How do you compare and contrast oscillators?

1 Types of Oscillators

There are many kinds of oscillators, but they can be broadly classified into two categories: bounded and unbounded. Bounded oscillators have a fixed upper and lower limit, usually between 0 and 100, and indicate the relative position of the current price within a given range. Examples of bounded oscillators are the Relative Strength Index (RSI), the Stochastic Oscillator, and the Commodity Channel Index (CCI). Unbounded oscillators do not have a predefined range and can reach any value depending on the price movement. Examples of unbounded oscillators are the Moving Average Convergence Divergence (MACD), the Rate of Change (ROC), and the Awesome Oscillator (AO).

2 How to Compare Oscillators

One way to compare oscillators is to look at their sensitivity, which refers to how quickly they respond to price changes. Generally, oscillators with shorter periods or smaller settings are more sensitive and produce more signals, but they are also more prone to false or noisy signals. Oscillators with longer periods or larger settings are less sensitive and produce fewer signals, but they are also more reliable and smooth. For example, a 14-period RSI is less sensitive than a 7-period RSI, and a 12-26-9 MACD is less sensitive than a 5-12-9 MACD. Depending on your trading style and time frame, you can choose the oscillator that suits your needs.

3 How to Contrast Oscillators

Another way to contrast oscillators is to look at their behavior, which refers to how they relate to the price action. Some oscillators are trend-following, meaning they move in the same direction as the price and confirm the strength or weakness of the trend. Some oscillators are trend-reversing, meaning they move in the opposite direction as the price and signal possible turning points or corrections. Some oscillators are neutral, meaning they do not have a clear bias and can be used in any market condition. For example, the MACD is a trend-following oscillator, the RSI is a trend-reversing oscillator, and the AO is a neutral oscillator. Depending on your market analysis and trading strategy, you can choose the oscillator that matches your view.

4 How to Use Oscillators

The most common way to use oscillators is to look for overbought or oversold levels, which indicate that the price has reached an extreme and may reverse soon. For bounded oscillators, these levels are usually defined by a certain threshold, such as 70 and 30 for the RSI, or 80 and 20 for the Stochastic Oscillator. For unbounded oscillators, these levels are usually determined by the historical range or the zero line. For example, the MACD is considered overbought when it is above the zero line and oversold when it is below the zero line. However, overbought or oversold levels do not always mean that the price will reverse immediately. Sometimes, they can indicate a strong trend or a consolidation. Therefore, it is important to use other indicators or tools to confirm the signals.

5 How to Combine Oscillators

Another way to use oscillators is to combine them with other oscillators or indicators to enhance your analysis and trading decisions. For example, you can use a trend-following oscillator with a trend-reversing oscillator to identify trend continuation or reversal signals. You can also use a bounded oscillator with an unbounded oscillator to measure the relative and absolute momentum of the price. You can also use an oscillator with a moving average, a trend line, or a support and resistance level to filter out false or weak signals. However, you should not use too many oscillators or indicators at the same time, as this can lead to confusion or contradiction. You should use only the ones that complement each other and suit your trading style.

6 How to Interpret Oscillators

The final way to use oscillators is to interpret them with caution and context. Oscillators are not infallible and they can sometimes give misleading or conflicting signals. For example, an oscillator can show a divergence, which means that it is moving in a different direction from the price, suggesting a possible reversal. However, a divergence can also be a sign of a strong trend or a consolidation, and the price can continue in the same direction for a long time. Therefore, you should not rely solely on oscillators and you should always consider the overall market situation, the price action, and the risk management. Oscillators are only tools that can help you understand the market better, but they are not the market itself.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?