Oscillator

A family of calculations rather than a single tool. Each compares the current price with prices from a stated lookback window and expresses the result on a confined scale. Bounded oscillators, among them the relative strength index and the stochastic oscillator, cannot leave a fixed range whatever price does. Centred ones swing around zero and have no limits, which is why the two kinds are read differently even when they are plotted in the same panel.

The conventions attached to them are few and all have authors. A reading beyond a stated threshold is labelled overbought or oversold; a crossing of the centre line is read as a change in the sign of momentum; a divergence between the direction of the oscillator and the direction of price is read as the move losing force. Each threshold and each lookback length is a choice made by whoever wrote the method, and different authors specify different ones for the same indicator.

The point most often missed is that an oscillator adds no information. It is a transformation of the same closing prices already on the chart, compressed onto a scale that makes the rate of change easier to see, so it cannot know anything the prices did not. Its known failure follows from that: in a sustained trend a bounded oscillator sits near its extreme for long stretches while the trend continues, so the readings that look most decisive occur exactly where the mean reverting reading of them is weakest. Most schools pair one with a separate trend measure for that reason, and they disagree about whether divergence carries information at all.