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Chapter 12, Part VI. Detrended Oscillator and Momentum Indicator. Page 5

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 20, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Filter entry points

    You should not enter long when DOSC is near extreme high and shows that the market is overbought. As well as you should not enter short when DOSC is near an extreme low and shows that the market is oversold.

    Check it here – assume that you use 25-period SMA for trend identification. When price is above the MA – the trend is bullish and you search for the possibility to enter long, when price is below the MA – the trend is bearish, and you want to go short. But what’s a pity – where to enter?

    DOSC allows you to filter unwelcome entry points. Check chart #4 – every time, when trend holds but DOSC at an extreme – the market shows solid retracement, that you do not want to enter. But when DOSC is not at extreme – entry points are much safer.

    Chart #4 | EUR/USD weekly DOSC(7) and SMA(25) – filtering entry points

    I’ve pointed not all points – just some of them, to show how you could apply DOSC (or Momentum) in this way.

    Stop placing

    You can use extreme values for estimation the levels for stop placement. For instance if you intend to enter Long and DOSC shows that market is 70% oversold. You may place stop beyond 100% oversold. But control your risk, because depending on volatility this stop could be really far away. I better call this stop as “for catastrophe”. Also, if you trade intraday – you may choose daily levels of overbought/oversold to place stops beyond them. Understand, this stop will not be triggered too often. Only if the market will break its level of overbought/oversold. But if it will happen – it means that situation on the market has changed drastically and your position has turned to the wrong one anyway.

    Another way to apply DOSC in this way is to build it not on close prices but on high prices or low prices. If, for instance, you intend to enter Short and market is overbought, then you can draw DOSC, based on high prices = High – SMA (7) by highs. It will be slightly higher than DOSC based on close prices. If you will place stop above this level – it will be very logical, because market will not trigger it occasionally, only if really something bad happens. The same is for DOSC based on Low prices.
    #1 Sive Morten, Dec 20, 2013
    Lasted edited by : Mar 22, 2016
    Hamza Samiullah and fran alvarez like this.
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