Oscillators and Indicators

With this section we are going beyond the territory that many spread betting books stick with, and looking at indicators and oscillators that are used by technical analysts. It is your duty to use all the tools at your disposal, and these tools are available on any common charting package. It used to require work to use any of these indicators, but with the widespread adoption of computers and online facilities, there is no excuse for leaving them out. Anything that gives you further information can serve to give you the edge in the competitive field of spread betting.

Before you panic and say you don’t want to be using a lot of different indicators, let me put your mind at rest. Real traders don’t use all these indicators every day. Instead, they know about many of them and they try them out to see which they like, and which seem to work well in the markets they are trading. Then they stick with just a couple for most of their work. After all, that just makes sense. Either all the indicators work effectively and give the same message as each other, in which case they are redundant; or they will be giving different messages and making it impossible to know when to put on a trade. So the practical solution is to keep just enough information so that any apparent trading opportunity can be verified with a different tool, without laying yourself open to conflicts and decisions of which indicators to use.

And on that theme, you should take care to make sure that any tools you use are based on different aspects of the market. If all your tools are based on, say, moving averages, then if the moving averages are affected by spikes or irrational movement of the prices, all your tools will be affected. For example, earlier I mentioned that you can get verification of traders’ sentiments by looking at the volume of trading, and volume is another factor that you can take into account with an appropriate indicator. In fact, you can include pattern recognition as another type of indicator, even though it requires some discretion in application. The important thing is not to depend on indicators that make their calculations from exactly the same data, otherwise there’s no verification at all.

In addition to the tools which we covered previously, such as all the different types of moving average, the moving average envelope and Bollinger Bands, an account with a typical broker online gives you access to the parabolic SAR, MACD, fast and slow stochastics, RSI, Williams %R, momentum, on balance volume, DMI, Chaikin’s volatility, and a whole range of charting styles which we’ll talk about in the next section. A subscription to a charting service such as ShareScope gives access to a multitude of other indicators such as average true range, directional movement (ADX), McClellan oscillator and many more. When traders invent or refine another tool, and it seems to work, then it gets added into the list for the software company to include in the charting package.

I won’t be explaining all these tools in this section, as some are rarely used and they are in any case described by the charting supplier. I’ll concentrate on the ones that are in general use because they have been found to be effective, and explaining the overall principles that apply to using any of them.

As mentioned in the previous section, the MACD can be used as an oscillator, and all is basically means is that the indicator will vary between two extremes, one of which is called overbought and one oversold. The meaning of these was described just a couple of pages ago, and they usually precede a change in trend. An indicator provides further information, such as the ADX which describes the strength of a trend. An indicator will try to clarify what is happening in the price move. Sometimes the two terms, oscillator and indicator, are used interchangeably. They all work to some extent, otherwise they would not have been adopted into general use, but you need to test them in the market you are betting on and try to optimize any variables, such as number of days, for maximum benefit.

Using Oscillators to get a feel for the Market

Oscillators are great tools when used wisely. They offer many ways in which they can be used, divergence, over bought/oversold, crossovers to name a few.

They can also be used to get a feel for the markets, whether trending or in a range.

If a trader wants to use oscillators to get a feel for the markets, what they need is some recent price action and a belief that the current trend or range will continue long enough to create some more opportunities.

For example, if you believe you are in an uptrend, and the trend has quite a way to go, you can then use an oscillator such as the ‘stochastics oscillator’ to tell you how deep the corrections are likely to go, based on how the oscillator behaved recently.

All you need to do is adjust the oscillators variable until the indicator produces a repetitive signal and one that you feel you can use.

Take a look at the chart below.

This is a daily chart and what has been added is a stochastics with a 25,5,5 setting. The most important variable was the first number, 25. Not because 25 works better than any other number, but because for this market, during this trend, 25 offered simple triggers as to when the corrections were likely to end and the trend continue, as shown by the arrows.

All you do as the trader is determine what number gives you the best signals or triggers for a possible trade.

When in an uptrend, look to use the oscillator as a signal that a correction is ending, and not when the trend itself is ending. Likewise, in a downtrend, use the oscillator as a signal that a bear market rally is ending, and not the downtrend itself.

However, when in a ranging or sideways market, you can use the oscillator as a way to signal when the top and the bottom of the range have been made.

Stochastics Indicator

Note: Do keep in mind that there are dozens of indicators and they all work some of the time but none work all of the time. For instance, in a ranging market moving averages and indicators don’t work – just use price action, support and resistance to buy the dips.

You won’t find many traders who can tell you what percentage of times an indicator wins or loses because most don’t appreciate that the indicator by itself is a long term 50/50 tool. There’s no licence to print money. The indicator mostly gives you no advantage of winning a trade but should be considered as a tool to help with discipline. What the indicator does do well is teach you when to pull the trigger on a trade and to and exit. Psychology, money management, risk : reward and choice of stops is where the money is made. I reckon it’s OK to follow an indicator but they are best used to confirm a chart pattern trade such as a breakout, reversal or higher high, higher low. Every trend that has ever existed has come from a breakout or a reversal. Every trend has HHHL or LHLL patterns. Follow the chart patterns in a similar way that you read music.