Why oscillators dont really work...

Discussion in 'Trading' started by Trend Fader, Dec 2, 2002.

  1. Am I right to assume... there is a miniscule relationship between today's close and tomorrow's close.. and its so miniscule that its not even tradable.

    So... if the market is up 5 days in a row.. I am a fool to think the sixth day is already too many up days.. so it has to come down.

    If all this is true.... how can anyone claim that oscillators work. Or can even be a valid indicator to be a profitable trader.

    I expect many people to start ranting how oscillators alone stink.. but when used as confirmation tools they are helpful. But what bugs me is... the whole premise behind them is faulty.

    The only things I use when trading is.. judge whether a market is trendy or choppy.. and when volatility is tight or lose.

    Its a known fact and has been proven many times.. when market tighten for a long period.. and volatility drops.... usually the market is setting up for a big move in a certain direction persistently. ALso... many solid trending stocks find support or resistance near the 20 and 50 day moving averages when they are trending. This is also a known fact. I believe what I just mentioned in this paragraph is more than enough for one to be a successful trader ( swing or intermediate term) as far as having an edge.

    I honestly believe... all oscillators are useless.

  2. In support to volatility contractions exploding and trending stocks find support near 20 and 50 MA's... I honestly can provide thousands of examples for each. I believe the proof is irrefutable.

    One can definately have an edge based on these 2 theories. These theories are used by many successful traders and have been around way before I was born.

    All of this is geared to EOD data.... as you can tell.. I am primarily a swing trader.

  3. Hi Mike,

    Oscillators are useless for your style of trading.

    However, they are a gold mine for the trading style of many other traders when combined with another trading tool.

    Further, I rarely meet a successful trader that uses one indicator alone as a successful trading tool.

    Simply, most successful traders uses a combination of several technical tools for profits.

    There's also an argument that Candlesticks alone are useless, price moving averages alone are useless, volume analysis alone are useless, chart patterns alone are useless, FIB numbers alone are useless, economic data alone are useless, being in the right psychological state of mind alone are useless,...

    However, you combine a few of the above together...in my opinion...odds for success begins to dramatically increase.

    Therefore, I completely agree that oscillators by themselves are useless.

    However, I completely disagree that oscillators combined with something else are useless...eventhough that wasn't what you said.

    Besides...I'm sure you've been trading long enough to know that what works for you may not work for another and what works for another may not work for you.

    Here's a story to explain myself in a different way:

    When I was in college...a science major...I didn't appreciate classes like Art History to fullfill certain requirements because after all...what usefulness will Art History have for a science major when I could have taken something more interesting to fulfill the same requirement.

    (Note: I wasn't able to take a more interesting class because of a schedule conflict.)

    So...I study hard...got a good grade to keep my GPA from dropping.

    About a year later...long after forgetting many things in Art History...a close friend of mine and I was at a bar where fellow students hang out.

    There was this beautiful girl my friend and I had seen many times previously on campus...she and her friend sat down next to my buddy and I.

    I seized the moment and started talking to her. She immediately started talking about classes (natural subject since we were both in college) and asked me a lot of questions about classes I enjoyed...of course I never mentioned Art History...it was useless to me.

    My friend made a move on her friend. Her friend was a Art History major and he didn't like Art History and was currently taking a Art History class and told her he loved it eventhough he really hated it.

    He and her started having a very smooth conversation about art works from a particular period of time.

    The girl I was interested in... joined their conversation...she too was an Art History major.

    To make a story short...I went home alone and he went home with both of them...I won't go into the dirty details about his night...details verified by one of the girls to a woman friend of mine.

    The following year I took a darkroom photograpy class...a class I didn't have to take because I had already fullfilled that requirement and was a little more interested in art for many obvious reasons.

    Class Enrollment: 15 students...10 woman and 5 guys. The odds were definetely in my favor of getting lucky with one of my female classmates especially since I had several classroom group projects....

    me being the only guy in my group.

    (Note: I never got lucky with any woman in the class but I did get a good grade and maintained my college GPA.)

    Also, some of my other science buddies thought it was a waste of time and recommended I unload the class...use the free 1.5 hours to sleep or prepare for my biology lab class that followed the darkroom photography class.

    I ignored their advice.

    Many years later...long after college...it was my conversation with another beautiful woman...a conversation about darkroom photography that impressed her along with talking about how art history shaped the facades of architecture.

    (Note: I had re-read my Art History books after hearing about my buddy incredible night...never sold any of them and still own them today.)

    Her and I have been together ever since.

    So Mike...my point is this...what's useless to you...may be a gold mine to another.

    P.S. I'm not a good looking guy...just a guy with a science degree :cool:

  4. Nihaba,

    You make a good point.. but isn't the entire premise of oscillators faulty? If there is barely any correlation between today and tomorrow.. how can something effectively benefit from measuring whether something is oversold or overbought?

    I agree oscillators might be good as a visual tool or maybe even in a system for filters... but its the entire math behind them that makes me doubtful of their ability to predict anything.

    Can someone mathematically or logically.. explain why the oscillator is an effective predictive tool?

  5. or any book on TA, say 'Trading for a living' by A. Elder. That should be enough to inform you that the real use of oscillators is in their divergences. Of course, that does not mean they are 100% predictive, but nothing is.
  6. bobcathy1

    bobcathy1 Guest

    I agree Wally. Basically occilators work for a few things like divergences or to jugde when a trend is peaking.
    I have been noodling around with this Chimpanzee trading today and it is looking good. Sorta like Don Miller, but a lot easier to spot the entries and exits.
  7. Nope. You can back test oscillators to prove to yourself
    that they alone have no edge.

    Lets face it... all an oscillator does is tell you when the
    market has been moving in a certain direction too
    long for *IT's* setting.

    An oscillator with period X can say oversold, while oscilattor
    with period Y can say, hey I just crossed the middle.

    I think they are simply visual flags to the trader that
    wave around and say, take a look... were entering what
    you THINK may be oversold territory, according to YOUR
    settings for this market.

    Then the TRADER decides if this is actual true.
    And THAT is where the real edge comes into play.



  8. Today's close doesn't at all depend on yesterday's close only if there's zero autocorrelation. But I suspect there's usually at least some autocorrelation.
  9. Just what does "noodling around" mean?

    I always have to laugh a bit when people say something doesn't work. Like my illustration about the driver and the guitar in other threads, is it the club or the instrument, or the player?

    Can you slap those babies on to the chart and giddyup.... no. As axeman and wally and cathy and Ashi have said, they have their strengths and weaknesses. The divergence is the most powerful "heads up" I think there is, and as Ashi said, combined with other ideas can be very useful.

  10. By mathematical definition all an oscillator can do is indicate slowing momentum, they cannot predict reversals. As a matter of fact, indicators in general can't tell you anything a decent working pair of eyes can.
    #10     Dec 2, 2002