Speeding up the oscillator
by Grady Garrett
In 1986, I began a study of Standard & Poor's 100-stock Index (OEX) in search of a reliable mechanical
trading indicator. This was a volatile time for the OEX— the bull market was getting its second wind and
I idealistically looked for something to help pick tops and bottoms.
A popular and time-tested study is the moving average oscillator, which is simply a histogram of the
difference between a fast (shorter-period) moving average and a slow (longer-period) moving average,
either simple or exponential.
The classic method to trade the oscillator is to enter long on positive crossovers when the fast-moving
average crosses above the slower-moving average and to exit long on negative crossovers. For my
research, I assumed the trader was always in the market, so that exiting long implied entering short and
vice versa. This type of system generally works best in slow-trending markets and seems to become
inefficient in very volatile markets that frequently change direction.