What is a differential oscillator?
The Derivative Oscillator is a technical indicator that applies a moving average convergence-divergence (MACD) histogram to the Double Smoothing Relative Strength Index (RSI) to create a more advanced version of the RSI indicator.
- The differential oscillator is the difference between the double-smoothed RSI and the double-smoothed RSI SMA.
- Derivative oscillators are often displayed as histograms.
- Zero line crossover is one way to generate a trade signal with an indicator. You can also use divergence.
Understand differential oscillators
Derivative Oscillator was developed by Constance Brown and published in a book Technical analysis for trading professionals.. This technical indicator is a more advanced version of the Relative Strength Index (RSI) and applies the principles of Moving Average Convergence Divergence (MACD) to the Double Smoothing RSI (DS RSI) indicator.
This indicator is derived by calculating the difference between the double smoothed RSI and the DS RSI simple moving average (SMA). The purpose of the indicator is to provide a more accurate buy / sell signal than the standard RSI calculation. The differential oscillator can be used at any time.
MACD is derived by subtracting the 12-term exponential moving average (EMA) from the 26-term EMA. In this way, the differential oscillator uses the MACD principle. This is because the differential oscillator is also derived from subtracting the SMA from the double smoothed RSI.
Derivative oscillators are used in the same way as MACD histograms. Positive readings are considered bullish, negative readings are considered bearish, and crossovers above and below the zero line signal indicate potential buying and selling opportunities. Traders may also look for differences in securities prices. This may indicate a future reversal of the general trend. This happens when the indicator goes down and the price goes up, or when the price goes down and the indicator keeps going up.
Traders should consider using derivative oscillators in combination with other forms of technical analysis such as price behavioral analytics and chart patterns.
Example of differential oscillator
Next Apple Inc. A differential oscillator is applied to the (AAPL) weekly chart. Zero line crossovers are marked with vertical lines and arrows. A buy / sell signal occurs at the end of the day the signal occurs or at the next open.
Indicators generate several transactions, some of which last only a few weeks. The chart shows that this trading strategy can generate both profit and loss trades. Therefore, risk management is important here as well. This strategy is most vulnerable to a large number of transaction losses when prices are flat and stocks (or other assets) are undirected.
A variation of the strategy is to buy when the indicator goes up and sell when the indicator goes down, rather than waiting for the zero line crossover. In this example, the indicators are color coded green when moved up and red when moved down. This provides an earlier entry point to the rally and an earlier exit during decline. This method works well when the price fluctuates and is trending, but when the price action is unstable or not trending, this method is prone to many false signals and loss of transactions.
Derivative Oscillator vs. Stochastic Oscillator
Stochastic Oscillator compares the current price with the price range for a defined period. This indicates whether stocks or other assets are stronger or weaker than their recent price range. Indicators are bound between 0 and 100.
Despite the different calculations, the stochastic, RSI, and derivative oscillators usually move in the same direction, but not exactly at the same time or the same size.
Limitations of differential oscillators
Derivative oscillators can generate a large number of trading signals, especially during unstable trading conditions where the indicator is most likely to give false signals or lose signals. Signals can also occur if prices have already moved significantly in a particular direction. This can mean bad start or end timing. It is important to note that this indicator affects historical price information. There is essentially nothing to predict about the indicators in that calculation.