The purpose of oscillator analysis is to confirm highs and lows in a market through the identification and evaluation of overbought and oversold levels. The nature of cycle highs and lows is that they most often occur at overbought and oversold levels. The combination of oscillators and cycles allows:
- The identification of the most significant patterns occurring at overbought/oversold levels, which are often the cycle highs and lows.
- Establishment of time expectations for the next cycle high or low and significant overbought/oversold level.
Remember
Cycles contract, extend and skip beats, while oscillators do not always overextend at cycle highs and lows. Even when they do overextend they often reach their most overextended before or after the exact price high.
If cycles are not exact in their timing, and oscillators are not consistent in reaching their extremes at cycle highs and lows, how can the combination of the two be anything more than inconsistent?
Note
Awareness of the limitations of cycles and oscillators is half the battle. Knowing what they cannot do demands the development of high probability parameters that will make Oscillator/Cycle Combinations more exact in the identification of cycle highs and lows and in trading decisions.
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First, do not expect oscillators to identify every cycle high and low. There will be times when a high or low will not show up as a significant overbought or oversold level in a particular oscillator … so, use several oscillators.
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Second, develop historically researched patterns that will indicate a cycle high or low with high probability and act when these parameters are met, using mechanical Setup/Trigger entry combinations.
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Third, use market-proven, money management concepts to control risk and optimize profits.
TECHNIQUES
that enhance the performance of most oscillators, take the judgment out of the identification of cycle tops and bottoms, and mechanize the market entry process.