Price Oscillator is a highly customizable tool that allows the user to measure the difference between two (and potentially more) moving averages. The difference is displayed as a histogram (by default) which allows the user to see the variance between the averages and determine if an investment is overbought or oversold.
Price Oscillator in Practice
The histogram bars or line will be centered on a zero line. When the bars are high above the zero line this would signal an overbought condition. When the bars are far below the zero line this would signal an oversold condition. Since the indicator is not bound to a particular range, overbought and oversold conditions are determined by reviewing historical periods where a high or low reading on the oscillator corresponded with a correction.
The chart above shows a 20 and 40 days moving average displays within the price graph. The price oscillator displays the same 20 and 40 day average in oscillator form. The primary reasons for displaying the moving average data in this fashion are:
- It allows for a more identifiable buy and sell signals when the histogram crosses the zero line.
- The difference between moving averages is easier to measure, allowing for easy measurement of overbought and oversold readings.
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The analytical tools described in this article are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or endorsement of any specific investment, tool or strategy. The choice to engage in a specific investment, tool or strategy should be based solely on your research and evaluation of risks involved, your financial circumstances and investment objectives. Securities are subject to market fluctuation and may lose value. Market volatility, volume, and system availability may impact account access and trade execution.