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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.
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