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What Is Oscillator Trading: Top 5 Indicators To Use

2022-08-30 07:45:17


  • Oscillator trading is the use of oscillator indicators to identify the direction, strength, or weakness of a trend before making a trade.
  • If an oscillator line is trending downwards, this indicates a negative (bearish) trend. If it’s trending upwards, it indicates a positive (bullish) trend. If there are multiple lines in an oscillator, the crossing of those lines could indicate a trend reversal in the opposite direction.
  • The most famous technical indicators are mostly oscillator indicators, such as MACD and RSI.



What Is An Oscillator?

An oscillator is a technical indicator that fluctuates between positive and negative territory within a range, located beneath a price chart. The purpose of oscillators is to identify the direction, strength, or weakness of a trend. Most traders make successful trades in trending markets, and oscillators specialize in identifying the current trend.

Oscillators that derive data over a longer period, such as RSI, tend to be great for value investing because we can wait for oversold support levels to buy crypto at a discount. The oscillators that derive data from a short period, such as StochRSI, are sensitive and suitable for day trading strategies.

On some indicators the line reaching upper limits signals a bullish uptrend while on other indicators it signals overbought levels. The middle level is mostly marked with 0. Oscillators have one or multiple trend lines. The signals and trends always vary by the indicator.

The most famous indicators we use for trading tend to be oscillator indicators:

  • Moving Average Convergence Divergence (MACD) – the most used indicator of all time.
  • Relative Strength Index (RSI)
  • Stochastic RSI (StochRSI)
  • Commodity Channel Index (CCI)
  • Money Flow Index (MFI)
  • Elder’s Force Index (EFI)
  • Fisher Transform (FT)
  • Awesome Oscillator (AO)
  • Williams %R (&R)
  • And many others – visit our technical analysis section to learn about them.

What Are The Different Types Of Oscillators?

Oscillators are very similar and easy to read, but there are slight distinctions in the data they output and the limits they employ. Here are the two types of oscillators.

  • Leading & Lagging Oscillators

Leading oscillators are oscillators that provide data about the current trend. A leading indicator sends trade signals as they occur, and takes in account previous historic data. These indicators are often based on “weighted” moving averages such as the SMA and EMA that place weight on recent price data. Most oscillator indicators are leading indicators and this includes the RSI, StochRSI, CCI, Williams %R, and Chande Momentum Oscillator.

Lagging oscillators are oscillators that work nearly identical to leading indicators, but they either place weight on historic data or they don’t account for the last day. An example of a lagging oscillator is the MACD.

  • Range-Bound & Non-Range Bound Oscillators

Range-bound oscillators are contained within a range in absolute values. No matter which chart we use (1D, 4H, 1H, etc.) the upper and lower range limits will be the same. For example, on the RSI indicator the upper (overbought) range is always 70 and the lower (oversold) range is always 30. This helps traders because it gives context about the limits in relation to historic prices. If the indicator goes above the upper range, or the psychological resistance level, we are in a strong uptrend.

Non-range bound oscillators do not have a fixed range and the values vary based on the chart. This is partially due to the mathematical formula they employ. For example, the Elder Force Index indicator might reach +5,000,000 on one chart and -400,000 on another. The only context we have in regard to range is that it’s positive or negative since the values differ on every chart.

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What Are The Benefits Of Oscillator Trading?

Oscillator indicators offer traders various insights in the following scenario:

  • Overbought/Oversold levels: If the price of crypto is trending in an extreme direction, this can be classified as “overbought” or “oversold”. Oscillators indicate these conditions based on the trend line reaching the boundaries.
  • Buy/Sell Signals: Oscillator indicators can provide buy and sell signals based on a crossover strategy. If an oscillator uses two moving averages, the crossing of these averages can indicate a new trend formation and we can open a trade accordingly.
  • Trend Trading: An oscillator rating can confirm the current trend. If a trader suspects that he is in a bullish trend based on the price action, the oscillator will confirm this by moving to positive territory on the upper end and vice versa. Centerline crossovers (i.e. above or below 0) indicate the start of a new trend.
  • Day Trading: Sensitive oscillators such as StochRSI help traders develop an oscillator intraday strategy for day trading. The increased sensitivity and weighted price data enables it to show the current trend of the day and we can trade while ignoring historical data.
  • Divergence Trading: If the oscillator indicator shows different values from the current price trend (i.e. Bitcoin’s price is going up, but the oscillator is going down) this indicates a potential divergence to the upside or downside.

