Price Zone Oscillator: What It Is, How It Works, Limitations

What Is the Price Zone Oscillator?

The Price Zone Oscillator (PZO) is a technical indicator that measures the current price versus averaged historical prices. The indicator calculates two exponential moving averages and is the ratio between them. Like other oscillators it helps identify potential overbought and oversold levels which may indicate selling or buying opportunities.

Price Zone Oscillator Formula and Calculation

The oscillator can be calculated using the formula:

$\begin{aligned}&\text{Price~Zone~Oscillator} = 100\left(\frac{CP}{TC}\right)\\&\textbf{where:}\\&CP\text{ (Closing Position)}=n\text{-period EMA} (+\text{-close})\\&TC \text{ (Total Close})= n\text{-period EMA (close)}\end{aligned}$​Price Zone Oscillator=100(TCCP​)where:CP (Closing Position)=n-period EMA(+-close)TC (Total Close)=n-period EMA (close)​

Here's how to calculate the Price Zone Oscillator, as it involves several steps.

1. Determine the sign for the day, + or -. If the close is above the prior close, it is positive. Below it is negative.
2. Calculate the Digital Value: = sign(close-close_-1)
3. Calculate CP, which is the EMA of the digital value over n periods.
4. Calculate TC which is the EMA of the closing prices over n periods.
5. Calculate PZO: 100*(CP / TC)

What the Price Zone Oscillator Tells You

The indicator is calculated as a percentage ratio 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 key levels in between for trade signals (discussed below).

Exponential moving averages are used to smooth out the Price Zone Oscillator rather than simply using raw prices.

Using the Price Zone Oscillator

Traders use the Price Zone Oscillator like any other oscillator by looking for overbought or oversold. According to the author’s original article appearing in the Technical Analysis of Stocks and Commodities magazine, the oscillator’s key 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 author's original article described several buy and sell guidelines based on using the PZO and ADX together.

• +60: If the indicator is above this level and declines, consider selling if long in an up trending market (ADX above 18).
• +40: If the PZO drops 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 not trending (ADX<18)
• -40: When the PZO crosses above this level from below, consider buying if the price trend is up (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, an increase 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 come up with their own rules for how to interpret and use the indicator.

The following chart shows a 21-day PZO applied to Meta (META) stock.

The Price Zone Oscillator vs. the Relative Strength Index

The Relative Strength Index (RSI) is another oscillator and momentum indicator that compares the magnitude of recent price moves to prior price moves. 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 built around being used with other indicators, which means it may not be useful on its own.

There tends to be a lot of activity around the zero line, which may make it difficult to decipher valid signals in this region. Also, since the indicator can be quite choppy, the other levels experience similar problems, but usually 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 filtered with other indicators.

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