Overview
Oscillators are indicators that are thought to be range bound and cycle between the extremes over time. An oscillator that is near an extreme is thought to be likely to move back toward the center of the range and toward the other extreme.
Oscillators
The following represent a sample of commonly used oscillators.
- RSI - Relative Strength Indicator :
- Stochastic Oscillator :
- Efficiency Ratio :
- Momentum :
- On Balance :
Fine Tuning Oscillators
Many oscillators require that a period be specified, for example, 14 days is a common window that is used in oscillators. The oscillator purports to measure overbought or oversold conditions in the given asset, which in general means that it measures when the given indicator is in the extremes of the range over the given period.
Nearly by definion, an oscillator assumes a certain kind of wave like behaviour to an asset's price, a back and forth motion between a set of extremes. The period specified often can be viewed as being proportional in some sense to the wave length of the wave. (distance between crests in the wave) This implies that the oscillator will only be accurate to the degree that the period number approximates the average length of a wave in the asset price.
For example, if the asset moves in 28 day waves, then it could spend a long time near the extremes of a 14 day based oscillator as it moves to its crest.
One way to try to pin down the best osciallator period length of a price series is to examine its autocorrelation. In particular, large peaks in the autocorrelation may represent the average period length of any price waves in the current data set.