Oscillators and Momentum Studies
What this domain tests
Oscillator questions test bounded indicators, centreline behaviour, divergence and the difference between momentum and trend. Expect RSI, stochastic, ROC, CCI and Williams %R.
Core rules
- RSI (typically 14 periods) ranges 0 to 100; above 70 is often called overbought, below 30 oversold. In a strong uptrend RSI can stay above 70 for weeks, so overbought is not a sell signal by itself.
- Stochastic %K compares close to the high-low range over n periods; %D is its moving average. Readings above 80 or below 20 are overbought or oversold; a cross of %K and %D is the trigger.
- ROC = (close today / close n periods ago minus 1) x 100; it is unbounded and measures speed, not level.
- CCI uses typical price and mean deviation; +100 and -100 are common thresholds. Williams %R runs from 0 to -100, with -20 and -80 as overbought or oversold.
- Bullish divergence: price makes a lower low while the oscillator makes a higher low. Bearish divergence: price higher high, oscillator lower high. Divergence needs a price-structure confirmation.
Worked example
Price falls from 80 to 70, rebounds to 76, then falls to 68 (lower low). RSI falls from 38 to 30, then to 34 on the second low (higher low). That is bullish divergence. A trader waits for price to close above the 76 swing high before acting; the divergence alone is a warning, not an entry.
Traps
- Shorting every RSI reading above 70 in a powerful trend.
- Treating divergence as an immediate reversal signal; it can persist.
- Comparing oscillator readings across different periods or assets.
- Forgetting that stochastics can stay pinned at extremes in a trend.