Trading, what are Indicators and Oscillators?

Since the advent of technical analysis, we have been talking about the use of indicators and oscillators, useful tools for the analyst/trader to interpret market movements, sometimes used as discriminating tools for operational choices and in other decisive cases in identifying direction and price levels of entry and exit from the market.

In this article we see how the use of indicators and oscillators can be advantageous for traders and how it can be counterproductive in the analysis prior to the trading activity. But what are these tools? Why are they used frequently?

Trading in the early 2000s

Let’s go back in time and catapult ourselves to the early 2000s. The bubble burst on the Nasdaq technology stocks, trading began to become a craze and thanks to the advent of the internet anyone could buy and sell stocks comfortably with their own computer from home. A real revolution for the banking and securities brokerage world, from that moment everything could be made faster, more immediate, connection speed permitting.

Many brokers are born that offer, in exchange for an account opening by the customer, a software connected with their investment account which allowed them to trade securities by searching for them among the many on the market. We can define this as the era of trading platforms, an era where brokers and banks began to develop better and better platforms, with cutting-edge tools such as trading books, 5-tier and multi-level books, vertical books and finally graphics.

With charts, a world has literally opened up to retail trading that has never seen stock market trends like that: line charts, bar charts, candlestick charts. The retail trader, attracted to this world, documents himself on how to generate money and becomes aware of the trading activity, an activity already known in the USA and which was taking hold in Italy, a country more devoted to saving than to investments in equity securities.

The first books on the subject come out, the famous “Technical Analysis of Financial Markets” by John Murphy, a must for those who trade, a book followed by several texts subsequently released at an astounding pace. We begin to meet American traders who have won world trading titles, championships we had never heard of such as the Robbins Cup. Larry Williams, multiple world trading champion, becomes a reference for those who wanted to trading an activity to get rich in a short time, a dream imported from the USA that had finally arrived on European soil. Larry Williams’ books on strategies come out, books on how to read Japanese candlesticks (the discipline that is now called "Price Action"), followed by texts on all types of trading we know today.

From the American model, the first trading competitions organized by Italian brokers begin, to name one there was the famous IT Cup from which the first illustrious names of the Italian trading scene come out, names that are still present in the trading and training. Usually these traders were invited to broker events, physical events where it was possible to talk to other novice traders and others who were starting to make money.

We have finally arrived at the focal point of our theme. It was precisely in those events that in the breaks the traders talked to each other, about their strategies and how they set up the charts. Apart from the well-known question “what time frame do you operate on?”, We had the comparison on how to use the indicators. Indicators and oscillators had become the central topic of discussion among traders, so much so that most of the questions addressed to the "gurus" of the time were related to what were the best indicators and oscillators and their setting and use. From the early 2000s to today, the use of indicators and oscillators has always been a central theme in various trading forums. The various trainers begin to explain analysis strategies with certain oscillators and indicators, sometimes demonstrating their use in a "live" environment, sometimes with success and sometimes not, as is normal. The trend of indicators and oscillators had by now taken hold and turning back was practically impossible. Today the situation does not seem to have changed that much.

Indicators and oscillators: what are they?

In a nutshell, indicators and oscillators are tools that, by means of mathematical/statistical processing of prices and their trends, identify market conditions that the analyst/trader can exploit to his advantage. The average retail trader of the early 2000s saw the systematic use of these tools as an easy solution to be able to earn, as if the systematic repetition of some indications provided by these tools always gave the same result. Over time he became aware of the fact that indicators and oscillators were only simple calculations that were of help to the trader in certain circumstances.

In short, the fact that these tools did not always give the desired results had only made things worse by decreasing the ability of traders and analysts to read the market. RSI, MACD, Stochastic, CCI, are just some of the names of the most used indicators and oscillators in that period, not to mention the excessive use of moving averages and their crossings which allowed to identify, depending on some trend reversals, trend continuations or market entry or exit points. Ultimately, the trader (or aspiring one) had become a sort of alchemist of indicators, completely immersed in the search for the magic formula to "break" the market at the expense of the only thing that really matters on the markets, the price.

There was so much focus on the indicators that the trader first analyzed the indicator/oscillator and then later the price. In this regard, therefore, remember that indicators and oscillators are "help" tools, they are formulas that should help the trader and not complicate his life. The only problem therefore lies in the operational weight that the trader attributes to the indicators, an extremely subjective weight that is given only ex-post, i.e. after seeing tangible results deriving from the use of one or more indicators/oscillators.

Indicators and oscillators are essential?

Yes, they are absolutely essential, especially if we want to define ourselves as trader in all respects. Many traders who operate with a “naked” chart, a chart that is clean at first sight, sometimes use some indicators based on the particular market circumstance. Like any tool, we need to know how and when to use it. Knowing that to open a door you need a key and not a hammer, it is as essential as knowing that to have technical confirmations on a certain type of movement you need a certain type of indicator/oscillator, an optional choice for the trader. So, are indicators and oscillators useful? In trading, the more you know, the better, the more culture you have, the higher our chances of success become, especially if we need that culture to understand when and how to use certain tools at our disposal.

Original article published on Money.it Italy 2022-10-18 08:57:00.
Original title: Trading, meglio con indicatori e oscillatori?