Sunday, June 15, 2008

Using oscillators

Oscillators are indicators that you can put on your chart. These indicators use mathematical formulas to try and find the best time to buy and sell a given security.
Some traders will use them as primary indicators. When their indicators tell them to buy they buy. When they tell them to sell they sell.
The problem with that is that all indicators have several false signals as well as good signals. If you were trading one of them by themselves you would come up with several wins and losses.
That is why it is best to use them as secondary indicators after price. For example if a stock is in an uptrend then a buy signal will have a much greater chance of being right then if it wasn’t up trending. The same can be said for a downtrend. If a stock is down trending then a shorting signal will be much more reliable then a buy signal.
You may also choose to combine an oscillator with a price signal such as a bounce off of support or a break above resistance. Combining an indicator with a price signal can help to weed out bad signals and give you a higher rate of success.
Another thing you can consider doing to weed out false signals is combine different indicators on your chart. If you have two different indicators that you need to see buy signals from in order to buy can give you more accurate buy signals.
In this case if one indicator says buy but the other does not, you should not buy. But if one says get out of a trade and the other says stay in you may choose to exit it. Using more the 1 indicator can give you a system that produces strong buy signals and weeds out bad trades.
A word of caution however, many traders will try to combine too many indicators at one time. Using a ton of different indicators can actually work against you and make it harder for you to trade.

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