Free
The Derivative Oscillator is a technical indicator that combines enhanced versions of RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence) to analyze trends and momentum in the market. It works on any instrument and timeframe and can be used in conjunction with price action, Chart Patterns, and other technical analysis tools.
How the Derivative Oscillator Works
The oscillator is derived from:
- Double-Smoothed RSI minus the simple moving average of the double-smoothed RSI.
- MACD calculation using the difference between a 26-period EMA and a 12-period EMA.
This combination provides more accurate buy/sell signals and highlights trend strength and momentum.
How to Trade Using the Derivative Oscillator
Buy Signals
- When the oscillator crosses above the zero line, it signals a bullish trend.
- Up-sloping bars (from negative to positive) indicate increasing bullish momentum.
- Longer bars = stronger trend; shorter bars = weaker trend.
Sell Signals
- When the oscillator crosses below the zero line, it signals a bearish trend.
- Down-sloping bars (from positive to negative) indicate growing bearish momentum.
- Use bar length to gauge trend magnitude.
Divergence Trading
- Bearish divergence: Price rises while the oscillator falls → potential reversal down.
- Bullish divergence: Price falls while the oscillator rises → potential reversal up.
Avoiding Consolidation
- When bars are small and near the zero line, the market is ranging or consolidating → avoid trades.
Example
On the EUR/JPY chart:
- Uptrend: Bars climb above zero, slope upward, and are long → strong bullish trend.
- Downtrend: Bars drop below zero, slope downward, and are long → strong bearish trend.
- Trend Reversal: Bars shorten near zero → signal momentum is weakening; prepare for a reversal trade.
Advantages
- Combines RSI and MACD in a single oscillator.
- Helps determine market direction and trend strength.
- Highlights potential reversals using divergence.
- Works on all instruments and timeframes.
Conclusion
The Derivative Oscillator is a two-in-one momentum and Trend Indicator.
- Buy: Oscillator crosses above zero with upward slope.
- Sell: Oscillator crosses below zero with downward slope.
- Use bar length to gauge trend strength and confirm entries with Price Action.
It’s a simple, accurate, and versatile tool for traders seeking both trend-following and reversal signals.
