Oscillator

An oscillator is a technical indicator that oscillates between two levels on a price chart. Oscillators assess momentum and are intended to indicate when an asset may be overbought or oversold.

These indicators operate on the premise that as momentum starts to wane, there are fewer active buyers and sellers willing to engage at the current price. Oscillators can assist in differentiating between reversals and fluctuations.

They are often utilized as a gauge to evaluate pricing momentum in relation to trend extension, exhaustion, and reversal. There are two main categories of oscillators:

• Centered oscillators that move above and below a central point or line.
• Banded oscillators that fluctuate between overbought and oversold extremes.

Typically, centered oscillators are more effective for analyzing the direction of price momentum, while banded oscillators are better suited for pinpointing overbought and oversold conditions.

Momentum indicators, a subset of oscillators, are visual tools that illustrate how quickly the price of a specific asset is moving in a certain direction. They can also provide traders with insights into whether the price trend is likely to persist.

The underlying principle of the momentum indicator is that as an asset is traded, the speed of price movement peaks when the influx of new buyers is at its highest. Once there are no more buyers, the tendency after this peak is for the price trend to either flatten or reverse.

Some of the most recognized oscillators include Momentum, Stochastic, the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and the Commodity Channel Index (CCI).