic SAR.
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