Page 216 - THE MARKET WHISPERER

212 PART 7 - Indicators: The Trader’s Compass

Oscillators

The oscillator is a technical tool that assists in identifying overbought and
oversold statuses, and signals that the current trend is reaching its end
before the change shows on the chart. In other words, the oscillator is a
kind of indicator which helps identify when “stupid money” is entering
the market, contrasted with “smart money” leaving the market; and vice
versa.

When overlaid on a chart, oscillators are very useful for identifying the
extreme points and overbought and oversold prices of stocks. Sometimes,
though, oscillators can be too effective and cause unnecessary and even
mistaken trade activity. This is why an initial signal for entry is insufficient,
and it is best to wait for the second, confirming signal. When the oscillator
does not move in the same direction as the trend, it is alluding to an
approaching trend reversal.

Unlike trend-following technical tools, oscillators are very effective
when the stock is moving sideways. As the field of technical analysis
develops, there are increasing numbers of oscillators. In general, because I
am a total fan of “understanding the stock” and because I don’t like a lot of
“noise” on the chart during the trading session other than volume, I tend
not to use oscillators. At the outset of my trading experience, I was far from
understanding the stock and needed oscillators just as you will during your
initial stages. Hopefully, over time, you will no longer need them either.
Some years down the line, when you’re completely free of dependence on
oscillators, you will be able to operate faster and more effectively.

Despite the above, however, when it comes to screening stocks, there
is no substitute for oscillators. Identifying candidates for trade at the end
of the trading session, before the new session opens, or during the trading
day all require using oscillators to help you prepare a filtered, useful list of
choice stocks.

Now is the time for an important cautionary note: sometimes new
traders attempt to use multiple oscillators simultaneously, magnifying the
“noise” as they work: usually, the result can be summed up as “not seeing
the forest for the trees.”