Oscillators

Formulas designed to measure price momentum (the rate at which price changes) and highlight shorter-term overbought and oversold levels — levels at which price is likely to correct or reverse. These indicators typically fluctuate in fixed ranges — for example, 0 to 100 or -100 to +100, although some do not.

Some of the better-known oscillators are the Relative Strength Index, the stochastic oscillator, the Commodity Channel Index (CCI), the True Strength Index (TSI), and the Moving Average Convergence Divergence (MACD) indicator. Related calculations include tools such as the price oscillator and momentum, or rate of change (ROC).

At the heart of every oscillator is momentum, or the rate at which price changes over a given period. Measuring momentum over a given period essentially means comparing the current price to the price n days (or minutes or weeks, etc.) ago.

There are a few basic ways to do this. You can calculate the difference between the price n periods ago from the current price (the momentum indicator), divide the two (rate of change), or calculate the difference or ratio between derivatives of price, such as moving averages. For example, the MACD is the difference between two exponential moving averages, and the stochastic oscillator and the TSI are momentum calculations that are smoothed with moving averages to reduce their volatility.