How to trade with an oscillator

[Smart_trade]

Manoj,

You will get answers to your questions in the above post...

ST

 

[Smart_trade]

Deleted as chart was attached successfully

 

[sibumajumdar]

I would like to share an important phenomenon regarding oscillator overbought/oversold conditions. Whenever an oscillator like Stochastics,( or even RSI,ROC etc ) stays above the overbought limit for more than 5 bars without taking a dip from overbought to neutral zone....the market has a lot of steam left further to go up, market then continues upward journey,then comes down,then goes into overbought zone again but shows negative divergence and then only it comes down...till then it keeps making higher tops. This is a very strong bullish signal to trade.....

Mirror image for oscillator staying in oversold region for more than 5 bars...

The above phenomenon was what was happening towards the later part of the session yesterday (26-06-09).... I traded this observation yesterday and thought I will share with all....


Smart_trade

Dear ST will u plz state this 5 BARS of 5 min or 1 min TF. Thanks.

SM

 

[Smart_trade]

Dear ST will u plz state this 5 BARS of 5 min or 1 min TF. Thanks.

SM

Dear SM,

Whichever timeframe you are trading...in this example we were trading 5 min so 5 bars of 5 min timeframe...Sorry the post was not clear about TF as it was posted in Pride's thread where 5 min TF is used....the next post chart is Bank Nifty chart of 5 min TF....

ST

 

[Satyen]

Wow Dada a first thread from you will be eagerly watchinng to learn

Regards
Satya

 

[Prabhjeet]

Nice Initiative ST, looking to learn about oscillators and their Proper use. :thumb:

 

[Smart_trade]

Wow Dada a first thread from you will be eagerly watchinng to learn

Regards
Satya

Hi Satya,

Never had any intension of starting the thread....but as this oscillator stuff was in Pride's thread...posted a post there...then questions...did not want to clutter Pride's beautiful thread ...so started a new thread...now as the thread is there,scribling down a few thoughts.....no intentions of having a great educative thread...it takes too much time and energy from our trading which is our main focus....

Welcome to the thread....

Look forward to some great posts from you....

Smart_trade

 

[sibumajumdar]

To understand the correct way of trading on oscillators let us study the Nifty futures 60 min chart. The stochastic oscillator is doing a great job till May 09end...calling each top and bottoms and our oscillator trader is on a high and feels that he has figured out everything in the markets and he is on his way to top the next batch of Market Wizards......But market has its own ways...we all know that....:lol:All of us have been there....

The problem areas for the oscillator trader are as under :

1) Up trending market from 27-5-09 ,1:00 bar to 2-6-09 ,11:00 bar

2) Up trending market from 9-6-09 ,3:00 bar to 12-6-09 ,12:00 bar

3) Down trending market from 12-6-09 ,3:30 bar to 16-06-09,12:00 bar

4) Down trending market from 17-06-09 ,3;00 bar to 18-06-09 ,3:30 bar

If he can handle the above 4 markets successfully,our oscillator trader is the king....

Let us see how he can handle these periods...I will explain first two cases,rest 2 are mirror images...

1) 27-05-09 ,1:00 bar onwards.....

On 27-5-09 at 1:00 bar the stochastic oscillator goes into overbought zone and that is a mouth watering trade for our trader friend to go short ( most will trade like this and repent later ). He goes short and gets killed in the subsequent market acyion.

The Oscillator Entry Qualifiers are as under :

1) The oscillator should have gone to overbought zone.
2) Wait for a bar where the oscillator flips...ie comes out of overbought zone and comes in neutral zone....
3) In doing step No 2 the oscillator should not have stayed in overbought zone for 5 bars and more
4) Wait for a downclose ( meaning close less than earlier day's close)
5) Ensure that by that time oscillator does not go very near oversold region
6) Sell when the low of the downclose bar is broken on downside.....

If you observe all 6 qualifiers you will see that there was no shorselling opportunity in this uptrend.....our trader friend is home safely....and made money in longs....

2) 9-6-09 ,3:00 Bar onwards

Oscillator went into overbought territory and stayed there for 9 bars.....so no shortselling ideas to be entertained....

Here the market will move to neutral zone,dissipate the extra bullish pressure ,then go to overbought region,fulfill all 6 qualifiers,give negative divergence and then change its direction to down...let us see what it did...

Come to 12-06-09 ,12:00 bar...after dipping into neutral territory the oscillator has gone to overbought zone again....it stayed there only for 1 bar.....next bar 1:00 it dips again into neutral zone,gives a downclose...Now all qualifiers satisfied...the low of the 1:00 bar cracked in 12-6-09 , 3:00 bar and that is an ideal sell entry....mkt never looked up after thatAlso note the classic negative divergence here,the mkt making new higher top oscillator making lower top....all perfect...

The other two are mirror images in downtrend.Our friends can easily figure them out well .....

Best wishes....

Smart_trade

Dear Sir,

Iam fully confused with lines in point 3 of Oscillator Entry Qualifier. Plz elaborate little more ---should not have stayed OB zone >5 Bars. If silly plz excuse me. Otherwise everything is comprehensible. BTW u deserve many many thanx for sharing ur keen observation. Thanx again.

SM

 

[Smart_trade]

Dear Sir,

Iam fully confused with lines in point 3 of Oscillator Entry Qualifier. Plz elaborate little more ---should not have stayed OB zone >5 Bars. If silly plz excuse me. Otherwise everything is comprehensible. BTW u deserve many many thanx for sharing ur keen observation. Thanx again.

SM

The qualifier is correct SM, for sell we want that the oscillator has not stayed in OB zone for 5 bars or more....if it has stayed for 5 bars or more we will not sell on its flip as the oscillator though has come down,the market will make still higher tops and take out our stop loss...

We want a mild overbought reading ( meaning oscillator to stay for less than 5 bars in OB zone) to see the other qualifiers for perfecting a sell entry.

Hope I am able to make it clear now....

Smart_trade

 

[Rajadhiraj]

The Oscillator Entry Qualifiers for a Short Trade are as under :

1) The oscillator should have gone to overbought zone.
2) Wait for a bar where the oscillator flips...ie comes out of overbought zone and comes in neutral zone....
3) In doing step No 2 the oscillator should not have stayed in overbought zone for 5 bars and more
4) Wait for a downclose ( meaning close less than earlier day's close)
5) Ensure that by that time oscillator does not go very near oversold region
6) Sell when the low of the downclose bar is broken on downside.....

Best wishes....

Smart_trade

Thanks Smart_trader for a great post :clapping::clap::clapping:

:thumb: The Oscillator Entry Qualifiers for a Long Trade are as under :

1. The oscillator should have gone to oversold zone.
   
   
2. Wait for a bar where the oscillator flips...ie comes out of oversold zone and comes in neutral zone....
   
   
3. In doing step No 2 the oscillator should not have stayed in oversold zone for 5 bars and more
   
   
4. Wait for an upclose ( meaning close more than earlier bar's close)
   
   
5. Ensure that by that time oscillator does not go very near overbought region
   
   
6. Buy when the high of the upclose bar is broken on upside.....