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Oscillators

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Oscillator Group

Oscillators measure the speed of price movement, irrespective of direction. That is, the rate of price change rather that the actual price. They can be applied to the market as a whole, or to individual stocks.

As is the case with other types of technical tools, there are times when oscillators are more useful than other types of indicators, and they are not infallible.

Oscillators are not trend following indicators, they do not measure the amount of change in price, or the direction of the change, only the rate of change. For this reason they are an extremely useful tool for technical traders in non-trending markets where prices fluctuate in horizontal bands of support and resistance. In these situations, trend following systems such as the moving averages do not perform satisfactorily, as many false signals are generated.

The usefulness of oscillators is not restricted to horizontal trading ranges. They can also be used to provide technicians with an advance warning of short term market extremes regardless of the market trend. Extreme readings indicate oversold or overbought market conditions and the possibility of a price reversal. Extended extreme readings indicate strength or weakness. Oscillators provide a warning, referred to as divergence, that a trend is losing momentum before the situation becomes apparent in the price action. Divergence is one of the most useful signs produced by oscillators.

Oscillators often utilize a balance or equilibrium line (often at zero level on the scale) that indicates a change of trend as the reading crosses above or below the line. Although there are different ways of interpreting this indicator, traders often look at a trend reversal when the oscillator is at its extremes. This information is used to take profits and/or reverse the direction of the trade.

Oscillator Indicators include:

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