**Defining Oscillators**

Oscillators are technical analysis tools that bound within a predefined range. Oscillators are placed below the main chart area and not within the chart area as common indicators.

**Trading with Oscillators**

Oscillators are tools of technical analysis that bound within a range. This predefined range helps traders to identify if the price of a financial asset is found in overbought/oversold levels.

Oscillators can prove a useful tool for:

- Identifying Overbought/Oversold Market Levels
- Evaluating the Momentum of the Trend
- Spotting Trend Reversal/Continuation
- Generating Trade Signals

*But how easy it is to spot a failure in the momentum of the trend?*

*“When a long-term trend loses its momentum, short-term volatility tends to rise. It is easy to see why that should be so: the trend-following crowd is disoriented.” -George Soros*

This tutorial includes information and tips when trading with the following oscillators:

**Commodity Channel Index**

(CCI)

◙ Usage: Identifying Overbought/Oversold Markets

◙ Trading: Trading Signals on CCI Readings | Trading Slope Divergences (More reliable signals in ranging markets)

◙ Standard Settings: 14 Periods (Recommended 20 Periods)

**Introduction to CCI**

The Commodity Channel Index or CCI is an oscillator that aims to identify overbought/oversold market levels. CCI is able to measure the current position of a financial asset with respect to its moving average. CCI can also signal trades as you can see below, these signals are more reliable in ranging markets.

**Calculating CCI**

*■* CCI = (TP - SMA (20) of TP) / (Constant x Mean Deviation)

Where:

- TP (Typical Price) = (High + Low + Close) / 3
- Constant = .015

**%R Larry Williams**

(Williams %R)

◙ Usage: Identifying Overbought/Oversold Market Levels

◙ Trading: Detecting Trend Continuation / Momentum Failures

◙ Standard Settings: 14 Periods

**Introduction to Williams %R**

Developed by Larry Williams, Williams %R is a momentum oscillator widely used for its ability to identify overbought and oversold market levels and to detect momentum failures.

-Williams %R oscillates from values 0 to -100

-Williams %R shows the level of the close relative to the highest high for a particular period:

- When Williams %R is near zero (0), it shows the price is trading near the highest high (look back period)
- When Williams %R is near -100, it shows the price is trading near the lowest low (look back period)

-Similarly, the Stochastic Oscillator shows the level of the close relative to the lowest low (► more about Stochastic)

-Williams %R and the Fast Stochastic Oscillator produce the exact same reading, only the scaling is different

**Relative Strength Index**

(RSI)

◙ Usage: Identifying Overbought/Oversold Markets

◙ Trading: Trading RSI Readings | Trading Slope Divergences

◙ Standard Settings: 14 Periods (we recommend 21 periods)

**Introduction to RSI**

Developed by Welles Wilder, the Relative Strength Index or RSI is a momentum oscillator measuring the velocity and magnitude of directional price movements. The RSI is known for its ability to identify overbought and oversold markets but also to generate trading signals.

**Calculating RSI**

■ RSI = 100 – 100 / ( 1 + RS)

Where,

RS = Average Gain / Average Loss

■ First RS calculation:

Average Gain = Summary of Gains for 14 periods / 14

Average Loss = Summary of Losses for 14 periods /14

■ Second RS calculation:

Average Gain = [(previous Average Gain) * 13 + current Gain] / Average Loss = [(previous Average Loss) * 13 + current Loss] /

■ Same procedure for the third and the subsequent RS

**Trading with RSI**

RSI can be used for multiple purposes:

- Identifying Overbought/Oversold Markets
- Trading Signals on RSI Readings
- Trading Signals on Slopes Divergences (price chart slope vs RSI slope)

**Moving Average Convergence Divergence**

(MACD)

◙ Usage: Trend-Following Momentum Indicator

◙ Trading: Trading Signals from Crossovers | Slope Divergences

◙ Standard Settings: 12-period Fast, 26-periods Slow, and 9-period EMA

**Introduction to MACD (Moving Average Convergence Divergence)**

Developed by Gerald Appel in the 1970s, MACD is a trend-following momentum indicator and one of the most widely used technical analysis indicators worldwide. The oscillator can evaluate the momentum of the trend and generate reliable trading signals.

- The MACD is the difference between a 26-day and 12-day EMA (exponential moving average)
- The Signal Line is a 9-day EMA which works a trigger for buying/selling the market

The MACD can be used for trading any financial market (Foreign Exchange, Equities, Commodities) in multiple timeframes. There are two ways to visualize MACD:

(a) 2 classic lines system (MACD and Signal Line) and focus on where they are interacting

(b) MACD Histogram (and focus on crossovers above/below zero)

**The MACD Histogram**

Developed by Thomas Aspray, the MACD-Histogram shows the distance between the MACD line and the signal line.

**Stochastic Oscillator**

◙ Usage: Evaluating the Trend and Detecting Overbought/Oversold Markets

◙ Trading: Identifying Trend Reversal/Continuation | Trading Slope Divergences

◙ Standard Settings: 14 Periods (14,3,3)

**Introduction to the Stochastic Oscillator**

Developed by George Lane, the 'Stochastic' is an oscillator that can measure the momentum and the speed of a price. It can be used as a tool for identifying trend reversals or trend continuation.

The Stochastic bound between 0 and 100 and it can identify overbought and oversold market levels as follows:

□ Overbought market levels are set at reading 80

□ Oversold market levels are set at reading 20

**Calculating the Stochastic Oscillator**

The Stochastic is formed by two lines

■ %K = {(Last Close - Lowest Low in K period)/(Highest High in K period - Lowest Low in K period)} * 100

Where,

K is the number of periods. Standard settings K=14 (14,3,3)

**Trading with the Stochastic Oscillator**

The Stochastic can be used for:

- Detecting Overbought/Oversold Markets
- Identifying Trend Reversal/Continuation
- Trading Slope Divergences
- Generating Trade Signals