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Oscillators for Technical Traders

An oscillator is a technical analysis tool that constructs bands between extreme high and low values and generates a trend indicator that fluctuates within these bounds. Traders use the trend indicator to identify short-term overbought or oversold conditions - when the indicator approaches the upper band, analysts view the asset as overbought, and when it approaches the lower band, the asset is considered oversold. Common oscillators include the stochastic oscillator, relative strength index, rate of change, and money flow index. Oscillators are most useful for analyzing sideways markets and work best when combined with other indicators like moving averages.

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279 views2 pages

Oscillators for Technical Traders

An oscillator is a technical analysis tool that constructs bands between extreme high and low values and generates a trend indicator that fluctuates within these bounds. Traders use the trend indicator to identify short-term overbought or oversold conditions - when the indicator approaches the upper band, analysts view the asset as overbought, and when it approaches the lower band, the asset is considered oversold. Common oscillators include the stochastic oscillator, relative strength index, rate of change, and money flow index. Oscillators are most useful for analyzing sideways markets and work best when combined with other indicators like moving averages.

Uploaded by

Sandeep Mishra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Oscillator

An oscillator is a technical analysis tool that constructs high- and low- bands between two extreme
values, and then builds a trend indicator that fluctuates within these bounds. Traders use the
trend indicator to discover short-term overbought or oversold conditions. When the value of the
oscillator approaches the upper extreme value, technical analysts interpret that information to
mean that the asset is overbought, and as it approaches the lower extreme, technicians consider
the asset to be oversold
KEY TAKEAWAYS
• Oscillators are momentum indicators used in technical analysis, whose fluctuations are
bounded by some upper and lower band.
• When oscillator values approach these bands, they provide overbought or oversold signals
to traders.
• Oscillators are often combined with moving average indicators to signal trend breakouts or
reversals.
How Oscillators Work
Oscillators are typically used in conjunction with other technical analysis indicators to make
trading decisions. Analysts find oscillators most advantageous when they cannot find a clear trend
in a company's stock price easily, for example when a stock trades horizontally or sideways. The
most common oscillators are the stochastic oscillator, relative strength (RSI), rate of change (ROC)
and money flow (MFI). In technical analysis, investors find oscillators to be one of the most
important technical tools to understand, but there are also other technical indicators that analysts
find helpful in enhancing their trading, such as chart reading skills and the technical indicators.
If an investor uses an oscillator they first pick two values; then, placing the tool between the two,
the oscillator oscillates, creating a trend indicator. Investors then use the trend indicator to read
current market conditions for that particular asset. When the investor sees that the oscillator
moves toward the higher value, the investor reads the asset as overbought. In the opposite
scenario, when the the oscillator trends towards the lower value, the investors consider the asset
oversold.
Mechanics of an Oscillator
In technical analysis, an investor measures oscillators on a percentage scale from 0 to 100, where
the closing price is relative to the total price range for a specified number of bars in a given bar
chart. In order to achieve this, one deploys various techniques of manipulating and smoothing out
multiple moving averages. When the market trades in a specific range, the oscillator follows the
price fluctuations and indicates an overbought condition when it exceeds 70 to 80 percent of the
specified total price range, signifying a sell opportunity. An oversold condition exists when the
oscillator falls below 30 to 20 percent, which signifies a buy opportunity.
The signals remain valid as long as the price of the underlying security remains in the established
range. However, when a price breakout occurs, the signals may be misleading. Analysts consider a
price breakout either the resetting of the range by which the current sideways market is bound or
the beginning of a new trend. During the price breakout, the oscillator may remain in the
overbought or oversold range for an extended period of time.
Technical analysts consider oscillators better suited for sideways markets, and consider them more
effective when used in conjunction with a technical indicator that identifies the market as being in
a trend or range-bound. For example, a moving average crossover indicator can be used to
determine if a market is, or is not, in a trend. Once the analysts determine that the market is not in
a trend, the signals of an oscillator become much more useful and effective.

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