What is the price zone oscillator?
The Price Zone Oscillator (PZO) is a technical indicator that measures current price against averaged historical prices. The indicator calculates two exponential moving averages and is the relationship between them. Like other oscillators, it helps identify potential overbought and oversold levels that may indicate buy or sell opportunities.
- The price zone oscillator has key levels at 15, 40, 60, -5, -40 and -60.
- These levels represent buy or sell signals depending on the direction from which the indicator crosses and the direction of the general trend in price.
- Another indicator, ADX, is typically used in conjunction with the PZO to identify the strength of price trends.
- The PZO calculates the difference between two exponential moving averages, the first determining whether the price has moved up or down, and the second EMA is calculated based on the closing price.
Price zone oscillator calculation
The oscillator can be calculated using the formula:
Price Zone Oscillator=1(TCCP)where:CP (Closing position)=North-EMA period(+-close)TC (Total closure)=North-EMA period (closing)
How to calculate the price zone oscillator
Here’s how to calculate the price zone oscillator, as it involves several steps.
- Determine the sign of the day, + or -. If the close is above the previous close, it is positive. Below is negative.
- Calculate the digital value: = sign (close-close-1)
- Calculate CP, which is the EMA of the digital security for n periods.
- Calculate TC, which is the EMA of the closing prices over n periods.
- Calculate PZO: 100 * (CP / TC)
What the price zone oscillator tells you
The indicator is calculated as a percentage relationship between two exponential moving averages (EMAs) and is used by traders and market timers to identify overbought or oversold conditions as well as potential reversal opportunities.
The highest possible value is 100 and the lowest possible value is -100, but traders also watch the intermediate key levels for trading signals (discussed below).
Exponential moving averages are used to smooth the price zone oscillator rather than just using gross prices.
Using the price zone oscillator
Traders use the price zone oscillator like any other oscillator when looking for overbought or oversold. According to the author’s original article appearing in the Technical Analysis of Stocks and Commodities magazine, key oscillator levels to watch include -60, -40, -5, +15, +40, and +60.
Most traders use the Price Zone Oscillator in conjunction with other technical indicators or chart patterns, such as the Average Directional Index (ADX), which measures the potential strength of trends. The original author’s article outlined various buying and selling guidelines based on using PZO and ADX together.
- +60: If the indicator is above this level and declining, consider selling if it is long in an uptrend market (ADX above 18).
- +40: If the PZO falls through this level from above, it is a sell signal in a non-trending market (ADX<18). Consider a short position if the asset is in a downtrend (ADX>18).
- +15: When the PZO crosses this level from below, consider buying if it is a non-trending market (ADX <18).
- -5: When the PZO crosses this level from above, consider shorting if the asset is trendless (ADX <18)
- -40: When the PZO crosses above this level from below, consider buying if the price trend is bullish (ADX> 18). It can also be a buy signal if the price is not trending (ADX <18).
- -60: When the PZO falls below this level, a rise in the Value Zone Oscillator (VZO) is a buy signal in a trending market (ADX> 18).
- The zero line can also be used to open or close positions depending on whether there is an uptrend or downtrend (ADX> 18) present.
Traders could also create their own rules on how to interpret and use the indicator.
The graph below shows a 21-day PZO applied to Facebook (FB) shares.
The price zone oscillator versus the relative strength index
The Relative Strength Index (RSI) is another oscillator and momentum indicator that compares the magnitude of recent price movements to previous price movements. It also provides overbought and oversold levels, typically at 70 or 80 and 20 or 30, respectively.
Limitations of the price zone oscillator
The PZO was designed to be used with other indicators, which means that it may not be useful on its own.
There is usually a lot of activity around the zero line, which can make it difficult to decipher valid signals in this region. Also, since the indicator can be quite choppy, the other tiers experience similar problems, but generally to a lesser degree.
There is nothing inherently predictive about the indicator. It is calculating past data. It is a lagging indicator. The indicator is best used in conjunction with other forms of analysis and is filtered with other indicators.