Oscillators

Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a trending market, oscillators can often warn us in advance that a market has rallied or fallen too far and will soon turn or retrace. Two of the most popular oscillators are the Relative Strength Index or RSI and the Stochastics. Both these oscillators work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Oscillator divergences often warn of market turns and as opposed to moving averages they work best in range bound markets. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.

As can be seen in the EUR/USD 1-hour chart below, the Stochastics break through the 80-20 barriers and cross over themselves on corrections of the price. This occurs several times.