A technical analysis tool that is banded between two extreme values and built with the results from a trend indicator for discovering short-term overbought or oversold conditions. As the value of the oscillator approaches the upper extreme value the asset is deemed to be overbought, and as it approaches the lower extreme it is deemed to be oversold.
An oscillator’s value is truly apparent where a stock’s trend is not apparent, e.g.: a stock moving sideways. The best way use an oscillator is by seeing when a stock’s upward or downward momentum runs out of steam, therefore suggesting a move in the opposite direction.
Above is a graph of Aspen ($JSEAPN) charted over a period of a year. The blue graph below the main graph is a charting of an Ultimate Oscillator.
Notice how the sideward and slight downward movement dramatically reverse as the UO reaches a level of around 40 and the move loses momentum at the 62 level.
How traders will benefit from using this oscillator is buy buying when the oscillator is at 40 and selling at 60. Usually a good average is to use a buy signal at 30 and a sell at 70, but each stock has their own movements.
The most profitable situation would be to find an oscillator that has decreased to 30 while the price has remained in a straight line, this hints at an oversold share with a relatively strong resistance, meaning more upside is to come. (This happens at the second and seventh green arrows in the graph above)
There are many different types of oscillators, all follow the same basics as demonstrated above, but are worked out using different variables in order to create the graph. As they say, each to his own.