Friday, July 28, 2006

Oscillators

Any oscillator will show you the pricechart in a kind of distorted way. If you just once switch to a Line on close chart and compare what you see with your Oscillator of choice (CCI, STO, RSI to name the most common) you will notice the similarities. Any oscillator is a derivative of price, it is based on pricedata, so that behaviour is to be expected. Price itself is the most important information you have in trading. The oscillator is secondary, the oscillator is giving you the Go ahead, the green light, when price has already told you, that something is about to happen.

Yesterday 1280 was major resistance in the ES. Price going up to 1279.0 1279.25 .. 1280.50 1281.00 .. 1280.50 1279.75 and suddenly you see a signal forming in your oscillator of choice and you take the Short. Why? Because price tells you, hey I'm at major resistance maybe it's a good idea to go short somewhere here. But you wait, as 1280 was broken to the upside and then the oscillator tells you, hey dude, now is the time to short.
Globetrader_85
Do you need the oscillator to tell you that there was resistance in the ES. Sure not. It was selfevident. Do you need the oscillator to short the rebreak of 1280? No. But it helps to see the signal in the oscillator, to get a clear go ahead.

Problems start, if you look first at the oscillator and see price as secondary information. You get a green light on the oscillator and you look at price and say, hey yes, that looks good, let's take it, but it fails. Now you blame the oscillator for giving wrong signals and you start finetuning. And you have success with eliminating bad signals the oscillator gives you. Unfortunatly that finetuning also eliminates good signals. Everyone trading for some time has been down that road and knows what I'm talking about. Finetuning isn't the solution. Changing perspective is!

Price comes first, then comes the oscillator. If you know how far an average trendmove goes in the ES, in the YM, in the Russel, in the contract you trade, then we can start talking business. Take the ER2. A trendmove usually goes for 10 to 12 full points. (see the second chart example from yesterday) Sometimes it stops at 8 sometimes it goes 14 but that's really extended and only to be expected with very bleak news. So Russel is down 6 points and you think, that might be a bottom, let's try a long, and you'r not the only one thinking that way, so your oscillator will take notice of the prices stalling and give you a long signal. But Russel goes 1 or 1.5 points stalls again and the downtrend resumes. We all know that. The long signal failed and it's one of these signals we try to eliminate from our tradesetups.

But if the Russel is down 12 and your countertrend long signal forms then it might be worth taking, maybe you wait for confirmation of a double bottom, maybe you see we already did 3 legs down and somewhere we remember there are usually 3 thrusts to a top or bottom.
And you can as well anticipate the signal forming on the oscillator! Why? Because you know the contract you trade, you know it's behaviour and you know, it's a better than 85% chance that a countertrend signal will work, if you see price up or down at least the average trend move range.

1 comment:

drbob said...

Hi Chris,
Just browsing the blogs and I came across this post on yours. This concept that you mention here has been something that I have been using everyday in trading for about 8 months now. It was first brought to my attention by reading Frank Dilernia's book and working and modifying the conecpts that he uses to fit my needs.

I don't know if any other software has the capability but Fibonacci Trader is a necessity for me to standardize this range analysis over any market and time frame and have all the information available real time. Robert Krausz had Carlos create a few indicators in FT that calculate prior ranges for any specified time interval and plot those ranges on the current charted time frame using the pivot (balance point in FT) as the anchor to work off of.

One of the truly unique insights that Robert had was fibonacci calculations of the ranges. You can set these within the indicator preferences so that the range plot for the current time frame shows up with levels based on these calc. drawn for you that change dynamically as you move into the next time frame.

Other indicators take these same range calulations and take an average of the ranges for a specified number of periods and apply the same fib work on those ranges and plot them as dynamic range projections.

The other unique feature of FT is that every chart is assigned 3 time frames and every indicator including the range ones is also assignable to any of the three time frames. So your one chart displays information garnered from three time frames.

This is just a brief synopsis of what is there, but if you would really like to explore the concept of trading via range information in an efficient manner , I suggest you take a look. I have removed all oscillators and moving averages from all of my charts and only have these levels plotted.

I only use range bars also, not minute,volume or tick. Taking trades off of observed levels on these charts will take the new user some time to be comfortable with, but the rewards are truly remarkable. Unloading oscillators and other indicators will be something that not all will do.

Your comments on seeing levels and taking the trade as opposed to waiting for an oscillator confirmation just rang so true with me that I thought I would share this with you and your readers.

Best wishes.
Bob