What is the use of oscilators in market analysis?

Question

please show some mathematical darivations which makes concepts clear

Answer 1

The idea of oscillators is that they are meant to be sensitive to changes in price trends of a specific share/currency pair. Consider a moving average; it notes when a price has changed direction, but it has a habit of lagging behind the price movement with the result that it has a habit of being late in its information. The EMA (exponential moving average) was constructed to increase its sensitivity but really it still lags behind the price moves.

Consequently traders adopted new methods like MACD which now doesn't really work well. A more commonly used oscillator is stochastic and it does not simply contain a moving average, but it is sensitive to noting when a moving average is beginning to change which means that it detects trend movements quicker. It consists of two oscillating lines, %D and %K:

%K = 100 x (closing-low)/(high-low)

%D = 3 simple moving average of %K

It does take a while to get your mind round what is happening with this oscillator, but the result is increased sensitivity to price changes. I should note that different currencies or shares move in different ways and they tend to have their own culture and so one oscillator will not work for them all. An example is GBPUSD which has a habit of moving quickly and suddenly, perhaps even too quickly for an oscillator whereas GBPJPY tends to roll, making an oscillator possibly useful in this context.

I should mention that oscillators communicate a large amount of information, all of which cannot be included here.