Oscillator
Candlefocus EditorOscillators are used to detect when a securities momentum is either increasing and decreasing, or running out of steam. Oscillators look for indications of trend change or a possible reversal that may indicate a buy or sell signal for investors. As trading continues and new data is available, oscillator values can indicate whether it is the right time to open or close a position.
The most basic oscillator is the Relative Strength Index (RSI). The RSI is calculated by subtracting the average of closing prices over a set period of time and dividing by the average of the absolute changes between closing prices over the same period of time. The RSI is considered overbought when it reaches values 70 or above, and oversold when it reaches values lower than 30. This can indicate a potential buy or sell opportunity.
Other popular oscillators used by day traders and long-term investors are Moving Average Convergence Divergence, or MACD, and Stochastics. The MACD compares two different moving average lines and indicates a potential buy or sell opportunity when the two lines cross over each other. Stochastics is calculated using both %K and %D values, with the %K indicating the current value and the %D indicating where the current value is relative to the past values. When Stochastics become oversold, a buy signal is indicated, and when they become overbought, a sell signal is indicated.
Oscillators are commonly found when combining with moving average indicators such as moving average convergence divergence (MACD) and Bollinger Bands to identify potential opportunities for investors. Oscillators are best used with other indicators to confirm the occurrence of a potential trend reversal. The combination of oscillators and other indicators can provide traders a disciplined approach to analyzing markets, while providing insight into whether to buy or sell.
In conclusion, Oscillators are widely used by short-term and long-term investors to identify potential buy and sell signs. Oscillators can indicate that momentum is increasing or decreasing, running out of steam, or that there is a potential trend reversal happening. The combination of oscillators and other indicators offer traders an additional layer of support for their market analysis.