Traders who are dealing with technical analysis in the stock market must come across the term oscillator indicator. The stock market is such a volatile field. Though there are thousands of tools and techniques available in technical analysis, no one can fully predict the market. You can’t successfully analyze a stock only based on a single tool. The more you learn the usefulness of different tools together, the more accurate your analysis will be. Now, without further delay, let’s step into today’s main discussion, “What is Oscillator in the Stock Market?”. At the end of the article, I hope you will get all the answers to the question “What is Oscillator in the Stock Market?”
What is Oscillator in the Stock Market?
In simple words, oscillate means a subject that can swing in a regular rhythm, back or forth movement. In technical analysis, the oscillator indicator also works in the same way. If you are a newbie in the stock market, you may go through our previous article on the basics of technical analysis and indicators. Let’s get back to the oscillator. As I have stated that these types of indicators oscillate within a certain range. However, not all oscillators belong to the same category.
Categories of Oscillators in the Stock Market
We can categorize the oscillators into two separate sections based on their plot. So, these are the banded oscillator and centered oscillator.
The specific category of oscillators oscillates between a range that is defined as 0 to 100. This particular range has separate zones, termed overbought and oversold zones. Generally, a range between 0 to 30 considers an oversold zone while 70 to 100 is an overbought zone. In one of my previous articles, you can get an overall idea regarding overbought and oversold situations. Overbought indicates a current bullish market or a hint of an upcoming bearish market and vice versa. However, if we have jotted down the whole thing, a gist comes out. It is advisable to wait for the oversold level for getting a buying signal and overbought for a selling signal.
Now, this section of oscillators is not range-bounded. The name itself clarifies its features. These oscillators oscillate or fluctuate above or below a central line. It helps to identify the weakness-strength, direction-momentum of a stock price movement. When the oscillator direction moves above the central line, a bullish trend indication appear. So, in the case of the bearish trend, the oscillator direction is below the central line. Our next cover point will be examples of different banded and centered oscillators.
Example of Banded Oscillators
There are various banded oscillators like RSI, Stochastic, etc.
RSI (Relative Strength Index)
The name RSI or Relative Strength Index defines its meaning. With the help of this particular oscillator, traders can measure the strength of a trend. RSI works in a range from 0 to 100 as I mentioned above. We can easily identify the overbought and oversold situation from it. From RSI, we can identify the divergence scenario. Divergence happens when price and RSI (or any other banded oscillator) move in the opposite direction from one other.
The Stochastic Oscillator measures the relationship between OHLC price (Open, High, Low, Close). It also helps to identify the overbought-oversold scenario. Generally, the Stochastic calculation is based on 14-period data. The banded oscillators help traders to trade with support-resistance levels. High-range stochastic considers as overbought while low-range means oversold. Here also divergence works well.
CCI (Commodity Channel Index)
The CCI indicator comes under a banded oscillator. When the range is above 100, considers as a strong price action or uptrend. Price action below -100 is a downtrend or a weak price trend.
Examples of Centered Oscillators
One of the most widely used and well-known examples of centered oscillators is the Moving Average.
As I have stated before a centered oscillator works around a centerline. In the moving average, there is a central line, and the particular indicator oscillates around the line. When the price moves under the MA signal line, consider as buying signal, and moves above the MA line, considers as selling signal. The two most common uses of MA are SMA (Simple Moving Average) and EMA (Exponential Moving Average).
Divergence: Positive and Negative
So, by using the banded oscillators, we can identify the positive and negative divergence or in other words bullish or bearish divergence. As I have already stated, when a disagreement happens between price and oscillator movement, divergence occurs. Therefore, this pattern considers the most significant trend identification of all time.
Positive or bullish divergence happens when price action establishes a lower low while the oscillator establishes a higher low.
In the case of negative or bearish divergence, the price makes a higher high whereas the oscillator makes a lower high.
The above two formulations are termed regular bullish and bearish divergence. There are other two concepts of divergence using the oscillator, hidden bullish and hidden bearish divergence.
Features of Oscillator
- Applying oscillators together with other indicators and charts give more prominent and accurate analytical data in the technical analysis of a stock.
- Oscillators are more popular to provide information regarding current and upcoming market trends.
- The banded oscillator is often termed a momentum oscillator.
- Trend movement is easily identifiable with this type of indicator.
- The support-Resistance level is also a significant outcome of applying an oscillator.
- By identifying the support-resistance level, traders can point out the exact by-sell point in a stock.
- On a banded oscillator, you can draw a trend line in order to find out the next movement of the market. Besides price action, on a banded oscillator also traders can draw a trend line.
Oscillators are the indicators of technical analysis, that indicate the possibility of market movement. Basically, it oscillates in a limited range, that’s why it is called an oscillator. It helps to identify the overbought and oversold situation of a stock’s price.
Structure-wise, oscillators have two types, banded oscillators, and centered oscillators. A banded oscillator oscillates between a range like 0 to 100 or 0 to 200 and a centered oscillator fluctuates above or below a central line.
One of the best ways to know about the overbought/oversold condition of the market is by using oscillators. For example, RSI, Stochastics, Commodity Channel Index, William % R, etc.
Stochastic oscillator comes under the banded version of oscillators. It compares a specific closing price of a stock to a range of its prices over a certain period of time. You can change the sensitivity of the oscillator by adjusting the time period.
However, if traders know every technique of oscillators usage, it can be very helpful for them to identify the market movement. In general, oscillators can trade with the trend and range if used in conjunction with other indicators. Here, in this article, I have tried to jot down all the points related to the oscillator in the stock market. Therefore, I hope the article on the oscillator in the stock market will be helpful to you.