Module 7 – Oscillators and Sentiment Indicators

Introduction

In this module, we are going beyond the confines of the price chart, and introducing indicators that are calculated in various ways and can show us some element of the market sympathy. We’ve covered the shapes of patterns and trends, and the different types and ways that moving averages can be used, superimposed on the price chart. Oscillators typically aren’t shown that way, but are added below the chart.

The chief purpose of oscillator is to indicate to us when the market is reaching an extreme condition, and therefore likely to change. The oscillator tends to go between limits, or oscillate, and these limits represent times when the market is stretched, often associated with the need to change. We talk about overbought and oversold conditions, and you can think of these as when the market has gone too far too fast and quite possibly needs to correct or consolidate.

When the market is overbought, we think of the demand being overenthusiastic and the prices being pushed up to an unsustainable level; when it is oversold, market participants have been hurrying to unload their holdings, for whatever reason, and the shares should be worth more than they sold them for.

Oscillators can also be used to reveal when a trend is losing its momentum before this becomes obvious in the price chart. There are many different oscillators, and most of the time they should portray similar messages, though some may indicate earlier or more clearly than others. We’ll talk about several of them, and when you are trading in earnest you should pick a couple that seem to work well for your style. You don’t have to know or use them all regularly.