V.7:6 (177-179): Speeding up the oscillator by Grady Garrett

V.7:6 (177-179): Speeding up the oscillator by Grady Garrett
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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.

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