Using the Awesome forex Oscillator developed by Bill Williams with the RSI (relative strength index) combines the power of measuring momentum with the forex Awesome Oscillator Indicator and market overbought or oversold conditions with the RSI indicator.
The Awesome forex Oscillator (AO) may be new to some forex traders, so here is a brief outline of this forex trading indicator. You can find more about the forex RSI here.
What Is The Awesome Oscillator
Bill Williams’s usage was to measure the momentum in the market (or any market) by using a combination of:
- 34 period simple moving average(SMA) of the median of the previous 34 candlesticks
- Five-period simple moving average of the median of the last five candlesticks
- Zero line plus histogram
- When the AO is below the indicator zero line, we can determine that the short-term moving average, five-period SMA of median price, is lower than the 34-period moving average. This is a downtrend.
- When the AO is above the indicator zero line, we can determine the trend is now an uptrend.
- When the histogram is rising green color, we can determine that the AO value of this candlestick is higher than the previous.
- When the histogram is red, the AO value is less than the previous chart candlestick.
While some forex traders may present these are buying entry or selling signals, they more accurately give an opportunity and not an entry signal to buy or sell entry at that moment.
We can also use a term AO called a “twin peak,” which can show chart divergence in the Forex pair you are trading.
This currency pair makes a lower low on the right, but the forex awesome Oscillator indicator is making a higher chart peak. The key is that the area between the chart two peaks remains above or below the zero line, depending on the location of the peaks. In this chart case, we need the histogram between the peaks to stay below the zero line.
Awesome Oscillator + RSI Forex Trading Strategy
We will combine the forex awesome oscillators’ ability to help determine momentum with the RSI indicator overbought/oversold condition to produce a forex trading strategy. This is a form of technical forex analysis, and we will use price action to trigger us into a market trade.
We can day trade, chart swing trade, and even position trade these chart setups. Your timeframe will depend on how much you can devote to forex trading.
Regardless of your trading approach, ensure a stop loss(SL) is used, and risk management is considered before taking any trading signal.
Now that you’ve understood the background let’s get straight into how to trade the RSI with an awesome Oscillator indicator. For the buying and selling entry rules that you are going to read below, refer to this mt4 chart where you can see examples of a sell and buy setup:
On the left, we are seeing a forex trading setup to go short.
- Has the 14-period RSI been above the 70 levels? If yes, has it turned below that chart level?
- If the forex RSI is now less than 70, is the Awesome forex Oscillator showing us a red histogram bar?
- If the AO is showing red color, we look to sell 2-5 pips below the current chart candlestick to allow chart price action to take us into the market trade.
On the right, we are looking at a chart trading setup to go long.
- Has the RSI been below the 30 levels? If yes, has it turned above that chart level?
- If the RSI indicator is now above 30, is the Awesome forex Oscillator showing us a green bar?
- If the AO is showing green color, we look to buy 2-5 pips above the current chart candlestick to allow chart price action to take us into the market trade.
There may sometimes be where the cross of the RSI indicator is followed 1-2 candlesticks later with a turn of the forex awesome oscillator color. A forex trader may consider that still valid; however, a forex trading plan may limit the number of candlesticks it takes to turn the AO.
Also, note that we are not concerned with the indicator zero line cross, although you may wish to use the histogram indicator crossing zero as a time to add to your open position. If you recall, an indicator zero line cross indicates a market trend change, and it is possible that by using the RSI indicator, you are picking up an oversold/overbought mt4 Forex pair and catching a chart trend reversal.
Stop Loss And Profit Targets
Stop loss(SL) is essential to your longevity as a good Forex trader. There are many ways to set a stop loss(SL), and you may consider using the chart swing high/low that precedes the forex trading setup.
Ensure you are not putting your stop right below chart swing lows or above swing highs.
Those are liquidity places, and We use those zones as failure forex test trades. You will be taken out of your open position at the time you should be entering.
Another stop loss(SL) plan is to use a multiple of an ATR, such as 1.5 X ATR, which uses the actual volatility of the mt4 currency pair you are trading.
Profit targets can be put as a multiple of your risk, or for a more trend-following approach, hold your open position until the Awesome forex oscillator’s zero line is crossed in the opposite direction of your trade. Picking tops and bottoms are rare but can do it at times. Catching the start of a market trend run can make your year!
Perhaps even consider getting out with a chart oversold/overbought condition; however, the forex markets can stay in that chart for quite a while. It does NOT mean the chart trend is reversing.
Simple Forex Market Analysis
We think this is a decent approach to the forex market, especially for those beginning forex market analysis. Knowing when momentum is in the forex market combined with an ” overdone ” market can teach a new forex trader a lot about chart price action and market tendencies.
Are there drawbacks? Sure.
Getting chopped in chart price consolidations can be tough on a trader, which can certainly happen with this strategy. Using price action as technical analysis to see consolidation form (that includes forex chart patterns such as triangles) can save a forex trader a ton of grief.
Once a market stops making higher highs/ higher lows or lower highs and lows, you run into issues with forming ranges. Just be aware.
Overall, fire up your forex chart and add these forex indicators to see if you can find a trading edge with them.