In the technical analysis of forex markets, an oscillator is a statistical indicator that oscillates between two levels, measuring the momentum. The indicator shows a trader when a currency pair is overbought or oversold. As momentum begins to slow, fewer active buyers and sellers are willing to trade at the current price. This is why oscillators can help traders distinguish between market reversals and fluctuations. In fact, they are frequently used as a proxy to measure pricing momentum as it relates to trend extension, exhaustion, and trend reversal.
There are two categories of oscillators: centered oscillators that fluctuate above and below a center point or line, and banded oscillators that fluctuate between overbought and oversold extremes. The former are used by traders to analyze the direction of price momentum, while the latter to identify overbought and oversold levels.
Momentum indicators, which are a type of oscillator, are graphic devices that can show how rapidly the price of a given asset is moving in a particular direction. Also, they can give traders an idea of whether the price trend is likely to continue. The principle behind the momentum indicator is that as a currency pair is traded, the speed of the price movement reaches a maximum when the entrance of new buyers is at its maximum level. When buyers leave the market, the tendency after the peak is for the price trend to flatten or reverse direction. Famous oscillators are: Momentum, the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and the Commodity Channel Index (CCI).