Oscillators

Oscillator is a tool used in technical analysis, which varies within a band/ range, over a period of time. It is used to identify price direction of a stock and is used along with price charts. Oscillators are useful in non-trending markets, in which price moves are sideways. Some of the most common oscillators are stochastic oscillator, relative strength index, and money flow index.

The purpose of an oscillator is to measure on a percentage scale from 0 to 100. When the market is trending in a range, the oscillator will follow the price fluctuations. It will generally indicate an overbought condition when it exceeds 70 to 80 percent of the specified total price range, signifying a selling opportunity. An oversold condition exists when the oscillator generally falls below 30 to 20 percent mark, signifying a buying opportunity. As long as the price of the underlying security remains within the established range, the signals are valid. However, the signals may be misleading if a price breakout occurs.