Chapter 13, Part II. Leading Indicators – Oscillators. Page 2

But sometimes they could give very confusing and conflicting signals. Take a look at chart #2. If you have intended to follow these signals, you at least have been confused by them. Stochastic comes out from overbought area and gives sell signal, RSI stays flat, while Parabolic SAR shows Buy mode.

Pipruit: And why is it that way?
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Commander in Pips: In general the major difference are due to math. If you remember the formulas, you can say that stochastic assesses position of current price in high to low range of some period. So, it does not include in calculation price difference between side-by-side trading periods. But regarding this issue RSI does – it counts price difference between near time periods. Parabolic SAR, in fact, just a count number of price changes in one direction with predetermined step. So, they are quite different. That’s the reason.

Pipruit: And so what?​

Chart #2 | EUR/USD Weekly, RSI, Stochastic and Parabolic SAR
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Commander in Pips: Well, it means from classical approach to “leading” indicators, that they are very sensitive even to small fluctuations in price. And although they could be, say, “ahead” of market – they are very erratic and prone to bogus signals. This is the dark side of speed – fake signals. If we also take into consideration the difference in math, then we understand that this is a fiscal suicide to use just oscillators in trading.

Pipruit: Ok, I’ve got it. But, Commander, I do not like this kind of leadership very much. I suppose that it’s better to avoid it. Or, rather, we can use oscillators, even have to use, I might say, but not rely on their leadership properties too much.
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Commander in Pips: You’re absolutely right. Although oscillators could give us contradictive signals – this is not the reason totally reject them. If that happens (contradictive signals) – we just should sit on our hands and do not make any trade – wait for when the situation will become clearer. That’s all. But oscillators are a very useful and important tool in arsenal of any trader.

Ok, since we’ve finished with common approach of indicators leadership - now we will discuss the correct thoughts, at least I think that they are correct.

Pipruit: Cool, let’s get started…​