Oscillator (OSC)

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.

FutureSource plots the oscillator using vertical bars. The oscillator has no confined limits. Its value fluctuates widely. It is a function of price volatility and the moving averages.

Parameters:

• Period1 (5) - the number of bars, or interval, used to calculate the first moving average.
• Period2 (10) - the number of bars, or interval, used to calculate the second moving average.

Computation

Since the oscillator is a rather straightforward calculation, this section shows only the general form of the equation. A thorough discussion of moving averages and their computation can be found in the moving average study. To calculate the oscillator, you first compute the moving averages. Next, calculate the simple arithmetic difference. The formula is as follows:

OSCt = MA1 - MA2

• OSCt is the value of the oscillator for the current interval.
• MA1 is the first moving average.
• MA2 is the second 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.