July 19, 2010

The Price Oscillator Technical Indicator

The Price Oscillator indicator (sometimes referred to as the Percentage Price Oscillator indicator) incorporates two moving averages (a short one and a long one) and is similar in many ways to all the other oscillating indicators, except that this one doesn't have overbought or oversold areas. Instead it provides you with a buy signal when the indicator crosses above 0 and a sell signal when it crosses below 0.

You could simply trade these crossovers all day long but it probably wouldn't be profitable to do so because you get a lot of false crossovers, particularly when the market is in a sideways trend.

Instead, as with so many indicators, you are much better off trading divergence patterns. This is simply where the price make new lows (or appears to be bottoming out) but the indicator in question fails to make new lows, or vice versa if the market is making new highs.

What this basically tells you is that the trend is starting to run out of momentum. So when this divergence pattern emerges, you can think about taking a position either straight away or when the indicator subsequently crosses through the 0 level.

You can see what I mean by looking at the 5 minute chart of the EUR/USD from earlier today. In this instance the price fell to the S1 level at the start of the day, but after testing this level for a second time the price bounced upwards from this support level and there was a clear divergence pattern on the Price Oscillator indicator. You can also see that there was a nice divergence pattern (and an upwards crossover) on the MACD indicator as well, plus a change in trend as indicated by the Supertrend indicator, so this would have been a nice high probability trade.

Anyway the point is that the Price Oscillator is another technical indicator that you might like to add to your armoury. It's nothing revolutionary, but it does provide you with some decent trading signals when you start to see some clear divergence patterns, particularly when combined with the MACD indicator or other similar indicators. It is also useful for indicating the current trend because if the indicator is above 0, the pair is currently in an upward trend, and if it's below 0 then it's obviously in a downwards trend.





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2 Comments on The Price Oscillator Technical Indicator »

July 21, 2010

Leah Tsang @ 4:14 am:

Hi James,

As always thanks for sharing. Have a great trip to Thailand. I envy you.

Take Care,

July 24, 2010

Andriy Moraru @ 8:38 am:

Could you, please, show exactly where is the divergence between the actual price chart and the Price Oscillator? Because I cannot see one here.

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