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KEY TAKEAWAYS
The derivative oscillator is the difference between a double-smoothed RSI and an SMA of the double-smoothed RSI.
The derivative oscillator is frequently shown as a histogram.
Zero line crossovers are one way to generate trade signals with the indicator. Divergence may also be used.
Understanding the Derivative Oscillator
The technical indicator is a more advanced version of the relative strength index (RSI) that applies moving average convergence-divergence (MACD) principles to a double-smoothed RSI (DS RSI) indicator. The indicator is derived by computing the difference between a double-smoothed RSI and a simple moving average (SMA) of the DS RSI. The indicator's intent is to provide more accurate buy and sell signals than the standard RSI calculation.
The MACD is derived by subtracting the 12-period exponential moving average (EMA) from the 26-period EMA. It is in this way that the derivative oscillator uses MACD principles, since the derivative oscillator is also derived from subtracting the SMA from the double smoothed RSI.
The indicator can be used on any time frame.
Derivative Oscillator Usage
The derivative oscillator is used in the same way as the MACD histogram. Positive readings are considered bullish, negative readings are considered bearish, and crossovers above and below the zero line signal indicate potential buying and selling opportunities. Traders may also look for divergence with the security's price, which could be an indication of an upcoming reversal in the prevailing trend. This happens when the indicator falls and price rises or when price falls and the indicator continues to rise.
Traders should consider using the derivative oscillator in conjunction with other forms of technical analysis, such as price action analysis and chart patterns.