Oscillators - some hints on use

[tech/a]

Oscillators are made from combinations of
Open
Close
High
Low
Volume or Open interest


They are then related to current price action which will return an Oscillation between a high and a low point.The oscillation is normally scaled so we can value the oscillator at any one point of time.

There are some common errors on the use of oscillators among traders.
Common Error (1)

Overlaying a Chart with 2 or more oscillators wanting each to confirm the other.This is similar to taking a train to a destination you can chose
(1)The Morning Train (open)
(2)The Midday Train (the Open less ,close or the RANGE)
(3)The Night Train (the close)
(4)Or the Train with the most people on board (Volume).

As you can see it doesnt matter which train you take all are going to the one destination!

Here is a chart Of ORI Ive highlighted the Oscillators and their signals when used correctly on this chart both are set to 14 days.

Common error (2) next.

 

[tech/a]

Re: Oscillators---some hints on use.

Common Error (2)

Trading Oscillators in the opposite direction to the predominant price action.

Oscillators normally have 2 extremes OVERSOLD and OVERBOUGHT.
One of the gravest errors I see is those attempting to use overbought as a sell signal in an uptrend or even worse as a buy signal to go short.
We should be looking for oversold signals in an uptrend to enter or add to an existing long position.

Both signals can be taken in a ranging market however this should be a range which is clearly defined.

See charts below.There was with ORI a great number of divergence signals which ofcourse are also overbought signals.But as you can see they are no certainty to succeed.

Although not noted there is an excellent "A" class buying divergence at the deginning of the chart.

More to come but need to eat. Enjoy!

 

[markrmau]

Re: Oscillators---some hints on use.

1. From what I have read, the only valid buy/sell signals are when there is the divergence which occurs in the oversold/overbought region. However, my info is a bit dated. I read a book from early 90's. I am sure William's ultimate oscillator stipulates the above requirement though.

2. As you have stated, there are times when the signals fail. So what percentage of signals are true/false. If it is 50/50, then the oscillator is useless. I guess I should randomly select a number of trends from randomly selected companies and count the number of successes/fails.

3. What oscillator relies soley on close? I would prefer this one as an extension of the idea "amateurs set the open and pro's set the close".

 

[tech/a]

Re: Oscillators---some hints on use.

Mark.

(1)All signals are valid----whether they continue in the direction of your trade only time will show.

(2)Signals often perform less than 50/50.A signal with a less than 50% success doesnt mean it can return good profit.
One I use is correct(In the sence that it goes on to profit)39% of the time and the method returns 60% on capital invested each year.
Expecting an oscillator or indicator or indeed any price pattern to perform in the long run better than 50/50 is unrealistic (These unrealistic expectations normall come from those who havent tested their theories).

Most oscillators are calculated from close.

(3) I like your conforming with this common theory (who trades the middle??)

tech