Stocks & Commodities V. 32:7 (10-16): Profit With Dual Oscillators & Bands by Barbara Star, PhD

Profit With Dual Oscillators & Bands by Barbara Star, PhD

The Power Couple

Channels make excellent tools for identifying trends, breakouts, and retracements. Here’s one way to combine channels with indicators to better identify the direction of price and the strength of that movement.

In several of my previous STOCKS & COMMODITIES articles, I have incorporated various types of channels — such as Keltner channels, Donchian channels, and the commodity channel index — as part of the trading strategies I’ve described. This article presents another way to incorporate channels by using two indicators found in most charting packages: detrended price oscillators (DPO) and Bollinger Bands.

Dual Bollinger Bands form the channels that show transitions in price movement. The detrended price oscillators detect early changes in price direction. Together they reveal price direction and price strength. This article will explain how to construct them and apply them to trading.

DUAL DETRENDED PRICE OSCILLATORS

Most computer charting programs include the de-trended price oscillator (DPO) as one of their built-in indicators. Its intent is to eliminate the trend and identify the smaller cycles that take place within the larger predominant trend. It does this by subtracting a displaced moving average from price.

However, I discovered that not all of the charting services calculate and display the indicator in the same way. Some shift the indicator back so it ends at the approximate half cycle several bars prior to the current price bar (for example, as the charting site StockCharts.com does). Other charting services center the indicator so that it ends under the current price bar (for example, the charting site FreeStockCharts.com). Readers interested in the various mathematical calculations will find links in the sidebar “Detrended Price Oscillator Calculations.”