The Oscillator can be used to help identify divergences, short-term variations from the long-term trend, and to identify the crossing of two Moving Averages, which occur when the oscillator crosses the zero line.
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Formula
To calculate the Simple Oscillator, you first compute the Simple Moving Averages. Next, calculate the arithmetic difference:
OSCt = MA1 - MA2
OSCt = the value of the oscillator for the current interval.
MA1 = the first Simple Moving Average.
MA2 = the second Simple Moving Average.
If you use the same length for each Moving Average, the difference is zero. You should use Moving Averages of different lengths to achieve a significant difference in the two averages.
Secondly, if you make the length of the second Moving Average less than the length of the first Moving Average, you reverse the trading signals. The length of the first Moving Average should always be less than the second Moving Average to follow the above trading rules.
Properties
Input Field: The Symbol field on which the study will be calculated. Input Field is set to "Default", which, when viewing a chart for a specific symbol, is the same as "Close".
Period1: The length of the first Simple Moving Average. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. The application uses a default of 5.
Period2: The length of the second Simple Moving Average. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. The application uses a default of 10.
Interpretation
To calculate the Simple Oscillator, you first compute two Simple Moving Averages, then calculate the arithmetic difference. If you use the same length (Period) for each Moving Average, the difference is zero. You should use Moving Averages of different lengths to achieve a significant difference in the two averages.
Secondly, if you make the length of the second Moving Average less than the length of the first Moving Average, you reverse the trading signals. The length of the first Moving Average should always be less than the second Moving Average to follow the above trading rules.
Technical analysts use a variety of oscillators. An oscillator is the simple difference between two Moving Averages. FutureSource calculates and plots the difference between two Moving Averages. Those values oscillate about the zero line and are plotted as a histogram.
One trading rule is similar to the crossover system used in Moving Averages. In fact, the oscillator is another method of using two Moving Averages. Sell when the oscillator crosses the zero line from above to below. Buy when the oscillator crosses from below to above. Some traders buy the valleys and sell the peaks of the oscillator.
Literature
Achelis, Steven B. Technical Analysis from A to Z.
Colby, Robert F., Myers, Thomas. A. The Encyclopedia of Technical Market Indicators. Dow Jones – Irwin. Homewood, IL. 1988.
Murphy, John J. Technical Analysis of the Futures Market.