Oscillators are tools used in technical analysis that help traders identify potential opportunities in the market by indicating points where a security could be either overbought or oversold. They operate within a band or scale, typically with a range of zero to 100, or -100 to +100.
When the oscillator reading is near the top of its band (e.g. above 70 on a 0-100 scale), this suggests the security is overbought, meaning it may be overpriced and due for a downward price correction. Conversely, when the oscillator is near the bottom of its band (e.g. below 30 on a 0-100 scale), the security might be considered oversold, implying it is underpriced and could possibly be due for an upward price correction.
Oscillators include popular technical analysis tools like the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and the Stochastic Oscillator. They are typically used in conjunction with other indicators to maximize the effectiveness of trading decisions. It’s important to note that, while useful, oscillators are not foolproof and should not be used as the only indicator when making trading decisions.
