Oscillators are a subset of indicators that fluctuate within a fixed range (e.g., 0-100) to identify overbought and oversold conditions. They are especially useful in sideways or ranging markets where trends are unclear.
- How Oscillators Are Used:
- Best for range-bound markets where price moves within a predictable range.
- Helps traders time market reversals before the trend shifts.
- Primarily leading indicators, providing early trade signals.
- Examples of Oscillators in Action:
- The RSI crosses above 70 → market is overbought, signaling a potential price drop.
- The Stochastic Oscillator falls below 20 → market is oversold, indicating a possible upward reversal.
- Limitations:
- False signals in strong trends – an overbought market can stay overbought longer than expected.
- Works poorly in trending markets without additional confirmation from other indicators.