Glossary
Oscillator
An indicator that moves within a band or around a center line, such as RSI or stochastics, used to gauge momentum and extremes.
An oscillator is a technical indicator whose value swings back and forth inside a fixed range, such as 0 to 100, or around a center line, usually zero. Instead of tracking where price is, it measures how fast and how far price has moved recently, which makes it useful for judging momentum and spotting stretched moves that a price chart alone can hide.
How it works
Every oscillator turns a window of recent prices into a single number. Bounded oscillators rescale that number so it cannot leave its range. The Relative Strength Index compares average gains with average losses and maps the result onto 0–100. The stochastic oscillator asks where today's close sits inside the high-low range of the last N bars. Unbounded oscillators, such as MACD or rate of change, have no ceiling and are read relative to zero.
How traders use them
Three readings come up again and again:
- Extremes. High readings are labeled Overbought and low readings Oversold, using thresholds such as 70/30 for RSI or 80/20 for stochastics.
- Center-line crosses. A move above 50 (or above zero) says recent momentum has turned positive.
- Divergence. When price makes a new high but the oscillator does not, upward momentum is fading. See Divergence.
What to watch for
Oscillators shine in sideways markets and mislead in strong trends. During a persistent rally RSI can sit above 70 for weeks while price keeps climbing, so an "overbought" reading on its own is not a sell signal. Many traders pair an oscillator with a trend tool, such as a moving average, and only act on oscillator signals that agree with the larger trend.