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38

n-day StochRSI = «t.o<b.-RSWbw

Lanj Williams Oscillators

Larrj Williams has been known for his development of trading methods based on oscillators since his publication of the AID Oscillator in 1972. Although they have changed over the 14 years spanning these sjstems, some similarities are apparent in Williams three techniques that follow

AID Oscillator

In 1972, jim Waters and Larrj Williams published a description of their AID Oscillator in Commodities magazme. For their sjstem, A/D means accumulation/distribution rather than the usual notation of advance/decline, a well-known interpretive index for stod. They used a unique form of relative strength, defining bujing power (BP) and selling power (SP) as

BP = high - open SP = close - low

where the values used were todays open, high, low, and closing prices. The two values, BP and SP, show the additional bujing strength (relative to the open) and selling strength (compared with the close) in an effort to measure the implied direction of the days trading. The combined measurement, called the daily rawfigure (DRF) is calculated

2 X (high - low)

The maximum value of I is reached when a market opens trading at the low and closes at the high: BP - SP = high - low. When the opposite occurs and the market opens at the high and closes on the lows, the DRF will be 0. Each price series will develop its own pattems, which can be smoothed or traded in many wajs similar to a momentum index. The Waters4Villiams A/D Oscillatcr solves problems of volatility and phjsical limits. The daily raw figure completely adjusts to higher or lower trading ranges because the divisor itself is a multiple of the days range; and because each day is heated independently, the cumulative values of the momentum index are not part of the results. This day-to-day evaluation causes the DRF to varj radically and requires some smoothing technique or cycle interpretation to make it useable. As an example, look at the Januarj 1977 soybean contract for the two months before delivery, November and December 1976. Table 6-1 shows the calculations for the DRF and for the smoothed DRF using an exponential moving average with a smoothing constant of 30°o (selected arbiharily). The daily raw figure is plotted as the solid line on a scale of .00 to I.OO in Figure 6-10 and is extremely erratic in its movements. The dotted line is the smoothed DRF. Once plotted, two horizontal lines can be drawn to isolate the peaks and bottoms of the DRF; the top part becomes a zone representing an overbought condition and the bottom zone represents oversold. Bear in mind that these lines were drawn after the DRF was plotted and cannot be construed as predictive; however, in the article by Waters and Williams, their example of soybean oil had lines drawn in a similar place. Corresponding broken lines were drawn to indicate the overbought and oversold state for the smoothed DRF.

The rules for using the A/D Oscillator were not defined in the Commodities magazine presentation, but some simple rules could be:

Sell when the DRF (or smoothed DRF) penetrates into the overbought zone. Close out

all accumulated long positions, if any, and go short on the open of the next trading day.

Buy when the opposite condition occurs.



TABLE 6-1 AID Oscillator-Januan-1977 Soj-beans

FIGURE 6-10 A/D Oscillatcr

If the DRF (or smoothed DRF) enters an overbought or oversold zone more than once without the opposite zone being entered, one additional position is added at each reentry. Following these rules, the A/D Oscillator showed excellent success for both the raw and smoothed values. Accepting the after-the-fact designation of zones, the results atill show that the method is viable and that a smoothing technique can he applied to the DRF to varj the apeed of trading.

Waters and Williarns used a simple 10-day momentum for their exariple of the A/D Oscillator. The choice of interval can be determined by examining the tops and bottoms of a chart for the natural cycle of the prices.

In reviewing the A/D Oscillator, there are modifications to be considered. Conceptually, the value of the oscillator should be +1 when prices are rising rapidly. The most extreme example is a locked-limit no-trading day, representative of the strongest (or weakest) market. But for that case, the open, high, low, and closing prices are all the same and the DRF cannot be determined (since the divisor is zero). A more basic problem concems gap openings. A much higher opening with a stronger close would also upset the resulting DRF For exariple the following trading occurs-



open

Hig*

Close

ADBf

EADBf

Monday

43.00

44.00

40.00

41.00

Tuesd

42.00

42.00

39.00

40.00

-.17

-.17

Wednesday

38.50

3e.so

38.00

38.00

+.17

Thursday

42.00

42.00

39.00

40.00

-.33

friday

40 0

43jOO

40.00

42.00

*.50

+.17

Note that on Wednesday, the DRF indicates that the momentum has reversed, but in fact the price is failing rapidly and gives no indication of recovering; it may actually be gaining momentum. On Thursday the price soars up and closes in the midrange, but the DRF shows a new downward momentum. The problem seems to be related to lad; of association with the prior closing price. The daily movement can take on different appearances if the entire range was above or below the closing price. To form this link, replace the current high or low with the prior closing price if that price was outside the current trading range The following exarrqale shows the results smoothed out and leaves the trend intact

open

High

Close

Monday

43.00

44.00

40 0

41.00

Tuesdv

42.00

42.00

39 0

40.00

-.17 -.17

Wednesday

38.50

(40.00)

38.00

38.00

+.04 -.13

Thursd

42.00

42.00

(3BJ»)

40.00

-.17 -15

Friday

40.00

43.00

40.00

42.00

+ 8 +.33

Another construction of an oscillator can be made using the highs and lows relative to the prior close-



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