V.3:6 (204-206): Reading between the lines by John Navarte

V.3:6 (204-206): Reading between the lines by John Navarte
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Reading between the lines by John Navarte

Charting oscillators is one of the most powerful technical analysis tools available for the private and professional investor. In this article, we will consider two standard oscillator constructions. The first helps you recognize "price excesses" relative to moving averages; the second analyzes changes in "price momentum."

Oscillator Formulas

The oscillators you can chart are often referred to as "difference curves." These are obtained by computing the difference between two quantities (for example, the closing price and its moving average, or a moving average and its value 10 days prior).

To draw an oscillator, you must specify two quantities and then plot the difference between them daily. A line chart is used to connect the plotted points. When the oscillator is drawn below the price bar chart, the two charts can be compared.

Oscillators usually involve moving averages. Because they are accepted indicators of price trend, you should use moving averages with time spans that reflect your investment philosophy. For example, you would not want to base a short-term trading strategy on momentum studies of a 200-day moving average.

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