Oscillators for Dummies

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Oscillators fall under the category of technical analysis. Basically they are technical indicators that factor in price movement and consistency. An oscillator performs calculations on an asset’s price movement between two extremes. When it shows values at the upper end of its scale this is an indication of an overbought asset, when the values are at the lower end of the scale then the asset in question is said to be oversold. These indicators are very useful as indicators of market reversals as overbought stocks are highly likely to drop in value and highly sold stocks are likely to increase. As far as individual oscillators go there are a number of different ones available to the technical analyst  but they are generally divided into two main categories.The first of these are centred oscillators which oscillate between points both above and below a centre line. Centred oscillators are employed to recognise strength and weakness in an asset. Simply put if the oscillator finds itself above the centre line then it is indicating strength, or bullish price action. If it is below the centre line then this is an indicator of weakness, or bearish price action.

The other type of oscillators are known as banded oscillators. These oscillators move between a high and low point without a centre mark and again indicate overbought and oversold levels at either end. Stochastic banded oscillators will typically have a mark above which traders can ascertain overbought securities and below which indicate overbought securities. They are also often customisable so traders can set their own trigger points. Relative Strength Index (RSI) is a particularly popular banded oscillator which indicates overbought assets above the 70 mark and oversold assets below the 30 mark.

Generally speaking oscillators are used by traders to generate educated buy and sell trading signals. They are used extensively in the trading of binary options as binary traders can capitalise on market movements very swiftly and place a series of rapidfire trades capitalising on reversals. It should be borne in mind that oscillators are normally used alongside other types of technical indicators. This is because are only useful for giving one side of the picture, namely momentum. They can be paired up with other indicators such as those that analyse volume or support and resistance to get a clearer view of the market. Two particularly well paired indicators are RSI and MACD.

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