Introduction to the Elliott Waves Oscillator Indicator
Ralph Nelson Elliott Observed that price action tends to oscillate on the price chart with a somewhat predictable pattern. It is a wave like pattern with clear pivot points. These are patterns that can predict oscillations and probable trend reversals.
Although this observation was recurring, some traders would still time the wave like oscillations wrongly making a bad trade. This indicator was developed in order to give traders an objective signal of the momentum reversals based on the Elliott Wave Theory.
What is the Elliott Waves Oscillator Indicator?
The Elliott Wave Oscillator (EWO) is an oscillator type of technical indicator which identifies and momentum direction based on the crossover of an underlying pair of moving average lines. It then indicates the direction of the momentum by plotting histogram bars that oscillate around its midpoint, which is zero.
How the Elliott Waves Indicator Oscillator Works?
The Elliott Waves Oscillator computes for the difference between two underlying moving average lines. These moving average lines are typically preset as a five-bar Simple Moving Average (SMA) and a 34-bar Simple Moving Average (SMA) lines. The difference between the 5 SMA and 34 SMA lines are then plotted as histogram bars.
This version of the EWO plots lime bars whenever a positive EWO bar is higher than the previous bar, and green bars whenever it is lower than the previous bar. It also plots red bars whenever a negative bar is lower than the previous bar, and maroon bars whenever it is higher than the previous bar.
This version of the EWO also plots a signal line which is preset as a five-bar Simple Moving Average (SMA) of the EWO bars.
How to use the Elliott Waves Oscillator Indicator for MT4?
The Elliott Wave Oscillator can be interpreted in different ways based on the value of the bars, color changes of the histogram bars, as well as its interaction with its signal line.
General trend direction can be observed based on whether the bars are generally positive or negative. Positive bars indicate a bullish trend bias, while negative bars indicate a bearish trend bias.
Color changes between bars can also be an early indication of a possible momentum reversal.
Crossovers between the EWO histogram bars and its signal line are also telltale signals of a momentum reversal.
Buy Trade Setup
When to Enter?
The currency pair should be in an uptrend with clear price oscillations. Wait for the momentum to temporarily reverse causing the histogram bars to drop below the signal line. Enter a buy order as soon as the histogram bars change to lime.
Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the histogram bars change to green.
Sell Trade Setup
When to Enter?
The currency pair should be in downtrend with clear price oscillations. Wait for the momentum to temporarily reverse causing the histogram bars to cross above the signal line. Enter a sell order as soon as the histogram bars change to red.
Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the histogram bars change to maroon.
Conclusion
This oscillator is a decent momentum reversal signal which tends to rely on a confirmed momentum reversal. However, it is not a stand-alone indicator. As such, it is best to pair this indicator with other trend following indicators as well as other indications of a potential reversal point such as Fibonacci retracements.
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