Popular oscillator studies include:

• Moving Average Oscillators
• Relative Strength Index
• Stochastic
• Directional Movement Index
• Average Directional Movement Index
• Moving Average Convergence/Divergence (MACD)

Moving Average Oscillators
The CQG Oscillator study plots the difference between two moving averages. The trader can choose different lengths or types for each of the two. A simple explanation of interpreting the oscillator is in Chart 1. Here, one moving average is a one-bar simple moving average versus a 10-day moving average. When the closing price is above the 10-day moving average, the oscillator is flashing a positive reading. Closing prices below the 10-day moving average generate negative oscillator readings. Through CQG, the bars are colored green for the positive oscillator readings and red for negative oscillator values.

The oscillator value is plotted on a horizontal axis, often with a central value of zero. The result of the oscillator calculating price differences is the computation detrending the data. The detrended data readings are plotted above and below the zero axis and is scaled with positive values above and negative readings below.

When the oscillator crosses zero it indicates a change in trend as the shorter, more sensitive, moving average is crossing over the longer, slower, moving average. Movement away from zero line by the oscillator indicates the market is accelerating away from the longer average.

The oscillator can be used to identify overbought and oversold levels. Previous extreme oscillator readings identify maximum differences between the two moving averages. The distance between the two averages can reach levels that have in the past indicated the short-term trend is overextended relative to its longer-term trend, as shown in Chart 3.

Traders also draw trendlines along peaks or troughs on the oscillator line. Penetration of the trendline can signal a new trend as shown in Chart 4.

Not all oscillators plot a line above and below zero. Other oscillators, such as the relative strength index and the stochastics oscillator, normalize the readings to be scaled between zero and 100.

Tracking momentum through an oscillator study gives the trader an edge because momentum will tend to lead market turns. Momentum tends to peak ahead of market tops and often turns up ahead of market bottoms. The oscillator leads the market turns because, frequently, the price differences begin to compress before the trend changes direction.

Watching for this loss of market momentum sets the trader up to look for a trend reversal. The one situation the oscillator cannot help with is the spike reversal, where the market reverses trend in an abrupt fashion.

Another application of the oscillator is when the market has been in a trading range, traders look to oscillators as confirming an initial wave of buying or selling as the start of a new trend. The first leg of an up- or downtrend may be breaking out of a sideways pattern. The initial price action can be accompanied by an extreme momentum reading relative to more recent momentum readings. Consequently, the market trend is expected to continue despite the initial severe overbought or oversold condition. In this situation, the extreme momentum reading is considered a reflection of a consensus view being discounted.

Further understanding of how oscillators work can be illustrated by using the correlation function. The CQG correlation function can be used in a custom study to determine whether two moving averages move together. In Chart 5, the oscillator is set to a nine- and an 18-day simple moving average. When the two moving averages rise or fall coincidentally, they have a very positive correlation. If the two moving average are converging, when they do not rise and fall at that same time and same rate, they have negative correlation. If correlation is above 99, this indicates that both averages are moving in the same direction at the same speed, so the market is trending strongly. When the two averages are converging, the oscillator is moving toward zero and the correlation reading drops below zero, indicating a trading range, and could lead to a trend reversal.