When Oscillators Are Most Useful

Most oscillator buy signals work best in uptrends and oscillator sell signals are most profitable in downtrends. The place to start your market analysis is always by determining the general trend of the market. If the trend is up, then a buying strategy is called for. Oscillators can then be used to help time market entry. Buy when the market is oversold in an uptrend. Sell short when the market is overbought in a downtrend. Or buy when the momentum oscillator crosses back above the zero line when the major trend is bullish and sell a crossing under the zero line in a bear market.

The oscillato is just one tool among many others and must always be used as an aid, not a substitute, for basic trend analysis.

There are times when oscillators are more useful than at others. During choppy market periods, as prices move sideways for several weeks or months, oscillators track the price movement very closely. The peaks and troughs on the price chart concide almost exactly with the peaks and troughs on the oscillator. At some point, however, a price breakout occurs and a new uptrend or downtrend begins. By its very nature, the oscillator is already in an extreme position just as the breakout is taking place. The trader is faced with a dilemma. Should he buy the bullish breakout in the face of an overbought oscillator reading? Should the dwonside breakout be sold into an oversould market? In such cases, the oscillator is best ignored for the time being and the position taken.

To summarize, give less attention to the oscillator in the early stages of an important move, but pay close attention to its signals as the move reaches maturity.