If you’ve ever looked behind the curtain at prop trading in the prop firm, you know it’s much more than just deciding on a direction to go and hoping it all works out. Specialist prop traders are data-oriented traders at heart, and they turn to tools like MetaTrader 5 as part of their arsenal. Of all the things that MetaTrader 5 has to offer, it’s the oscillator indicators that are the game-changers—and whether or not you know what you’re getting yourself into, having sharp terms like RSI, MACD, or Stochastic thrown at you can feel like code in another language. Never fear; it’s all easily understandable, and I will explain how it all works in the world of prop traders who are always on top of their game.
What Are Oscillator Indicators?
But before we dive in, let’s begin with the basics. What are oscillator indicators? These are actually technical analysis tools designed to reveal overbought and oversold levels in the market. Imagine these as meters that move in an oscillating manner, typically in the form of two extremes, indicating whether the market is overvalued or undervalued.
Oscillators are the big deal for prop traders. Why? Because one of the most difficult things about participating in a funds management competition like this is controlling the tendency to make impulsive trades, which can erode gains or blow through stop loss limits. Oscillators offer the insight you need to sense the timing—to know that a trend is probably getting weak or that a reversal might be underway.
Oscillators contrast with trend indicators such as moving average calculations since they concentrate on momentum rather than trending patterns. Momentum is a fancy term that basically refers to speed and intensity of price movement. Through this measure, it is possible to detect when a trend is weakening before prices reverse, which is how prop traders use their secret sauce.
Well-Known Oscillator Indicators in MT5
MT5 trading platform has many native oscillators, and additional ones can also be added. Let us now move forward and explore some of the most widely used oscillators and what they do.
1. Relative Strength Index (RSI)
RSI stands out as likely being the first oscillator you will ever hear of. RSI calculates the rate of speed and change of price action and will give you a percentage value that ranges from 0 to 100. This rule of thumb will help you:
- Over 70 → Overbought (Price may fall soon)
- <30 → Oversold (price may bounce back)
Something that is useful for prop traders in RSI is that it assists in the selection of trades that are less likely. You would pass on a long position if the market is already overbought, as it may appear ripe for a trap.
Important trick: RSI is not infallible. In some situations, the asset may remain overly bought or sold for an extended period, especially during strong trends. Therefore, prop traders will often combine RSI analysis with that of other tools such as moving averages and support or resistance levels.
2. Moving Average Convergence Divergence (MACD)
MACD is a little more complicated. It’s just analyzing two moving averages, fast and slow. When the MACD line crosses above the signal line, this is considered a buy signal. When the MACD line crosses below the signal line, this is considered a sell signal.
Proprietary traders find MACD appealing because it assists in validating trends rather than following the market blindly. This is even more effective when used on higher time frames, for instance, on the 1-hour or 4-hour chart.
Pro tip: Look for divergence. If price is making new highs and MACD is not, it may be a sign of a weakening trend—a great opportunity to tighten stops or take partial profits.
3. Stochastic Oscillator
Stochastic works slightly differently from both RSI and Stoch RSIs. It compares it with a set of prices for a period of 14 bars. Here again readings range from 0 to 100:
- Above 80 → Overbought
- Below 20 → Oversold
Stochastic is excellent for identifying a reversal over a short duration. Most prop traders combine Stochastic with RSI and MACD indicators and use a false signal, meaning that if a stock is overbought using RSI and Stochastic indicators, it could be a good idea to sell.
4. Commodity Channel Index (CCI)
CCI calculates to what extent the price diverges from its average value. Like most other oscillators, CCI can point to overbought or oversold levels, normally set at +100 or -100.
CCI is not as popular as RSI or MACD, but it may be considered a hidden diamond when markets experience extreme volatilities. It is sometimes used by prop traders to identify any developments in the trend as it is sensitive to prices.
Methods Used by Prop Traders for Oscillators
It's one thing to understand what these indicators can do, and it's another thing entirely to leverage them effectively. The point here, as it relates to a prop firm, is that every trade matters, because you're trading not only for yourself, but for others. It's this pressure that makes oscillator indicators such big helpers.
1. Identifying Overbought and Oversold Markets
As we already mentioned, oscillators are excellent for highlighting the extremes. Oscillators are used by the best prop firm traders to initiate trades when the security hits an overbought or oversold level.
For instance, when RSI for EUR/USD reaches 75, a prop trader may decide not to enter a long position although the trend is strong. They can decide to wait for a signal from a candlestick pattern or another indicator before making a move.
2. Entrez et sorties Vous
Oscillators can also be used, in conjunction with other tools, to better time entry and exit points. For example, you can already determine that the trending process for this particular stock is positive. When the RSI indicator falls below the level of 50, this may indicate a low-risk entry point into the trend, thus allowing you to benefit from the trend without having to purchase the stock at the highest price.
Likewise, if you are making money in your trade, if it is overbought, you may know that it is time to sell out or close and set a stop loss. This is a basic lesson in props.
3. Avoiding
Prop traders have rules on the number of trades they can execute, maximum daily loss, and so on. Oscillators assist in eliminating trades that are not in line with what you are looking for.
It could be that although everything appears to be optimal in the chart, when different oscillators indicate that the market is overbought, an expert trader would decide to avoid this trade. Doing this will ensure that your account remains safe.
4. Other Uses
More oscillators are used for reversals, while some also confirm strong trends. A strong trend is signaled when the MACD indicator is above zero and increasing, and RSI is in the 50–70 range. Proprietary traders take this signal and decide to enter an existing trade rather than opening at any given point.
