Price Zone Oscillator

DEFINITION of 'Price Zone Oscillator'

The Price Zone Oscillator is a technical indicator that measures whether the most recent closing price is above or below the preceding price.

BREAKING DOWN 'Price Zone Oscillator'

The Price Zone Oscillator is a technical indicator that measures whether the most recent closing price is above or below the preceding price. The indicator is calculated as a percentage ratio between two exponential moving averages and used by traders to identify overbought or oversold conditions, as well as potential reversal opportunities.

Calculating the Price Zone Oscillator

The Price Zone Oscillator can be calculated with the formula 100 x (CP / TC), where CP is closing price of the X-period exponential moving average of the current price and TC total close of the X-period exponential moving average. The highest possible value is 100 and the lowest possible value is -100, but traders also watch key levels in between the range for signals.

Exponential moving averages - and especially the 14-day EMA - are used to smooth out the indicator rather than simply using raw closing prices. If the current period’s closing price is higher than the prior period’s closing price, the indicator will have a positive value for that period. Otherwise, the indicator will have a negative value for the period.

Using the Price Zone Oscillator

Traders use the Price Zone Oscillator like any other oscillator by looking for overbought or oversold conditions and convergence and divergences with the security’s price. According to the author’s original article appearing in the Technical Analysis of Stocks and Commodities, the oscillator’s key levels to watch include -60, -40, -5, +15, +40, and +60.

As with other oscillators, traders watch for overbought or oversold conditions when extremes are reached. Traders also watch for convergences or divergences between the oscillator’s trend and the price trend, which can be an important sign of an upcoming reversal. For example, a rising stock price and a falling PZO reading could signal a potential bearish reversal.

Most traders use the Price Zone Oscillator in conjunction with other technical indicators or chart patterns, such as the Average Directional Index, which can be used to measure the strength of trends. By using several indicators, traders can maximize their odds of success.

The Bottom Line

The Price Zone Oscillator is a technical indicator that measures whether the most recent closing price is above or below the preceding price. Often times, traders use the indicator in conjunction with other technical analysis tools to identify overbought or oversold levels, as well as potential bullish or bearish reversals.