Oscillators and Momentum
RSI, MACD, and stochastics — measuring the speed of a price move rather than its direction, and reading divergence.
Oscillators are introduced as a different category of tool from trend-following indicators like moving averages — where a moving average measures direction, an oscillator measures the speed or momentum behind a price move, typically bounded within a fixed range (0 to 100 for the Relative Strength Index, for example) that makes "overbought" and "oversold" conditions directly readable. Murphy covers three in depth: the Relative Strength Index (RSI), which compares the magnitude of recent gains to recent losses; MACD (Moving Average Convergence Divergence), built from the difference between two exponential moving averages; and the stochastic oscillator, which compares a closing price to its recent trading range.
A consistent warning across all three tools is that "overbought" does not mean "sell immediately" and "oversold" does not mean "buy immediately" — a strongly trending market can stay at oscillator extremes for a long stretch precisely because the trend is strong, and treating an overbought reading as an automatic reversal signal during a genuine strong trend is presented as one of the most common ways new traders misuse these indicators.
| Oscillator | What it measures | Typical range |
|---|---|---|
| RSI | Magnitude of recent gains vs. recent losses | 0 to 100 |
| MACD | Difference between two exponential moving averages | Unbounded, centered on zero |
| Stochastic | Closing price's position within its recent trading range | 0 to 100 |
Across all three oscillators, the single signal the book treats as most reliable is divergence: price making a new high (or low) while the oscillator fails to make a corresponding new high (or low). This is read as the underlying momentum weakening even while price is still nominally extending the trend — the same kind of participation-fading signal volume gives in the earlier chapter, just measured a different way. A bearish divergence (price higher, oscillator lower) ahead of a top and a bullish divergence (price lower, oscillator higher) ahead of a bottom are both presented as warning signs worth taking seriously specifically because they represent the market's own momentum quietly disagreeing with its own price action.
- Oscillators measure the speed of a price move, not its direction — a separate category of tool from trend-following indicators like moving averages.
- Overbought and oversold readings are not automatic reversal signals — a strongly trending market can stay at an extreme for a long stretch.
- Divergence between price and an oscillator — price extending a trend while the oscillator fails to confirm — is the single most reliable oscillator signal the book identifies.