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Chapter 12, Part VI. Detrended Oscillator and Momentum Indicator.

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Jul 7, 2011.

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  1. Administrator

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    Part VI. Detrended Oscillator and Momentum Indicator. [​IMG]
    Commander in Pips: During previous chapters I’ve said that this or that indicator has some lack in estimating Oversold/Overbought conditions on the market. But today we will discuss a couple of indicators that are perfect for that purpose. I’ve decided to take a look at couple of them, because not all software has them both. So, you will not be frustrated, because at least one of them usually exists. These indicators are very simple. They are – Detrended Oscillator (DOSC), aka just Oscillator, and Momentum. Personally, I use DOSC for estimation of oversold and overbought condition on the market. Also it has some additional ways That it could be used. Metatrader 4 comes with Momentum as one of its built in indicators.

    [​IMG]

    Pipruit: Cool! Finally, because I even thought that I will never find the perfect indicator for oversold overbought recognition.​

    Commander in Pips: In the beginning I want to say, that my preferred indicator is DOSC. So, I will talk particularly about it. But, if it will turn that your software does not have it – use Momentum. All that I will say about DOSC is absolutely applicable to the Momentum Indicator as well.

    So, both DOSC as well as Momentum consist of just a single line. It’s simple. Their math is very simple:

    DOSC=Close Price – Some MA (N);

    Momentum = Close Price – Close Price N days ago

    So, as you can see, there is only one difference – DOSC uses average value of close prices for some period, and momentum pure close price some days ago. Personally, I use for DOSC N=7 and simple MA for averaging, so my formula of DOSC:

    DOSC = Close Price – SMA (7);


    Pipruit: Commander and why are you so fascinated with them? They are quite simple…​

    Commander in Pips: Indeed! And this is excellent, that they are perfect. But the major advantage of these indicators is that they are not scaled in the range! So they much better show overbought and oversold during really solid thrusts. I’ll show you:


    Chart #1 | EUR/USD weekly DOSC(7); Momentum (7); Stochastic (8; 3; 3
    [​IMG]

    On chart #1 you see obvious comparison scaled Stochastic with non-scaled DOSC (blue line) and Momentum (black line). You should remember this chart – we’ve used it much in current chapter. So, take a look at strong down trend in the beginning 2010. When the market accelerates to the downside in April – both DOSC and Momentum establish new lows and how a stronger level of oversold. And now look at what Stochastic has shown – It even has risen! The same is happening now. Take a look – both DOSC and Momentum show that the market is not in overbought condition, but Stochastic is above 75! We can replace Stochastic with any scaled indicator and we will get the same result. I hope that these examples should be enough and the conclusion is obvious – scaled indicators skew the real level of overbought and oversold conditions.
     
    #1 Administrator, Jul 7, 2011
    Lasted edited by : Mar 22, 2016
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