After looking at the parabolic SAR indicator in the February 13th TrendWatch, we
started getting questions about oscillators. Mostly, readers wanted to know which
ones to use, but I think the more important question we'll look at today is when to
use an oscillator at all (as you may guess, an oscillator is just a signal derived
from data readings between two points on a chart).
As a quick framework, there are two basic types of technical indicators: oscillators,
and trend indicators. Understanding the difference between the two is important,
because they are often at odds with each other. Oscillators are reversal oriented. In
other words, they indicate points in time when a market move has probably exhausted
itself and is ready to turn the other way. Trend indicators, on the other hand, seek
to spot momentum, and are continuation-oriented. Their assumption is that a strong
trend will continue, and you should trade with the trend. Have you spotted the
disparity already? A trend will either continue, or it will reverse - but it can't do
both.
The oscillators you choose will matter, but first you need to understand the kind of
market environment you are trading in. Sometimes oscillators work well, and sometimes
momentum indicators work well. Oscillators are great tools in a range-trading
environment, characterized by short-lived swings (on the order of days) and quick
reversals. We've been in something of a range-trading environment recently (since
December). And which oscillators have we used with success? Stochastics, Wilder's
Relative Strength Index (not the 'relative strength' indicator), and Wilder's
parabolic SAR. (To learn more about these tools click here). The chart below will
graphically show how these indicators have worked well in our range-trading market.
Each of the signals is circled, and the synchronization of all three tools is
uncanny. They all three spotted market tops and bottom within two days.
SIGNALS FROM OSCILLATORS
Tools such as moving average convergence divergence (MACD), ADX/DMI, and moving
average crossovers were more apt to give good signals in a trending environment, such
as the middle of 2002 (to learn more about these indicators, click here). However,
these trend tools are somewhat ineffective in a range-trading environment. Let's
circle these momentum signals on the same chart and see if they were helpful.
SIGNALS FROM MOMENTUM INDICATORS
As you can see, here the momentum indicators were mediocre at best. The point is,
make sure you're using the right tool for the job. Oscillators are just as
ineffective in a trending market. The real trick is not knowing what oscillators to
use, but when to use them.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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