RSI and momentum oscillators

Oscillators are indicators that move up and down within a set range. Instead of showing trend direction, they measure the speed and strength of price movement. The best known are RSI and the Stochastic oscillator. They help answer a practical question: is the current move gaining momentum, or running out of steam?

The Relative Strength Index (RSI)

RSI compares the average gains of up periods with the average losses of down periods over a chosen window, and plots the result on a scale from 0 to 100. The usual default is 14 periods. Traditionally, readings above 70 are called "overbought" and readings below 30 "oversold".

A common mistake is to treat overbought as "price must fall now". In a strong uptrend, RSI can stay above 70 for a long time while price keeps rising. For that reason some analysts treat the 40–50 zone as RSI support during uptrends, and 50–60 as resistance during downtrends, rather than trading every extreme reading against the trend.

The Stochastic oscillator

The Stochastic measures where the closing price sits relative to the high-low range of recent periods. The idea is that in an uptrend, closes tend to cluster near the top of the range. It has two lines, %K and %D, and the 80 and 20 levels are usually treated as overbought and oversold boundaries. It is more sensitive than RSI and produces more signals, a fair share of which are noise.

Divergence

One of the most useful applications of oscillators is spotting divergence:

• Bearish divergence: price makes a higher high while the oscillator makes a lower high, suggesting buyers are losing strength.
• Bullish divergence: price makes a lower low while the oscillator makes a higher low, suggesting selling pressure is fading.

Divergence is a warning, not a verdict. Trends can continue through several divergences in a row. It is more meaningful when combined with a break of price structure or a reaction at a key level.

Key takeaways

• Oscillators measure momentum, not the certain direction of future price.
• Overbought or oversold alone is not a reason to trade against the trend.
• The Stochastic is more sensitive than RSI and noisier.
• Divergence is an early warning that needs confirmation from price.