Forum Archive Index - April 2004

[Phaedrus <Phaedrus@techemail.com>]

T100,
     It is important to understand the characteristics of oscillators when they 
are applied to trending stocks. Stocks that are in an uptrend will normally 
give a string of Sell signals, all of which are wrong (premature) except the 
last one. They will also normally give a much smaller number of Buy signals, 
all of which will mark good entry points - except the last one. With downtrends 
the situation is reversed - you get a string of Buy signals, all premature 
except the last one, and fewer Sell signals, all of which mark good shorting 
opportunities - except the last one. Now, it is obvious that we do not know 
which signal is the last one until after the event, so, if a stock is clearly 
trending, oscillators give useful signals only with the trend. Counter-trend 
oscillator signals are unreliable on their own, but if they coincide with 
failing trend indicators they are much more reliable.
 When you say that I "highlight the merits of using oscillators for a stock in 
an uptrend" in that ShareTrader FBU post, the sole point I was making there 
with regard to oscillators was that they mark good entry points into trending 
stocks. Did you notice that I was only plotting Buy signals and totally 
ignoring the "Sells"? The post was highlighting the merits of using trendlines.
 There is another factor at work here as well. Most oscillators use a fairly 
short period, for example 5 days for the Stochastic oscillator, 14 days for the 
Williams'%R etc. If this default period is markedly increased, the oscillator 
becomes much less sensitive to daily volatility and starts to behave more as a 
trend indicator. You may have noticed that the W%R period I was using for FBU 
was 90 days. The longer the period, the more blurred the distinction between 
the two classes of indicator.
 Rather than struggling to combine trendlines and oscillators, a more fruitful 
endeavour might be to combine trendlines with other trend indicators. 
Oscillators can provide useful additional information, but it is mandatory to 
check other indicators before taking any action on an oscillator signal, 
especially if the signal is counter-trend. 
 Many people totally avoid these complexities by not using oscillators at all 
on trending stocks, utilising multiple trend indicators, trailing stops and 
such to monitor their trade.
                Phaedrus.

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