Overlays and oscillators, and where each sits on a chart
Some indicators are drawn in the same units as price. Others are not, and cannot be. Where an indicator lives on the screen tells you what it measures.
Indicators divide neatly by whether they share units with price.
Overlays
An overlay produces values in the same units as price, so it can be drawn directly on the price panel. Moving averages, Bollinger Bands, Keltner channels, VWAP, pivot levels, and volume-profile levels are all overlays. So are the marks the True Range Research suite draws.
The advantage is that you read the indicator and the price in one glance, without switching scales. The disadvantage is clutter. Four overlays on one panel and the price bars stop being legible, which defeats the purpose.
Oscillators
An oscillator produces values on its own scale, so it needs a separate panel underneath the chart. RSI runs 0 to 100. Stochastics runs 0 to 100. MACD is unbounded and centred on zero. Rate of change is a percentage.
Oscillators are usually one of two shapes:
- Bounded — the value cannot leave a fixed range. RSI and stochastics cannot exceed 100 or fall below 0, which is why they are read in terms of extremes.
- Centred — the value crosses zero, and the sign matters more than the magnitude. MACD and rate of change work this way.
Why the distinction is practical, not cosmetic
A bounded oscillator compresses. Once RSI reaches 90, a further violent rally can only move it to 100 — the reading saturates while price keeps going. This is the single most common source of frustration with oscillators, and it is arithmetic rather than a flaw.
An overlay does not saturate, because it is denominated in price. But an overlay cannot tell you about the rate of a move without you comparing it to something else on the panel.
A practical rule for screen space. Two overlays and one oscillator is usually the limit before a chart becomes harder to read than the bare price. If you find yourself needing a third panel to interpret the second panel, the setup has stopped helping.
The hybrid case
Some tools compute an oscillator internally and then express the result as a level on the price panel. Volatility bands do this: the band width encodes a non-price quantity, but the band edges are prices you can act on. That is generally the more useful form, because it keeps your eyes on one panel.