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44
 Week S&P500 10 Bar 20 Bar Difference Closes 323.7 322.2 320. 0 318.5 317. 9 317.6 317.9 318. 5 320. 0 321. 2 323 .7 323.7 325.0 323.6 327.6 323.8 329.1 323 .8 330.4 324.2 330.4 324.0 329.8 323,9 6. 0 329.4 324 .0 328.2 324 . 1 325.5 323.4 322, 0 322.9 -2.10

Smoothed by 10

4.1 } Plot 4.0 } Points

To obtain a 10 week moving average, simply sum the total of the prices for 10 weeks and then divide the total by 10.

To obtain the number for the next week, simply multiply last weeks moving average by 10 and then add this weeks price and subtract the price from 10 weeks; ago.

For the 20 week moving average, do the same thing substituting 20 for 10.

For the smoothing, add the differences rather than the prices, and divide by 10 just as for the 10 week moving average.

1 want to emphasize for purposes of this manual, I use the oscillator only on weekl\ charts. My computer program shows it as a histogram, but the vertical lines that are drawn on the histogram are totally unnecessary and are only there for visual effect. If you are trading using a computer, and if you have MACD Histogram capabilities, then just use that, but set the parameters at IK)/20,10. That is a ten period moving average, a twenty day moving average, and smoothed by a factor of ten. If you want to see the equivalent of the oscillator on a daily chart, then set the parameters to 4386,43. The approximation will be very accurate. Better yet, try to notice what the ¸ doing in relation to the oscillator. Then, you wont need to use it at all.

What the Oscillator Means

> This oscillator represents market sentiment in the fornn of bullish or bearish pressure. Regardless of whether it is above or below the zero line, if the oscillator is pointing up, then the market is bullish and I take only daily trades from the long side. If the oscillator is pointing down, then the market is bearish and I only take daily trades from the short side. I do no counter-trend trading.

This oscillator will appear to either lead or be coincident with the market. Keep in mind, as with all oscillators, they are based on history. They do not give answers until a price bar is complete. To a certain extent the appearance of the oscillator is dependent on the rhythm of the underlying price structure.

A turn to the upside by the oscillator, when it is well below the zero line, is more significant than a turn to the upside when the oscillator is above the zero line.

t Conversely, a turn to the downside by the oscillator when it is well above the zero line, is more significant than a turn to the downside when the oscillator is below the zero line.

However, all turns by the oscillator are significant, because they represent a change in the long term (weekly) trend. The weekly trend should be obvious to anyone with a trained eye. If you have trouble seeing the trend, then i suggest asking the nearest Xiyejyear-pLd,. They usually can tell if a market is going up, down, or sideways.

This oscillator is never absolutely overbought or oversold. It may be considered relatively overbought or oversold if it continues to turn when it reaches a particular level either above or below the zero line. But realize that ob/os is not its purpose.

Trading By Tiie Book - Part ill

Because of tfie manner in whicli tiiis oscillator is calculated, it lias a flexible, expandable/contractible scale. Tliat is why it is never absolutely ob/os. Actually, Ive never been able to figure out what ob/os really is. Markets can go up and up and up, or down, and down, and down, in spite of any oscillator.

This oscillator may have significance when It begins to diverge from the price trend on the chart. This oscillator can show divergence in two ways: 1. It is trending opposite the trend of prices. 2. It is making lower highs whiie prices are making higher highs; and the reverse of that, it is making higher lows while prices are making lower lows.

Keep in mind, though, that such divergence can be misleading, and does not necessarily portend an imminent change in direction. The oscillator, as with al! oscillators, can be divergent for many weeks before prices actually turn.

When the oscillator is flat, do not take any trades.

When the oscillator is stair-stepping up or down, wait for at least 3 steps in the same direction entirely above or below the zero line before risking a trade.

1 never enter a trade against the direction of this oscillator.

ii-lf Im in an existing trade when this oscillator changes direction or goes flat, I immediately send up a mental caution flag and begin to watch the trade very closely on the daily charts, and also consider tightening up my Stops.

One final reminder, I use this oscillator only in a time frame that is one magnitude greater than the one in which I am trading. Since this manual is about trading the daily charts, I would use this oscillator only on the weekly charts. It becomes meaningless to use it on both the daily and the weekly charts.

One more thing, if you do not have weekly data, this oscillator can be closely approximated by using the parameters 43-86-43 on the daily chart, in place of 10-20-10 on the weekly chart as wili be shown a few pages ahead.

In the next Part of the Manual t will show a different oscillator for use on the daily

chart.

As 1 go through this next chart, I will attempt to point out all of the conditions that 1 have mentioned previously regarding the weekly oscillator.

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