Monday, March 5, 2012

Finding a Better Oscillator for the Current Market Condition

MetaStock SPRS Series - Week 58 - TechniTrader® Stock Discussion for MetaStock Users: Finding a Better Oscillator for the Current Market Condition - March 5, 2012
By: Martha Stokes C.M.T.

There are innumerable price/time Oscillators, some are ideal for Trading Range market conditions, such as Stochastic and Price Rate of Change, while others are better suited to Platform Market Conditions.

Wilder’s RSI is an under used Oscillator Indicator. Few retail traders employ this powerful oscillator in their trading. Stochastic has a larger active user group, but it is not ideal for many market conditions. In fact, Wilder’s RSI tends to work better in more Market Conditions more of the time.

Since we are in a value oriented Platform Building Market, with indexes stuck at the fundamental and technical resistance levels, using Wilder’s RSI instead of stochastic will net higher profitability due to earlier entry patterns, and better analysis of narrow sideways action.

Chart 1

Staff at TechniTrader® have modified Wilder’s RSI so that there is a floating center line RSI and a shorter RSI that creates the converging diverging patterns, to help chartists see what is going on with price better.

With Stochastic, the overbought patters in October and November would be a signal to exit just as the stock moved up further. Clearly in the stair stepping out of a bottom with gaps patterns for this stock, Stochastic doesn’t work properly.

Stochastic was designed to be used in Trading Range markets with wider price action. If you attempted to trade this stock with stochastic signals would have you exit prior to the gaps. This would cause you to miss out on the gaps and runs of this trade.

TechniTrader® TT RSI/RSI

By using a slower, smoother RSI to create a center line, the RSI indicator now has more information and better cross overs, for traders to take advantage of the gaps and runs of a stair stepping trend line pattern moving quickly out of a bottom low.

The rule for trading is: Wait for the short TT RSI to cross over the long TT RSI center line for confirmation of the competed bottom. Then continue to hold as the stock moves up, even if the short TT RSI rises into the traditional RSI overbought line. As long as the long TT RSI is slowly moving upward, and the short TT RSI remains angling upward the stock is held. This allows traders to remain in a stock that is moving out of a bottom with gaps and faster runs.

Instead of using RSI as an Overbought/Oversold Oscillator, using it as a Momentum Oscillator allows you to enter stocks sooner and hold as they move up.

TT RSI is ideal as a Momentum Oscillator because it compares current price to past price based upon the period used. Each trader can adjust the settings to suit their own trading style, hold periods, and exit strategies. This provides maximum flexibility with TT RSI.

During bottoming Market Conditions, Stochastic tends to force a trader out prematurely before the run has begun. Instead using the TT RSI as a Momentum Oscillator with the center line cross over TT RSI pattern, traders are able to enter before stocks gap and run.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

No comments: