It goes without saying that in forex trading, when doing technical analysis, the price of a currency pair can move anywhere between zero and to an unspecified upper limit on the charts. For example, based on today’s prices in GBP/USD at around 1.298, a 1.37 would be regarded as a high price. However, how about 1.40, or 1.45? While these numbers may seem unrealistic (according to history), and they are all ‘high’ by definition, then we would have some degree of difficulty in placing a stop loss or assign a certain profit on the charts. There needs to be a more realistic and practical range that can be classed as truly high.
This is where oscillators come into effect because they help to overcome a lack of precision in defining a high or low price for a currency pair within a specific time frame. The aim of oscillators is to rearrange pricing to accommodate oversold or overbought levels.
What are oversold and overbought levels?
An oversold value indicates that the price is too low in comparison to where it has been historically. Whereas an overbought value indicates that the quote has been driven too high by traders. The good thing is that trade may be profitable in both cases.
It is worth noting that oscillators generally fluctuate between an upper and lower value, beyond which an oversold and overbought level is defined. As the price moves to the overbought level, the trader will contemplate a sell order. When the indicator signals an oversold price, the trader will consider placing a buy order. Oscillators are defined according to the price pattern where they function best.