Read on to find out how to read the short and long term averages of the price oscillator and what the relationship between those price points tells you about the asset of interest.
We also explain how you can spot overbought and oversold signals using the price oscillator.
What Is The Price Oscillator?
The Price Oscillator uses two moving averages, one shorter-period, and one longer-period, and then calculates the difference between the two moving averages.
The Price Oscillator technical indicator can suggest areas of overbought and oversold conditions as well as attempting to confirm bullish or bearish price moves.
The moving averages lengths are defined by the user. The chart below shows the E-mini Russel 2000 futures contract with the 9-day and 18-day moving averages:
When the 9-day moving average crossed over the 18-day moving average, the Price Oscillator crossed over the zero line.
What Do Moving Average Crossovers Show?
When a short-term moving average crosses over a long-term moving average, a bullish crossover occurs. A trader might consider bullish crossovers to be a good time to buy.
Likewise, when the 9-day moving average crossed below the 18-day moving average, the Price Oscillator crossed below the zero line. When a short-term moving average crosses below a long-term moving average, a bearish crossover occurs.
A trader may consider the bearish crossover a good time to sell.
What Else Is The Price Oscillator Useful For?
The Price Oscillator makes it easy to see moving average crossovers.
More, the Price Oscillator can be a useful tool to detect overbought and oversold conditions; this is discussed on the next page.
Overbought & Oversold Signals Explained
The Price Oscillator may be used in an attempt to detect when a trend is slowing down and potentially could reverse. This occurs when the Price Oscillator moves back towards the zero line.
In contrast, when the Price Oscillator is moving away from the zero line, the price trend is accelerating.
Moreover, the Price Oscillator might reveal areas of overbought and oversold, which is shown below in the chart of the E-mini Russel 2000 Futures contract:
In oversold areas, where the Price Oscillator is bottoming, a trader might look for buys. Of course, other technical indicators should be used to initiate the trade.
Similarly, in overbought areas, where the Price Oscillator has topped, a trader could look for sells.
Is The Price Oscillator Enough To Detect Sell And Buy Signals?
Other technical indicators should be consulted before an official decision is made, but nevertheless, the Price Oscillator suggests a bias as to whether buy or sell indications should be acted upon.
Generally, when a trader sees overbought regions they might look for sells; whereas in oversold regions, a trader might look for buys.
The Price Oscillator is very similar to the popular MACD indicator and should be investigated as well.
Where Can I Trade With The Price Oscillator?
If you are interested in trading using technical analysis, have a look at our reviews of these regulated brokers available in to learn which charting & analysis tools they offer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Learn more about technical analysis indicators, concepts, and strategies including Momentum, Elliot Waves, Market Thrust, Moving Averages, and Fibonacci Patterns.
Also see our guides on Forex, Crypto, Stocks, Bullion dealers, and Options brokers to find out which tools brokerages offer their clients.
How do you read a price oscillator?
To read the price oscillator on a chart, you need to draw the two moving averages required for this tool: one short-term average and one long-term average. Then, you need to calculate the difference between the two moving averages to find oversold and overbought signals. Brokers like Plus500 and AvaTrade have price oscillator charting tools to draw the relevant points for you.
How do you calculate a moving average?
The moving average (MA) is calculated by collecting the price of an asset over a given period of time, adding up those values, and dividing it by the number of price points. Moving averages can be calculated for price highs, lows, and real averages. For example, a stock’s highs for the past five days were $42.25, $42.56, $44.81, $41.05, and $41.96. The sum of these highs ($212.63) divided by five is your price-high MA of $42.53.