Overview
The Price Oscillator displays the difference of two moving averages in either points or in percentages. This technical indicator is very similar to the MACD, but there are two main differences. (1) The trader can define any two input parameters for the periods of the moving averages, while the MACD is always 12 and 26. (2) The Price Oscillator can be expressed in terms of percentages, so buy and sell signals can be generated as the price oscillator shifts from positive and negative territories.
How to Calculate The Price Oscillator
To plot the Price Oscillator in terms of points use the below formula:
Shorter Moving Average - Longer Moving Average
To plot the Price Oscillator in terms of percentages use the below formula:
(Shorter Moving Average - Longer Moving Average)
------------------------------------------------------------------- * 100
Longer Moving Average
Trading Methods
There are numerous trading methods for the Price Oscillator. Since the indicator is a trend following system, majority of traders follow a very simple rule of buying when the shorter average crosses above the longer average and conversely when the shorter average crosses below the longer average a sell signal is triggered. Another method is to fade the signals and go in the opposite direction. This generally works better in choppy markets, as the moving averages are not permitted to trend due to a range bound market.
Positives
As stated above, the Price Oscillator is a trend following indicator, so naturally the indicator works best in trending markets. Remember, that crosses in the moving averages will generate buy and sell signals, so in trending markets, there are few signals triggered, which allows a trader to maximize their gains, by riding the stock for big profits.
Negatives
Traders can find themselves in serious trouble with the Price Oscillator when the market is choppy. For example, if a stock is trading within a range of $20 - $25 dollars, as the stock approaches $25, the shorter moving average will often close above the longer average due to the upward move in price. To the detriment of the trader, the range will provide resistance at the $25 level and the stock will once again head lower. Depending on the traders stop loss strategy, at a minimum this situation will cause a number of false signals and losing trades.
Al Hill is the co-founder of mysmp.com (My Stock Market Power) which provides education on all topics finance; including stocks, bonds, options, futures, forex, technical analysis, and more! Please visit http://www.mysmp.com for more free financial educational content.
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