The stock market is not the world’s biggest guessing game. Those that are savvy investors can use tools to square odds that may be stacked against those that choose to throw their money at the market in a blind fashion. The reason for this is because they have a firm grasp of indicators. More specifically, they have an astute knowledge on the common subsection of indicators known as oscillators.
Oscillators and Indicators Defined
Generally speaking, indicators are calculations that are derived from a stock’s price and volume through metrics like trends, momentum, money flow, and volatility. While they aren’t necessarily the prime mover of stock fluctuations, they can be a useful measurement that adds depth to a stock’s technical analytics. From a technical analysis standpoint, indicators can be a prime way for investors to predict what a stock may do over a predetermined period, even during extended periods of times when a chart is being coy with its signals.
Indicators are chiefly used to add validity to price movement and a chart pattern, as well as to create buy and sell signals. Indicators are broken up into two types; leading and lagging. Leading indicators are predictors of price movement and are therefore used as predictive tools, while lagging indicators are used to confirm the validity of current price movement.
Indicators can either fall within or without a bounded range. The ones that fall in a bounded range are ones that encompass the movement that flows between a stock’s high and low period. The indicators that are bound within the particular range are called oscillators. This particular tool is the most commonly used indicator, and it tends to be prized within the field of technical analysis.
What’s an Oscillator?
An oscillator is a technical analysis tool bound between a stock’s two extreme values and constructed with results from a trend indicator for unearthing short-term overbought and oversold condition. In other words, it’s a tool that can help the technical analyst determine which stocks are overrated or underrated and are prime for a tumble or a boost.
Oscillators come in handy when a clear trend cannot be easily plucked from a company’s stock trends. If a stock is trading horizontally or sideways, the use of oscillators can be applied to sift through the straight line and discover the real story. In a sense, an oscillator can become an indicator in ways that big picture indicators cannot.
How an Oscillator Works
Oscillators are used as a measuring tool, on a percentages scale that ranges from 0 to 100, where the closing prices are about the overall price range for a specified number of bars in a bar chart. The tool deploys various manipulation techniques such as smoothing out moving averages to achieve results. They kick into action once the market is in the trading range. When this happens, an oscillator will follow the price fluctuations and pinpoint an overbought condition, which occurs when it exceeds 70 to 80 percent of the specific total price range. This will signal to the indicator that it’s time to buy. Conversely, an oversold condition will be in place when the oscillator drops to a range between 20 and 30 percent. This will then give the trader the green light to sell.
The oscillator’s signals will work fine as long as the price of the stock remains within the predetermined range the trade analyst has established. However, the signals can get crossed if a price breakout occurs. During a price breakout, the range involving the stock is either going to be reset or it’s going to “take it to the next level” via a trend. However, during this time, the oscillator will be stuck in an overbought or oversold for a lengthy time, depending on the breakout’s extent. When this happens, the investor has a grave situation to ponder. That is, do they buy follow the indicators of the oscillators, which are telling them to buy in an overbought or oversold market, or do they break away and follow what may be a bullish or bearish trend?
Oscillators are Best Used with Other Indicators
The tricky nature of oscillators may make their usage a bit difficult for the investor new to technical analytics. Then again, even if you are a savvy investor with plenty of technical, analytical skill under your belt, it’s still not necessarily the greatest tool to use on its own. It is wise to use them in conjunction with other indicators to provide a complete visual with a stock’s movement.
With that being said, the savvy investor may find that oscillators are essential tools for sideways markets. This makes sense; after all, oscillators are at their best when they are mining horizontal patterns to pick out investment-worthy information. When used with the right indicator, an investor may be able to detect things that may otherwise be hidden in plain sight.
For instance, let’s say an investor uses an oscillator with a moving average crossover indicator. The stock price is going to be initially “smoothed over” as a result of its function of eschewing the debris and “noise” from the stock. Once this has been done, the use of an oscillating indicator can make uncertainties that may crop up in the wake of the moving averages indicator more certain.
Don’t Be Afraid to Use Multiple Indicators
A good strategy that technical analysts can put to use is to ply the data from multiple indicators. Various signals can come from various sources, and each can provide different stripes of essential knowledge that can help fortify various market-driven decisions.
Ideally, utilizing indicators can provide you with identifiers about momentum, volatility, trends, and other metrics that can provide substantial signals on which way a market may be going one way or another. While it is possible to use just one indicator to help buy and sell signals, using an indicator in conjunction with other indicators can provide a significantly greater amount of depth to a trading strategy.