Oscillators are types of crypto trading indicators that can be used to determine potential market reversals and to analyze the strength of a market trend.
In this guide, we’ll cover three widely used oscillators: Relative Strength Index (RSI), Stochastic RSI (StochRSI), and Moving Average Convergence Divergence (MACD). Learn how they work, how to interpret their signals, and how to integrate them into your trading strategy.
What are oscillators in crypto trading?
Oscillators are technical indicators that fluctuate between fixed values, typically signaling overbought or oversold conditions. They are designed to help traders:
- Spot potential trend reversals.
- Assess the momentum of a trend.
- Identify entry and exit points for trades.
Accessible on most trading platforms, including Bitstamp’s Tradeview, oscillators are great tools for technical analysis.
Relative Strength Index (RSI)
What is RSI?
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of price movements. It ranges from 0 to 100, offering insights into whether an asset is overbought or oversold.
RSI Overbought and Oversold Levels
An asset is considered to be overbought when its RSI is above 70. This means there was a significant upward price movement without correction and implies buyers are losing momentum.
Conversely, the asset is considered to be oversold when its RSI is below 30. A vast price decline with no correction means that the sellers are getting exhausted.
When the RSI enters overbought or oversold levels, it typically signifies a potential market reversal and can thus provide a trader with good buy or sell points.
Pro Tip: In strong bull or bear markets, RSI can remain overbought or oversold for extended periods due to market sentiment, often driven by FOMO (fear of missing out).
RSI Divergences
RSI divergences between price and indicator movement reveal market strength or weakness. There are three types of divergences:
- Regular Divergences A: Bearish: Price forms higher highs, RSI forms lower highs. B: Bullish: Price forms lower lows, RSI forms higher lows.
- Hidden Divergences A:Bearish: Price forms lower highs, RSI forms higher highs. B:Bullish: Price forms higher lows, RSI forms lower lows.
- Exaggerated Divergences
A: Bearish: Double top in price, lower high in RSI.
B: Bullish: Double bottom in price, higher high in RSI.
Stochastic RSI: spotting trend reversals
What Is Stochastic RSI?
Derived from RSI, the Stochastic RSI (or StochRSI) adds sensitivity by applying a stochastic calculation to RSI values. It oscillates between 0 and 100, making it a sharper tool for detecting market trends.
How Stochastic RSI works
StochRSI identifies the highest and lowest RSI values over a set period and compares the current RSI within this range. It is highly responsive to price changes, generating more frequent signals.
Stochastic RSI overbought and oversold levels
Stochastic RSI uses different thresholds for overbought and oversold conditions compared to the standard RSI. Generally:
- Overbought: Readings above 80 suggest the asset is overbought and a potential reversal to the downside may be imminent.
- Oversold: Readings below 20 suggest the asset is oversold and a potential reversal to the upside may be imminent.
Trading tips for StochRSI
- Buy Signal: When StochRSI exits oversold territory (crosses above 20).
- Sell Signal: When StochRSI exits overbought territory (crosses below 80).
Comparison: RSI vs. Stochastic RSI
Feature
RSI
StochRSI
Sensitivity
Moderate
High
Signal Frequency
Less frequent
More frequent
Divergences
More reliable
Less reliable
Moving Average Convergence Divergence (MACD)
What Is MACD?
The MACD is a trend-following momentum oscillator composed of two exponential moving averages (12-period EMA and 26-period EMA) and a histogram. It highlights bullish and bearish momentum.
Key MACD Components
The rules of potential signals from this indicator’s exponential moving averages are the same as for regular moving averages, and can be viewed when the signal lines crossover each other:
- Bullish: Faster EMA crosses above slower EMA (buy signal).
- Bearish: Faster EMA crosses below slower EMA (sell signal).
The histogram, which is drawn in the form of vertical columns, represents the space between the moving averages. When the faster moving average is above the slower one, the histogram prints its columns above the zero value. When the faster moving average is below the slower one, it prints columns below zero value. The bigger the space between the moving averages, the bigger the columns of a histogram are.
Histogram Analysis:
- Columns above zero: Bullish momentum.
- Columns below zero: Bearish momentum.
MACD Divergences
Similar to RSI, divergences between price and MACD movements signal potential trend reversals. Traders can use trendlines and histogram behavior for deeper analysis.
Oscillators vs other indicators
Indicator Type
Purpose
Example
Oscillator
Identify overbought/oversold conditions
RSI, StochRSI, MACD
Trend-following
Track long-term price direction
Moving averages
Volatility indicator
Measure price fluctuation intensity
Bollinger Bands
Why Use Oscillators?
- Market Insights: Spot trend changes before they occur.
- Versatility: Applicable in trending and range-bound markets.
- Ease of Use: Intuitive for traders of all skill levels.
Pro Tip: Combine oscillators with other tools like volume analysis or candlestick patterns for better accuracy.
Oscillators essentials
- Oscillators are essential for identifying trend reversals and market strength.
- RSI, Stochastic RSI, and MACD are among the most popular tools for traders.
- Pair oscillators with complementary indicators for more reliable trading strategies.