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. In the chart below of the E-mini Russel 2000 futures contract, the 9-day and 18-day moving averages are used:
When the 9-day moving average crossed over the 18-day moving average, the Price Oscillator crossed over the zero line.
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.
The Price Oscillator makes it easy to see moving average crossovers. The Price Oscillator might also be a means to detect overbought and oversold conditions; this is discussed on the next page.
Price Oscillator Overbought & Oversold
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.
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 MACD line of the very popular MACD indicator and should be investigated as well (see: MACD).
How to Start Trading
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