V.6:3 (97-98): Reading indicator charts by Arthur A. Merrill

Reading indicator charts by Arthur A. Merrill

In the preceding column, I discussed the smoothing of indicator data. When you have tamed the wild fluctuations, how do you translate the result into a forecast? How do you read the chart?

There are several possible interpretations. A method that works well with one indicator may not be the best for another. The selection of the method is usually made by common sense and trial and error. We'll look at five of the most common and useful.

Unusually high or low

For most indicators, I assume that the indicator is trying to tell me something when it is unusually high or low.

For oscillators, this is a very useful method. However, this method should not be used if the indicator has an upward or downward trend. For example, if it has an upward trend, the most recent data will appear "unusually high" and will tell you no more than the fact that it is recent.

What should you consider unusually high or unusually low? I usually use a simple benchmark: I consider the top 25% of the data points to be unusually high and the lowest 25% to be unusually low. The middle 50% is called "no forecast." In Figure 1, 25% of the points are above the upper dashed line and 25% are below the lower dashed line.