All oscillators essentially tell us the same thing; how price has performed over a specific time. At first, oscillators appear to be the perfect stock or index trading tool because so often they give excellent buy and sell signals. But, the more you use oscillators, the more you realize that oscillators give an equal number of false signals. An oscillator actually measures the momentum of data, whether it is price, volume, or opens interest. An oscillator will help show the speed at which the information is changing. Thus, it can also define over-bought or over-sold areas. The reason people have continued interest using oscillators is that they have the capability to give indications in advance of market turning points.. oscillators lead, sometimes they lead far too early and instead of buying a bottom, you are buying falling daggers and getting sliced up. Even the best oscillators consistently give premature buy and sell signals…The largest failure of oscillators is their inability to deal correctly with the time cycles involved…. If you use a 7-day average, you will quickly find that the maximum move you are going to catch is one that lasts somewhere in the area of 3 1/2 to 9 days. In other words, the type of moves the oscillator catches cannot, by definition, be much longer than the time period measured in the oscillator.
One thing noticed is that the traditional short term oscillators, such as those featured in most trading and investing books, will turn very positive at the start of a major upmove in the market but quickly show divergence and overbought readings, causing most traders to sell short somewhere after the first leg of a bull market. They then take a short position on the market and hold that short position in one form or another, actual outright short or afraid to purchase, for the next three or four legs of the bull market. That can be a costly experience. This happens because the time measurements in the oscillators they are following are too short-term in nature to catch a major move. Time is one of the most critical elements.. three time cycles that generally have been the most dominant time cycles in the market short term 7days/medium term 14 days/ longterm time 28days .
There will be two requirements for a buy and sell signal to execute a market position using the oscillator. first requirement is that we have a price divergence from the oscillator. In the case of a buy we must have had a lower low in price that was not matched by a lower low in the oscillator. In the case of a sell we must have had a higher high in price that was not matched by the oscillator. Second requirement is, await a trend break in the Oscillator to produce the actual signal.
A moving average is a line drawn on a stock chart representing the average price of a stock over a given period. They smooth out the gyrations in the stock price so that the trend becomes more obvious. The most common types of moving averages are the SMA (Simple Moving Average) and the EMA (Exponential Moving Average).The SMA takes a stock’s prices over a given period and averages those prices. A line is then drawn to represent the average price over time. Simple Moving Averages are slow to react to recent price changes. An Exponential Moving Average is calculated in a similar manner to the SMA except that the EMA places more weight on recent prices. This means that they react more quickly than SMAs to recent price action.
Two important things to realize about moving averages, no matter what type you are considering, they are lagging indicators. They show you where the price has been. They don’t predict future price movements. They only work in trending markets where there is a clear and distinct trend. They don’t work in ranging markets where the price is bouncing up and down between support and resistance levels.
Regarding “trending” and “ranging” stocks: Some traders use an indicator called ADX (Average Directional Index) to determine if a stock is “trending” or “ranging”. Moving averages help you to identify the direction of the trend. Stock prices can only move three ways – up, down, or sideways. We are only interested in stock prices that are going up for “long trades”, or down for “short trades”. Trend strength can be indicated with moving averages according to the angle of the slope. A steeper slope means a stronger trend.If you use two moving averages on the same chart, one slow and the other one fast, you can get an idea of the strength of the trend by observing how far apart the two moving averages spread as they rise. Two very common MAs are the 50-day and 200-day. The 50-day (the faster MA) represents the intermediate-term trend and the 200-day (the slower MA) represents the long-term trend. If both MAs are rising and pulling apart then the trend is strong.
The intermediate- and long-term trends are the most important. 50-day and 200-day MAs are adequate for determining the state of the market. Before buying/trading a particular stock, part of your trading plan might insist on the overall market that you’re investing/trading in be above rising 50-day and 200-day MAs. You may also want to see that the two MAs are spreading apart (indicating trend strength).Trading in the direction of the overall market increases your chances of a successful trade. Monitoring the dominant market trends is part of a trader’s due diligence.
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