Mastering Oscillators In Trading

Oscillator indicators are technical analysis tools that show the rate at which a particular asset's price or other aspect is changing. Oscillators help traders identify potential trend reversals, trend continuations, and overbought or oversold conditions. These are general strategies that can apply to most oscillators. We would like to cover these in detail so you can ensure that you are using your oscillators to the fullest of their potential.

There are literally thousands of oscillators to choose from on TradingView. All of them probably have a solid use case, but there are a handful of oscillators that have stood the test of time. Those titans of the oscillator category would include the Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), and Stochastic Oscillator.



1. Trading with Oscillators: Identifying Entry and Exit Points

To use oscillators for trading, traders can look for signals to enter or exit trades. For example, a bullish signal could occur when the indicator crosses above its centerline, indicating that the trend is shifting from bearish to bullish. A bearish signal could occur when the indicator crosses below its centerline, indicating that the trend is shifting from bullish to bearish. Depending on if you are currently in a trade or considering a trade these bullish/bearish signals can be used as either an entry or exit signal.


Traders can also use the momentum of oscillator indicators to identify overbought or oversold conditions. An asset is considered overbought when the oscillator is above a certain threshold, such as 70. Conversely, an asset is considered oversold when an oscillator is below a certain threshold, such as 30. Traders can use these thresholds to identify potential reversal points. Highly overbought can be power areas to look for entry or exit signals.


2. Oscillator Divergences: Confirming Trend Reversals and Continuations

One of the most popular ways oscillators are used is by looking for divergences between the indicator and the price of the asset being analyzed.

For example, a bullish divergence could occur when the price of an asset is making lower lows, but the oscillator is making higher lows. This could be an indication that the trend is about to reverse from bearish to bullish.


Conversely, a bearish divergence could occur when the price of an asset is making higher highs, Oscillator is making lower highs. This could be an indication that the trend is about to reverse from bullish to bearish.


3. Using Oscillators in Combination with Other Technical Indicators

While oscillators can be an incredibly powerful tool on their own, traders can also use them in combination with other technical indicators. For example, traders can use moving averages to confirm oscillator signals. If the oscillator generates a bullish signal and the price of the asset is above its 50-day moving average, it could be a strong indication that the trend is shifting from bearish to bullish.


We see a similar use case in a bearish scenario to follow a trend!


Traders can also use momentum in combination with other oscillators, such as the relative strength index (RSI) or the Stochastic RSI. These indicators provide additional confirmation of momentum signals and can help traders avoid false signals. This is actually one of our favorites as the Stochastic RSI is a measure of the momentum of the RSI. So their respective signals can complement very well.


Putting It All Together

Traders can put this knowledge forward to use most oscillators correctly to adjust their trading strategies and adapt to changing market conditions. We also recommend looking at information the creator of an oscillator has put out in regard to how to properly use the indicator.

Traders can use these strategies to help modify or change their positions. For example, if the chosen oscillator used for an asset is weakening, it could be an indication that the trend is about to reverse. Traders can adjust their strategies accordingly by taking profit from their long positions or entering short positions.

Similarly, if the chosen oscillator for an asset is strengthening, it could be an indication that the trend is about to continue. Traders can adjust their strategies accordingly by adding to their long and short positions or entering new long or short positions.

In conclusion, oscillators are an extremely powerful technical analysis tool that can help traders identify potential trend reversals, trend continuations, and overbought or oversold conditions. By using oscillators in combination with other technical indicators and adjusting their trading strategies to adapt to changing market conditions, traders can improve their trading performance and achieve greater success in the markets.