what is Oscillator and type of Oscillator
An oscillator is a technical analysis tool that constructs high- and low- bands between two extremes. Traders use it to discover short-term overbought or oversold conditions. Ideally, peaks and troughs in the oscillator represent the peaks and troughs in the market. When the value of the oscillator approaches the upper extreme value, it represents that the asset is overbought, and as it approaches the lower extreme, it represents the asset to be oversold.
There are different types of oscillators, all of which are based on the idea of momentum or speed of price movements. In this blog, I am going to discuss different types of oscillators.
the acceleration or deceleration of prices rather than actual price level itself is illustrated by momentum oscillators. A momentum oscillator is designed to measure the markets speed of change or direction of the market movement.
Momentum is calculated by subtracting Price “n” Days Ago from current Price.
Rate of Change (ROC) Oscillator
ROC shows the percentage change in price over a given period. ROC oscillates around zero. When the price goes up, ROC goes down and vice versa. For example, the 20-day ROC would measure the percentage price change over the last 20 days. The bigger the difference between the current price and the price 20 days ago, the higher the value of the ROC.
Rate of Change is calculated by dividing Price Today with Price “n” Days Ago
Moving Average Convergence/Divergence (MACD)
MACD (pronounced Mac-Dee) is an exponential moving average that shows the difference between short and long term moving averages. MACD can signal convergence or divergence as well as overbought and oversold conditions.
The stochastic oscillator measures the relationship between closing, high, and low prices. It is also used to identify overbought and oversold markets. It is usually calculated using 14 days and always ranges between 0-100%. the closing price tends to be near the high price of the period in an uptrend, and a downtrend trend is marked by the low and closing prices being close together.
The Commodity Channel Index (CCI)
It measures the current price relative to the average price over a given period. The oscillator is considered unbound because there is theoretically no upper and lower limit on that relative price difference.