Derivative Oscillator

DEFINITION of 'Derivative Oscillator'

The Derivative Oscillator is a technical indicator that applies a moving average convergence-divergence (MACD​) histogram to a double smoothed relative strength index (RSI) to create a more advanced version of the RSI indicator.

BREAKING DOWN 'Derivative Oscillator'

The Derivative Oscillator was developed by Constance Brown and published in the book Technical Analysis for the Trading Professional. The technical indicator is a more advanced version of the relative strength index (RSI) that applies the moving average convergence-divergence (MACD) principles to a double-smoothed RSI indicator. In other words, the indicator is the difference between a double-smoothed RSI and a simple moving average applied to it.

Usage

The Derivative Oscillator is used in the same way as the MACD histogram. Positive readings are considered bullish and negative readings are considered bearish, while crossovers above and below the zero line signal buying and selling opportunities. Traders may also want to watch for divergence or convergence with the security’s price, which could be an indication of an upcoming reversal in the prevailing trend.

Traders should consider using the Derivative Oscillator in conjunction with other forms of technical analysis, including both technical indicators and chart patterns.

Example

In the chart above, we highlight some crossovers of the Derivative Oscillator and the trading signals that they generate on the SPDR S&P 500 ETF (SPY). These signals tend to be quite timely and accurate in identifying potential tops and bottoms, while downtrends can be clearly seem once they begin by looking at the green and red highlighted bars.

The Bottom Line

The Derivative Oscillator is a technical indicator that applies a moving average convergence-divergence (MACD) histogram to a double smoothedrelative strength index (RSI) to create a more advanced version of the RSI indicator.