The oscillator is a technical tool which is extremely useful in non-trending markets where prices run in a horizontal price band or trading range. This tool provides a way for the stock trader to profit from these trendless or sideways trending market environment.

However, the value of the oscillator is not only seen in trendless markets. When used in conjunction with price charts during trending phases, the oscillator will alert stock traders when short term extremes, as in overbought or oversold conditions, arise. It can also warn the the trend's momentum is dying well before it is evident in the price action, as well as warn of the trend's completion by displaying divergences.

An oscillator is a secondary indicator in the sense it must be used subordinate to basic trend analysis. There are a number of oscillators, and even the most commonly used stresses the importance of trading in the direction of the overriding market trend. Just like other tools used in technical analysis, there are times when the oscillator is more useful than at others. For instance, using an oscillator at the beginning of an important market move can actually be misleading. Whereas, using an oscillator toward the end of a market move increases its value greatly.

Andy Swan is co-founder and head trader for DaytradeTeam.com.  To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.