An oscillator is a technical analysis tool that constructs high and low bands between two extreme values, and then builds a trend indicator that fluctuates within these bounds. Traders use the trend indicator to discover short-term overbought or oversold conditions. When the value of the oscillator approaches the upper extreme value, technical analysts interpret that information to mean that the asset is overbought, and as it approaches the lower extreme, technicians consider the asset to be oversold.
KEY TAKEAWAYS
- Oscillators are momentum indicators used in technical analysis, whose fluctuations are bounded by some upper and lower band.
- When oscillator values approach these bands, they provide overbought or oversold signals to traders.
- Oscillators are often combined with moving average indicators to signal trend breakouts or reversals.