One of the most common types of oscillators measures the difference between two moving averages. When the moving averages are further apart, but now the short-term average is below the long-term average. The oscillator becomes zero when the two moving averages cross.

Some of the trading rules or uses for oscillators are:

Buy when the oscillator crosses the zero line, changing from a negative to a positive value. Sell when the oscillator crosses the zero line, changing from a positive to a negative value. These rules are the same as buying or selling when the moving averages cross, so the results are similar.

2. Buy when the oscillator becomes oversold. Sell when the oscillator becomes overbought. A market is considered overbought when the oscillator value reaches extremely high levels. A market is considered oversold when the oscillator value reaches extremely low levels.

How high must the oscillator be for an overbought reading, and how low for an oversold reading? An oscillator measures absolute amounts, so 100 may be overbought in the Treasury bond market, but may be insignificant in another market. Each market will have different values, depending on the price and volatility of the commodity. The trader must determine what values constitute overbought and oversold by reviewing the oscillator for the particular market. The same market may have a large variation in oscillator values over time. Some traders may use 100, and others may use 75, while others may use 50 or lower as an overbought condition.

This type of method is called counter trend trading because buying occurs on market weakness, and selling on market strength. This type of trading works well when markets are congested, but is less than a pleasurable experience when markets trend.

3. Oscillators may also be used to confirm or not confirm a trend. A divergence occurs when the market makes new highs but the oscillator does not or the market makes new lows but the oscillator does not. For example the oscillator drops below -124 in the beginning of August and makes a higher low near -24 at the end of August. The bonds make a low in early August below 90 and then resume the downtrend bottoming out below 87 during the same interval in August. The oscillator does not make new lows during the same time and therefore does not confirm this new price low. This is an example of a bullish divergence. This might suggest the market is developing internal strength and may be ready for a rally. A bearish divergence would occur when the market rallies and makes new highs but the oscillator does not make new highs suggesting possible internal weakness.

An oscillator confirms a move when the market makes new highs (lows) and the oscillator makes new highs (lows). For example in the middle of December the oscillator reaches a high of 100 and then makes a lower high in the beginning of January around 16. The market makes a high the same time in December near 98 and then makes a lower high near 97. The oscillator confirms the lower high suggesting the market may possibly head lower.

A line oscillator is a simple moving average of the moving average oscillator values (ie. a moving average of an oscillator), Moving averages are used to smooth data, as mentioned in the moving average section. A line oscillator smoothes the data to a greater degree, since it is a moving average of the difference of two moving averages. A line oscillator can be employed in a similar fashion as the moving average oscillator. A five- and ten-day line oscillator.

The moving average convergence divergence (MACD), is similar to the line oscillator, but is calculated with an exponential moving average instead of a simple moving average.