Oscillators tend to follow the current price chart, but they provide unique data that gives an informed trader an edge over traders who trade without technical indicators.

How Do Oscillators Work?

Oscillator indicators apply mathematical formulas to calculate positive and negative trends and divergences. The data used is a combination of price data such as the closing prices, highs, and lows. More advanced indicators use volume profiles histograms and incorporate historic data over multiple x-period.

For example, if the average price of Bitcoin was $40,000 last week and the average price is $50,000 this week, the oscillator would likely move into positive territory because the price is appreciating.

Instead of directly applying the line on top of the Bitcoin candles such as Pivot Points (PP) or Bollinger Bands (BB) indicators, oscillators use their own chart that gives us a different perspective on the price action. Many of them rely on Moving Average (MA) indicators that calculate average prices over a certain period. Some might even use multiple moving averages. For example, the RSI indicator uses the SMA. By applying smoothening (additional time values), they increase the accuracy of their predictions.

Some oscillators are more sensitive than others. Sensitivity refers to the speed of movement of the oscillator. For example, the Stochastic RSI indicator is highly sensitive and it can move from “overbought” to “oversold” levels in a matter of days. Meanwhile, the Relative Strengths Index is less sensitive and it can take weeks or months for the trend line to move in a different direction. This is because it uses long-form data to correlate the current price to historic prices.

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Top 5 Oscillator Indicators to Use for Oscillators Trading

To learn how to use oscillators in trading, a trader can start with the most popular oscillators that have been used in commodities and stock markets for several decades. Here are the top picks.

  • Moving Average Convergence Divergence (MACD)

The MACD indicator is the most used indicator in the world across all markets. It is a testament to the effectiveness of all oscillator indicators and is based on two Exponential Moving Averages (EMAs) that place weight on recent period data. One is the “Signal” line that signals a trend reversal once it crosses the MACD line. The indicator also includes a histogram (red trend line) that indicates the current trend:

oscillator trading 1


  • Relative Strength Index (RSI)

The Relative Strength Index indicator is the most used indicator in crypto because it accounts for long-form data and is ideal for the volatility of the crypto markets. When Bitcoin is overbought or oversold, the historic references can let us know exactly how and signal if we’re reaching critical support & resistance levels:

oscillator trading 2


  • Williams %R

The Williams %R or the “Williams Percentage Range” indicator is a sensitive indicator that detects overbought and oversold levels. It is ideal for oscillator intraday trading because it is range-bound and the values fluctuate rather quickly, showing us daily entry & exit points:

oscillator trading 3


  • Commodity Channel Index (CCI)

The Commodity Channel Index  is a leading, range-bound indicator which measures the current trend. The indicator is based on moving averages and the deviation from those moving averages, alerting traders of potential divergence:

oscillator trading 4


  • Stochastic RSI (StochRSI)

The Stochastic RSI indicator is a sensitive indicator that moves between 0-100 and indicates overbought and oversold levels. The advantage it has is that it has two moving averages marked as “K” and “D” line – the crossover between these two lines indicates a trend reversal and alerts us to trade accordingly:

oscillator trading 5

What Is The Difference Between Indicator And Oscillator?

Indicators and oscillators are technical analysis tools. An oscillator is considered an indicator, but it is unique and distinct in that it is contained in upper and lower limits. If we compare a regular indicator that moves over the candles such as Bollinger Bands (BB) to an oscillator indicator such as Relative Strength Index (RSI), we can easily see the distinction:

oscillator trading 6
Oscillator vs indicator on the Bitcoin chart.


Bollinger Bands are the blue bands on the candles that envelop them in a channel-like structure and indicate support and resistance levels. RSI is the oscillator below the chart that shows overbought and oversold levels in a limited range, separate from the chart. While both indicators and oscillators belong to the category of “technical indicators”, we can clearly see that Bollinger Bands is not an oscillator while RSI is an oscillator.

All oscillator indicators look almost the same because they have one thing in common: they all oscillate over a centerline. The line splits the readout between positive and negative territory. An oscillator can remain at an extreme level such as “overbought” for a long time, but it will eventually reverse to the downside – or vice versa. This is where the best trading opportunities arise and smart traders can ride the new trends as they’re forming.

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Oscillators can be used in isolation or combined with other oscillators. It is always recommended to use multiple indicators simultaneously to decrease the chance of false signals, as they all use unique formulas and produce different results. Use them as reference to confirm your trading bias.

To learn more about oscillator indicators you can implement with your trading strategy, visit Phemex’s comprehensive technical analysis section.


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