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AВр UniqueВр OscillatorВрforВр Day Trading

An oscillator is a timing indicator which is comprised essentially of two or more moving averages. To oscillate means to move back and forth between extremes. Hence, an oscillator is an indicator which changes values between two extreme levels. The stochastic indicator is an oscillaВэtor, and so are RSI, MOM, and ROC. Not all oscillators are the same even though they are based on the same general idea. The basic conВэstruction of a two-line oscillator appears as shown in Figure 13-1. As you can see, the oscillator values generate buy and sell signals when they change their positions by crossing over one another. The simplest oscillator consists of two moving averages.

Such indicators as the moving average convergence-divergence (MACD) consist of exponential moving averages which generate buy and sell signals when they cross, very similar to the relationships shown in Figure 13-1.

Although MACD is a very effective technique for day trading, there is another oscillator method which I feel has more potential for the day trader. MACD, in my experience, is a very effective method for trading short-term price swings of from 2 to 6 days' duration.

Figures 13-2 and 13-3 illustrate how MACD buy and sell signals occur on the intraday S&P futures charts. As you can see, MACD is an outВэstanding indicator for trading such moves. MACD is also an acceptable indicator for day trading, but I find that another oscillator is preferable. Specifically, I am referring to an oscillator which compares opening to closing prices on an intraday basis.

Opens versus Closes

Although there is no such thing as a 5-minute open or a 5-minute close, the concept is a simple one to understand. The first price tick of a 5-minute period is arbitrarily defined as the open, and the last tick of the 5-minute time segment is arbitrarily defined as the 5-minute close.

The relationship is a simple one. It is based on the well-established pattern for closing prices in a bull trend to be higher than opening prices and for closing prices in a bear trend to be lower than opening prices. By comparing a moving average of the 5-, 10-, or 15-minute openings with a moving average of the 5-, 10-, or 15-minute closings, we can quickly detect trend changes either before they occur or very early in their inception.

Figures 13-4fl and 13-4& illustrate the ideal signals and relationship to which I am referring using a 5-minute chart of S&P futures. Examine my buy and sell signals in relation to price trend changes during the day. Figure 13-5 shows the same oscillator combination and signals on a Swiss franc chart.

As you can see from the illustrations, the signals are very reliable and tend to signal major moves. I call this method the O/C oscillator (O/C). Although the O/C method is wonderful for catching large intraday price swings, it does have its limitations which I will discuss later on.

Before doing so, however, I'll review the construction of the O/C oscilВэlator, and then I'll give you rules for using it.