Oscillators and Technical Indicators
Oscillators and technical indicators are mathematical tools that transform raw price and volume data into actionable signals. They complement trend analysis by measuring momentum, overbought/oversold conditions, and trend strength.
Last updated: 29 July 2026
Prerequisites
PrerequisitesThis sheet requires an understanding of moving averages (ch. 5, Intermediate level), since the MACD is built from two EMAs. It also assumes a solid command of trends and support/resistance (ch. 2).
Definition
DefinitionIn chapters 10 and 11 (1999 edition) Murphy separates technical indicators into two families:
Oscillators fluctuate between fixed bounds (typically 0-100, or around zero) and measure momentum — the speed and force of a price move. They are particularly useful in trendless markets for identifying overbought and oversold zones, and in trending markets for detecting the divergences that warn a trend is running out of breath.
Trend-following indicators track the market's direction and work best when the market is moving directionally. The distinction between the two families is fundamental for Murphy: using an oscillator as the primary signal in a strong trend, or a trend-following indicator in a range, produces catastrophic results.
Why it matters
Murphy stresses that oscillators offer one advantage pure price analysis cannot: they quantify momentum. A new high in price accompanied by a new high in the RSI shows the upward dynamic is intact. A new high in price with a lower RSI (a bearish divergence), by contrast, shows buyers are tiring — even though price still appears to be rising. That information is simply not visible on the price chart alone.
Murphy cautions, however, that oscillators are tools of confirmation, never of prediction. They must remain subordinate to trend analysis: in a strong uptrend, you never sell merely because the RSI is overbought. On the contrary, in a strong trend the RSI can stay above 70 for months — as it did through the 2020-2021 rally on the Nasdaq.
Key points
Murphy recommends using the ADX as the arbiter between oscillators and trend-following indicators. If the ADX is above 25, the market is trending: use MAs and the MACD in trend mode. If the ADX is below 20, the market is ranging: use the RSI and the stochastic for overbought and oversold signals
Divergences are the most reliable signals oscillators produce, but Murphy insists on one crucial rule: a divergence identifies exhaustion, not a guaranteed reversal. Wait for confirmation — a support break for a bearish divergence, a resistance break for a bullish one — before acting
Murphy strongly advises against stacking redundant indicators. The RSI, the stochastic and the CCI all measure momentum; running three at once adds no information. He recommends one momentum indicator (RSI or stochastic) plus one trend indicator (MACD or MA) plus volume: three complementary dimensions
The default parameters (RSI 14, MACD 12/26/9, stochastic 14/3) are the most tested and the most widely followed. Murphy advises against over-optimising them, which leads to curve fitting — over-adjustment to historical data
Concrete example
ExamplesIn December 2021 the Nasdaq set a new all-time high at 16,212. The 14-period RSI, however, printed a peak markedly below its November 2021 high, forming a textbook bearish divergence. The MACD confirmed it with a bearish crossover in January 2022. Traders who read those signals were positioned for the Nasdaq's 2022 bear market (−33%). Murphy notes that this sequence — a new price high, an RSI divergence, then a bearish MACD crossover — is the "bearish trinity" he describes in chapter 10 as the most reliable composite signal of a major trend reversal.
The mirror image closed the same cycle. In October 2022, the S&P 500 reached its bear market low with a clear bullish divergence on the weekly RSI: price made a lower low while the RSI made a higher low — the same mechanism, read the other way round.
Common mistakes
CautionSelling on overbought readings in a strong uptrend. Murphy hammers the point: an RSI at 70 in a bull market means the trend is strong, not that you should sell. The S&P 500's RSI stayed above 60 for almost all of 2021
Stacking four or five oscillators that measure the same thing (momentum). The redundancy creates a false sense of confirmation. Murphy recommends combining indicators from different families
Optimising parameters to fit past data (curve fitting, overfitting). An RSI tuned to 7 periods may look impressive in a backtest and collapse in real time. Murphy recommends keeping the standard settings
Ignoring divergences, which are the most reliable but also the most subtle signals oscillators give. Murphy reckons the majority of major reversals are preceded by at least one divergence on the RSI or the MACD
Practical note
MurphyMurphy teaches a decisive three-step approach: (1) identify the trend with moving averages or the ADX; (2) if the market is trending, use the MACD and moving averages as the primary signals, and oscillators only to detect divergences; (3) if the market is ranging, use the RSI and the stochastic for overbought and oversold signals. This discipline avoids the fundamental trap of applying the wrong tool to the wrong market context.
📊 RSI — Surachat, Survente et Divergence
Market impact
MarketsThe RSI and the MACD are the two most displayed indicators on trading platforms worldwide (Bloomberg Terminal, TradingView, MetaTrader). Divergences on the major indices are commented on daily by the technical analysts of the investment banks (Goldman Sachs, Morgan Stanley, JPMorgan). Bollinger Bands are used by options trading desks to gauge implied volatility. Extreme RSI overbought and oversold readings on the major indices (above 80 or below 25) generate measurable order flow, and their effect on price is most visible in less liquid markets.