When to Use Oscillators for Maximum Trading Effectiveness

06/12/2015 12:01 am EST

Focus: STRATEGIES

This idea comes from many years of live trading (real money, not demos, etc.) and sticking to figuring out when to use the typical (rebased/indexed) oscillators like the MACD and stochastic, says trader Bradley Taylor.

I don't believe in just entering on an under-20, over-80-type idea, but rather when the Stochastic, for example, is under 20 and something else happens: candle pattern, on Fib retracement, at support/resistance, etc.

I use an idea here called market form. This is another idea I use which is based on Dow Theory of higher highs and lower lows for deciding the trend direction and when the market is ranging.

When to Use It

1. The market is ranging with form. Long and short trades work with high probability

Here, the market is in a range with good form. The oscillator (Stochastic) in this case works well. For shorts and longs...


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2.  The market is ranging without form. Oscillator (Stochastic) doesn't work well. A lot flatter and not that many profitable trades, more false signals...

 


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3. The market is trending with form. Here, only look to take trades in the direction of the trade. The Oscillator is good for entry only and not exits.


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4. The market is trending without form. There is no signal in the trend direction and it will give signals against the trend but has poor performance.


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I hope this is helpful and stirs up some thinking around the different movements of the market and Oscillators. We have shared four of them here.

By Bradley Taylor, trader and conductor of trading surveys

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