Advance Breakdowns And Breakouts In Oscillators by Martin J. Pring
Oscillators have always been a popular tool for traders. Here are some guidelines from a leading market analyst on various ways to apply this widely used technique.
I think of momentum as a generic term that embraces all kinds of oscillator-type indicators. Stochastics, the relative strength index (RSI), the moving average convergence/divergence (MACD) and my own KST system are all statistical variations of price data, which appear as oscillators when plotted on a graph. Some are relatively smooth, such as the stochastic indicator, while others, such as the rate of change, are more jagged in nature. All are subject to the same principles of interpretation, but their individual characteristics differ.
Differing characteristics means that for any indicator, the usefulness of an individual interpretative technique will depend on its specific attributes. For example, the rate of change lends itself to trendline analysis, but the slow-turning stochastic does not. It is better suited to reversals in direction and moving average crossovers. This is not to say, however, that you can never construct a trendline from a stochastic, just that this is not the preferred method of interpretation because trendlines cannot be constructed very often. This article describes one of these interpretative momentum principles: advance breakouts and breakdowns.