Technical Analysis Basics: Oscillators

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Oscillators

The purpose of oscillators is to show when a market is either overbought or oversold. This suggest likely points of price reversal. These techniques are most useful in sideways markets where the price is predominantly moving within a range. Most oscillators have an upper and lower range that displays below the main chart. With some subjective analysis, this allows technical traders to identify overbought or oversold levels within the range.

Figure 5
MACD - Overbought (sell) and Oversold (buy) Signals

MACD - overbought and oversold signals
 © forexop

The most widely used are MACD, the Stochastic Oscillator and RSI. In Forex, many traders use MACD owing to the fact that currencies, unlike stocks, spend a lot of the time in ranges. There are range traders who rely almost entirely on MACD. Figure 5 shows the MACD and resulting buy/sell signals it produces.

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