by Helmut Schmidhofer
Oscillators are powerful indicators of trend and overbought/oversold conditions, but the information is buried in a confusing array of connected points. The simplest, oldest and most reliable are the net-change oscillators. They provide a measure of the velocity (momentum) of price change.
The diagram shows the same data that has been used to illustrate trendlines, SCHM bands, and moving averages. It is shown here with the three-week simple moving average and a three-week net change oscillator (zero-line offset to the 0.7 mark to keep the chart compact).
Net change oscillators (sometimes called 'momentum indicators') are constructed by deducting a value (usually the close) that existed a given period ago from a current value.
You will recall that simple averages are the sum of a number of values divided by the number. As we move along the time line, the oldest value is dropped off and the latest value is added on. The change in the average is the difference between the latest and the oldest (i.e. the net change) divided by the number. The change in the average is called the velocity or momentum of price change; therefore, the net change is a measure of that momentum.
When the net change is plotted along a time line, it oscillates across a zero line (in the graph the 0.7 line). This is called the net-change oscillator. Now let me describe a phenomenon that has given correct signals nine times out of ten in the course of many years of trading commodities, bank bills, indexes, and currencies. It was explained to me by Arthur Sklarew in his book "Techniques of a Professional Commodity Chart Analyst ".
When I was a broker and explained the method to the people in my trading room, they too found that the signals were correct 90% of the time, some trading gold, silver and other metals, and some trading what was then the hottest of all commodities, orange juice.
The method is simple: in an uptrend, you draw a guideline across the bottom tips of NCO, in a downtrend the guideline is drawn across the top tips. When the NCO penetrates the guideline, a trend change is imminent.
Frequently, the trend change is signalled AHEAD of the MA signal, as the graph shows.
Personally, I need no other oscillator. However, there are numerous other oscillators, which are discussed next.
Back to weighted moving averages Proceed to other oscillators
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