Oscillators
RSI, Stochastic, CCI, Williams %R, and other bounded indicators for overbought/oversold signals.
What are Oscillators?
Oscillators are indicators that fluctuate between fixed boundaries -- typically 0 and 100 (or -100 and +100). Unlike moving averages that overlay on the price chart, oscillators appear in a separate panel below the chart and measure the intensity of price movement rather than its direction.
The core idea: when an oscillator reaches an extreme reading, it signals that the price may have moved too far too fast. Readings near the top of the range are called "overbought" and readings near the bottom are called "oversold." These terms describe the oscillator's position, not a guaranteed price reversal.
Overbought and Oversold -- What They Actually Mean
"Overbought" means the oscillator has reached a high reading. "Oversold" means it has reached a low one. Many beginners interpret these as direct buy and sell signals -- sell when overbought, buy when oversold. This is a common mistake.
An overbought oscillator can stay overbought for an extended period during a strong uptrend. Selling every time the RSI crosses above 70 would have you fighting the trend. Similarly, an oversold oscillator can stay oversold during a persistent downtrend.
Overbought and oversold readings are most useful in ranging markets where the price moves sideways without a clear trend. In trending markets, oscillator extremes are common and do not reliably predict reversals.
Divergence -- When Price and Oscillator Disagree
Divergence occurs when the price makes a new high (or low) but the oscillator does not. For example, if the price makes a higher high but the RSI makes a lower high, the momentum behind the move is weakening. This disagreement between price and oscillator is called "bearish divergence."
The opposite -- price makes a lower low but the oscillator makes a higher low -- is "bullish divergence." The selling pressure is fading even though the price is still dropping.
Divergence signals are considered more reliable than simple overbought/oversold readings because they reflect a change in the underlying momentum, not just an extreme level. However, divergence can persist for many candles before the price actually reverses (if it reverses at all).
The Common Ones
If you are starting out, focus on RSI and Stochastic. They are the most widely used oscillators and cover most use cases.
RSI (Relative Strength Index)
The most popular oscillator. RSI measures the ratio of recent gains to recent losses on a 0-100 scale. Readings above 70 are considered overbought, below 30 oversold. It uses Wilder's smoothing method, which gives it a characteristic smooth curve.
Stochastic Oscillator
Measures where the closing price sits within its recent high-low range on a 0-100 scale. It produces two lines -- %K (faster) and %D (slower) -- and crossovers between them generate trading signals. There are two variants: Fast Stochastic (more responsive) and Slow Stochastic (smoothed, fewer false signals).
Read the full Stochastic deep-dive >
CCI (Commodity Channel Index)
Measures how far the price has deviated from its statistical mean. Unlike RSI and Stochastic, CCI is unbounded -- it can reach any value, positive or negative. Readings above +100 and below -100 are considered extreme, but CCI can go much further during strong trends.
The Specialized Ones
StochRSI (Stochastic RSI)
Applies the Stochastic formula to RSI values instead of price. This creates an oscillator that is more sensitive than either RSI or Stochastic alone -- it reaches overbought and oversold zones more frequently. Useful when you want earlier signals and are willing to accept more noise.
CMO (Chande Momentum Oscillator)
Similar to RSI but uses a symmetric formula that ranges from -100 to +100 instead of 0 to 100. Positive values indicate bullish momentum, negative values bearish. The symmetric range makes it easier to see the balance between buying and selling pressure.
MFI (Money Flow Index)
Often called "volume-weighted RSI." MFI incorporates both price and volume data, measuring buying and selling pressure on a 0-100 scale. It requires volume data as input, so it is most useful for stocks and crypto. Forex spot markets do not have centralized volume -- tick volume is used as a proxy but is less reliable.
MFI is not yet available in Simula's strategy builder, because backtests do not load volume yet. The same applies to the volume indicators.
Ultimate Oscillator
Combines three different timeframes (default: 7, 14, 28) into a single oscillator. The multi-timeframe approach reduces false signals that come from using a single period. It ranges from 0 to 100 with overbought at 70 and oversold at 30.
Williams %R
Functionally identical to the Stochastic %K but inverted -- it ranges from -100 to 0 instead of 0 to 100. Readings above -20 are overbought, below -80 are oversold. The inverted scale is a historical convention; the actual information is the same as Stochastic.
Reference Table
| Indicator | Range | OB / OS Levels | Key Parameters | Inputs |
|---|---|---|---|---|
| RSI | 0 to 100 | 70 / 30 | period (14) | close |
| Stochastic | 0 to 100 | 80 / 20 | %K (14), %D (3), slowing (3) | high, low, close |
| StochF | 0 to 100 | 80 / 20 | fast %K (5), fast %D (3) | high, low, close |
| StochRSI | 0 to 100 | 80 / 20 | period (14), fast %K (5), fast %D (3) | close |
| CCI | unbounded | +100 / -100 | period (20), constant (0.015) | high, low, close |
| CMO | -100 to +100 | +50 / -50 | period (14) | close |
| MFI (not yet available) | 0 to 100 | 80 / 20 | period (14) | high, low, close, volume |
| Ultimate Osc | 0 to 100 | 70 / 30 | periods (7, 14, 28) | high, low, close |
| Williams %R | -100 to 0 | -20 / -80 | period (14) | high, low, close |
Common Mistakes
Treating overbought/oversold as automatic buy/sell signals
An oscillator entering the overbought zone does not mean "sell now." In a strong uptrend, the oscillator can stay overbought for many candles while the price continues to rise. The overbought/oversold zones indicate intensity, not direction. Use them as awareness, not as standalone triggers.
Using oscillators as the sole signal in trending markets
Oscillators work best in ranging (sideways) markets where the price bounces between support and resistance levels. In a trending market, oscillator signals will repeatedly produce false reversals. If you use an oscillator strategy, consider adding a trend filter -- for example, only take oscillator buy signals when the price is above a moving average.
Not understanding the differences between oscillators
RSI, Stochastic, and CCI all measure "momentum" but in different ways. RSI looks at the ratio of gains to losses. Stochastic looks at where the price closed within its range. CCI looks at the deviation from a mean. Using two oscillators that measure the same thing (like RSI and Stochastic together) adds noise, not confirmation. If you want confirmation, pair an oscillator with a different type of indicator -- like a trend indicator.
Where to Go Next
RSI (Relative Strength Index) -- the most widely used oscillator.
Stochastic Oscillator -- price position within its range, with %K/%D crossover signals.
CCI (Commodity Channel Index) -- unbounded oscillator for measuring deviation from the mean.
Mean Reversion -- strategies that use oscillators to identify stretched prices.
Combining Indicators -- how to pair oscillators with trend filters for better results.