Monday, September 15, 2014

Price Oscillators, Trading Styles, and Market Conditions

In my last webinar I talked about ways to use indicators that lead big price action.
The most common indicator that many traders first consider is a price oscillator.  But price oscillators are not all the same. There are as many kinds of price oscillators as there are price patterns.
There are many price oscillators and many formulas for various price patterns to consider.
  1. Momentum price patterns
  2. Overbought and oversold price patterns
  3. Relational price action
  4. Range Bound Price action
  5. Breakout compression Price patterns.
Stochastic, as an example, is comparing prior end of day close to current end of day close to determine whether a stock is closing lower and lower or higher and higher on each day as it moves. For the upside, George Lane believed that this was a good way to determine that buyers were fading which would mean the stock was “overbought” and ready to cycle down again. Lane’s work focused on the trading range or sideways patterns. Lane used an 80% high range and a 20% low range to quantify the overbought and oversold conditions.
Price Rate of Change is a momentum oscillator that measures price from one period to another period of time.  PRC, aka ROC, measures the difference between the current price and the price X number of days ago to expose momentum energy in a stock’s current or recent price action.
%B is a relatively new indicator from John Bollinger CMT, who wrote the magnificent Bollinger Bands.  %B is a relational oscillator based on the high and low levels of the Bollinger Bands.
There is also Wilder’s Relative Strength Index which is not an index at all but compares price relationships in a unique way.  It compares the current price to the price X periods ago within a 70% high and 30% low range.
Williams %R is a variation of RSI, so it is an adaptation, not an original indicator. Always use the original primary indicator, not some mildly modified version of that indicator.
What this means to you as a trader is that you need to first understand what the indicator writer was intending to have the price oscillator REVEAL, how it works, what market conditions are best suited for that indicator, and what SETTING you should use for your personal trading style.
Day traders will use different settings than a momentum or velocity trader. Swing traders will have slightly longer settings than a momentum trader, and position traders will use periods that are longer than swing traders use.
When you go to choose a price oscillator or ANY indicator for your trading, don’t just rush to use what is taught in a webinar or what you hear other traders use, you need to first consider the proper application for that indicator.
As an example: a momentum indicator should be used during velocity and moderately trending market conditions. It should not be used in a trading range or sideways market.
Platforms should use RSI which is better at revealing the compression of price before a breakout.
%B is perfect for those who use Bollinger Bands but also need a price oscillator that tracks sudden momentum action after quiet price action.
To learn more about leading indicators, sign up to check out this video.
Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor & Developer of TechniTrader Stock Market Courses
MetaStock® Partner

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