Oscillators are an essential tool in every technical analyst’s arsenal. They are very crucial for crypto price prediction in relatively volatile situations. However, if misused, they could prove disastrous to your trading portfolio.
So, in this article, we’ll introduce you to the world of price oscillators in cryptocurrency trading and how to use the most common indicators correctly.
What are Oscillators?
Oscillators are technical analysis indicators that help traders determine whether a cryptocurrency or token is overbought or oversold. The typical oscillator has upper and lower lines, which are also called bands or limits. When the price of a token exceeds these limits, it indicates an imminent price reversal.
When a token’s price nears or crosses the upper band, it means the cryptocurrency is overbought, and it would be wise to short the asset or sell it. On the other hand, if the price nears or crosses the lower limit, the cryptocurrency’s price is likely to rise, and you may benefit from buying it.
Oscillators are mainly used for short-term price movements, unlike some other technical analysis tools like moving averages. Furthermore, they are most accurate when combined with other indicators, such as Bollinger Bands and some volume indicators.
There are several oscillators for crypto technical analysis. The most common ones used for price prediction include the Relative Strength Index indicator (RSI), the Stochastic Oscillator, the Commodity Channel Index (CCI), and Moving Average Convergence Divergence (MACD).
How Does an Oscillator Work?
Oscillators are also known as momentum indicators. So, aside from helping you identify price movements and reversals, they also indicate trend speed.
Usually, oscillators use scales or percentages ranging from 1-100. This scale compares the closing price to the highest and lowest prices over a specific number of bars shown in your charting platform, such as TradingView.
As a trader, you have to determine which points the upper and lower limits will be at. Generally, the higher limit is set at 70, and the lower line is set at 30. But some traders prefer to use 80 and 20.
These bars or bands are usually overlaid over the chart on the platform, such as Crypticorn’s Price Prediction Dashboard. When the indicator’s line stays within the 0 to 100 scale, it can accurately suggest overbought and oversold conditions.
As aforementioned, when the indicator exceeds the upper line (70 or 80), the cryptocurrency has been overbought, and the price will fall soon. This indicates that you should sell or short the token in question.
On the other hand, when the oscillator’s trend crosses the lower limit (20 or 30), it usually means that the coin has been sold too many times, and a price rise is imminent. So, you are most likely to profit from buying the cryptocurrency.
It’s important to note that this is the foundational principle of crypto oscillators, and each one has unique mechanics that build upon it.
Furthermore, oscillators are only sometimes accurate when you use them solo. A common occurrence called divergence may also happen too. This occurs when the price of a cryptocurrency and the values of an oscillator indicator move in opposite directions.
To account for this, we traders usually combine other technical indicators with their oscillators. The MACD, for instance, is a standard indicator used for detecting divergence.
Examples of Common Oscillators in Crypto Trading
When it comes to trading assets, there are several kinds of oscillators. But for technical analysis in DeFi, these are the most commonly used kinds.
- Moving Average Convergence Divergence (MACD)
- Relative Strength Index (RSI)
- Stochastic Oscillator
- Commodity Channel Index (CCI)
- Price Channel Swing (PCS)
1. Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence, or MACD, is an oscillator that measures the momentum of price changes by analyzing the relationship between short-term (12-day) and long-term (26-day) exponential moving averages (EMAs).
Like other momentum indicators or oscillators, the MACD indicator is used to identify trend direction, momentum, and potential entry or exit points in the DeFi market. When the MACD line crosses above the signal line, it’s considered bullish, suggesting a possible uptrend. On the other hand, when the MACD line goes below the signal line, the market is likely bearish, indicating a potential drop in price.
2. The Relative Strength Index (RSI)
The RSI, or Relative Strength Index, is one of the most popular indicators used in crypto trading. It uses the typical upper and lower lines set at 70 and 30 to indicate overbought and oversold conditions in the market.
The Relative Strength Index is calculated using the average gain and average loss over a specified period, typically 14 days. The formula for the RSI involves comparing the average gain (the average of upward price movements) to the average loss (the average of downward price movements) over 14 days.
Furthermore, RSI is also used to observe divergence in the market and anticipate trend reversals.
3. The Stochastic Oscillator
The Stochastic Oscillator is another commonly used momentum indicator in crypto technical analysis. Like the RSI, it measures the speed and direction of a cryptocurrency’s price movement using a 14-day period. It works by measuring the current price of a token relative to its price range over a specified period, which, in this case, is 14 days.
In addition, the Stochastic Oscillator uses the %K line and the %D line to determine overbought and oversold conditions in the market.
4. Commodity Channel Index (CCI)
The Commodity Channel Index (CCI) is an oscillator that’s not widely used because of its technicality. Still, it utilizes the same concept as the previously mentioned oscillators. It compares the current price of a cryptocurrency or a DeFi asset to its historical price to determine whether it is overbought or oversold.
Once your calculations are complete and the CCI is above zero, it means the price is above the historical average. On the other hand, when the CCI falls below the zero mark, the price is less than the previous average.
5. Price Channel Swing (PCS)
Price Channels are rare in technical analysis. Regardless, they’re handy for identifying oversold and overbought positions in the market. Like the others, it also uses bands or lines set at generally accepted support and resistance levels.
A price channel is typically formed by drawing parallel lines connecting consecutive swing highs and swing lows on a price chart. The upper line represents resistance, while the lower line represents support.
Conclusion
Oscillators are beneficial indicators for technical analysis in crypto. They help determine whether a token or crypto asset is experiencing a bullish, bearish, or neutral trend. Furthermore, they are essential for short-term trading as they utilize historical data to make assumptions about future prices.
Regardless, they are best used in combination with other indicators. And in subsequent articles, we’ll be discussing the details of each one.
FAQ
What is the difference between an oscillator and an indicator?
The difference between an oscillator and an indicator is that an oscillator is a kind of indicator. The typical oscillator, such as the MACD or RSI, lets you spot when a cryptocurrency is overbought or oversold.
How do you read an oscillator?
For simpler oscillators like the RSI, you can simply check whether the price of a cryptocurrency or DeFi token is nearing or crossing the upper or lower band. If it crosses the upper band, it’s likely to drop in price; if it goes below the lower band, it will likely increase in price.
Which is the best oscillator?
Determining which oscillator is the best is challenging since each has its own use case. However, most traders tend to prefer the Stochastic Oscillator.
