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Projection
Oscillator
Description
Developed
by Mel Widner, Ph.D., the Projection Oscillator is
a by-product of his Projection
Bands. The
Projection Oscillator is basically a
slope-adjusted Stochastic.
Where the Stochastic
Oscillator shows the
relationship of the current price to its minimum
and maximum prices over a recent time period, the
Projection Oscillator shows the same thing, but
the minimum and maximum prices are adjusted
up/down by the slope of the price’s regression
line. This
adjustment makes the Projection Oscillator more
responsive to short-term price moves than an
equi-period Stochastic.
Put
another way, the Projection Oscillator shows where
the current price is relative to the Projection
bands. A
value of 50 indicates that the current price is
exactly in the middle of the bands.
A value of 100 indicates that prices are
touching the top band.
A value of 0 indicates that prices are
touching the bottom band.
Interpretation
The
Projection Oscillator can be used as both a short
and intermediate-term trading oscillator depending
on the number of time periods used when
calculating the oscillator.
When displaying a short-term Projection
Oscillator (e.g., 10-20 days), it is popular to
use a 3-day trigger line.
There
are several ways to interpret a Projection
Oscillator.
Overbought/oversold:
Buy when the oscillator falls below a
specific level (e.g., 20) and then rises above
that level, and sell when the Oscillator rises
above a specific level (e.g., 80) and then falls
below that level. High
values (i.e., above 80) indicate excessive
optimism. Low
values (i.e., below 20) indicate excessive
pessimism.
However,
before basing any trade off of strict
overbought/oversold levels, you should first
qualify the trendiness of the market using
indicators such as r-squared
or CMO.
If these indicators suggest a non-trending
market, then trades based on strict
overbought/oversold levels should produce the best
results. If
a trending market is suggested, then you can use
the oscillator to enter trades in the direction of
the trend.
Crossovers:
Buy when the oscillator crosses above its
trigger (dotted) line and sell when the oscillator
crosses below its trigger line.
You may want to qualify your trades by
requiring that the crossovers occur above the 70
level or below the 30 level.
Divergences:
You may consider selling if prices are
making a series of new highs and the oscillator is
failing to surpass its previous highs. You may
consider buying if prices are making a series of
new lows and the oscillator is failing to surpass
its previous low. You
may qualify your trades by requiring that the
divergence occur above the 70 level or below the
30 level. |
