It is a technical analysis indicator that varies between two set values and then shapes a trend gauge that runs between these bounds. Traders used oscillator indicator to determine short term oversold or overbought conditions. When trend indicator approaches the extreme upper value, analysts interpret that asset is overbought, and as it comes the lower extreme value, technicians analyse that asset is oversold.
Traders used oscillator analysis tool in conjunction with other technical indicators to make the best trading decision. The most common oscillators are relative strength index, stochastic oscillator, money flow index, moving average convergence divergence, commodity channel index, momentum and rate of change.
In technical analysis, the traders measure the oscillator based on a percentage scale from 0 to 100. When market trades in a specific range, the oscillator follows the price fluctuation and indicates oversold condition when it falls below 30% to 20% and indicates overbought condition when it exceeds 70% to 80%. The oversold condition signifies an opportunity to buy while overbought signifies a chance to sell.
Many technical analysts think that oscillator is well suitable for sideways markets and measured more operative when used in combining with other technical indicators that detect the market as being in a range-bound or in a trend. Once it is determined that the market is not in a direction, the oscillator signals become much more effective and useful.