What is an Oscillator?
Updated: March 28, 2012 at 4:45 AM
Oscillator Definition. An Oscillator is a term used to describe a specific set of indicators used in technical analysis to determine when a stock, commodity or currency pair is reaching an overbought or oversold condition in the market. Oscillators are particularly beneficial in trading markets where forex traders cannot easily detect any discernible trends. Research in this area has yielded a number of indicators, which vary to a small degree in their formulaic approach, yet were also designed to gauge the health of the detected trend. The signals generated by these indicators tend to be more useful at the extremes of their scales. Forex trading signals for optimum entry and exit points are usually given when a divergence occurs between the oscillator and the price of the underlying currency or when crossovers occur between dual curves operating within an indicator. Lastly, crossing the centerline usually confirms a shift in price direction. The three most familiar oscillators are the Slow Stochastics, the Reserve Strength Index (RSI), and the Moving Averages Convergence-Divergence (MACD). The first two oscillators are referred to as leading indicators, and the latter, as lagging. The MACD is often used in combination with one of the other indicators to confirm the leading trade signals generated. Each of these oscillators is displayed in the lower portion of the chart shown below:
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.