Online Trading Concepts

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Price Oscillator Overbought & Oversold

Price Oscillator

  1. Price Oscillator Defined
  2. Price Oscillator as an Overbought & Oversold Indicator

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:

Price Oscillator can act as an overbought and oversold indicator

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).

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