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.I have the least amount of criticismfor the CCI, probably because it does a fairly good job of approximating the Oscillator Iuse.Although Donald Lambert's3 development of this indicator was tied to Trend andcycle work, most traders who use this indicator use it as an Overbought/Oversold tool.The CCI is not normalized to +/- 100 and therefore requires more understanding toemploy.This is likely why it is not used (or misused) extensively.Although the CCI hasvalue, I believe the Detrended Oscillator achieves significantly better results.3Donald Lambert, "Commodity Channel Index: Tool for Trading Cyclic Trends", Technical Analysis ofStocks & Commodities magazine, July/August 1983, page 120-122.Chapter 7 Overbought & Oversold Oscillators 115THE DETRENDED OSCILLATOR:The Detrend is an indicator that's been around a long time.I don't know who theoriginator was or when it was developed.The Detrend attempts to measure variations ofprice about a zero line which represents the Trend, hence Detrended.We define the Trendas a given Moving Average, then we mathematically make that average constant, or thezero line.The formula for the Detrend is simple:Detrended Oscillator = Close minus Moving Average.A reasonable variation is the high or low, minus a given Moving Average as depicted onChart 7-5.Some of my colleagues believe incomprehensible math equates with genius, and thereforeto profits.I always believe in keeping things as simple as possible.Since I did myresearch on the indicator in the early 80s on an 8088 processor, keeping the math simplewas a practical, as well as a philosophical consideration.I approached research on the Detrend in the same way as I approached research on theDMAs.I observed the quality of the indicator's usefulness, in trading situations, over abroad spectrum of data.I used none of the typical optimization techniques popularizedsome years later.In observing literally thousands of data sets, with a wide variety of combinations of thedetrend (simple, weighted, exponential, and mathematical MAs, of the median, high, low,close, etc.), my final conclusion for the best data sets were:1.The close (today) minus a three day simple Moving Average of the close.and2.The close (today) minus the seven day simple Moving Average of the close.Of the two data sets, the 7 day MA of the close is clearly the most useful in the context Iapply it.I still use both data sets, however, particularly under Strategy 1, describedbelow.Aside from the profits generated from this laborious enterprise, the most gratifying aspectis that I see no reason to change the parameters today, over 15 years later!116 DiNapoli LevelsUSING THE DETRENDED OSCILLATOR:Now, let's talk about how to use this powerful and versatile Oscillator in a variety of easy-to-apply strategies.STRATEGY 1:When your position reaches 70, 80, 90, or 100% of average Overbought/Oversold, takeyour profit.The key considerations for employment of Strategy 1 are:The Time Frame we use to calculate Overbought/Oversold and.the definition of what ismeant by average Overbought/Oversold.Here's where experience comes in.I always calculate OB/OS levels on a daily basis, i.e.daily data, even though 80% of my trades are off a five minute chart.Let me put this alittle differently, so there is no misunderstanding.I never use intraday charts to calculateOB/OS levels for determining Logical Profit Objectives, even though intraday charts arewhere my position may be taken.To determine OB/OS levels, I look back over theOscillator peaks and valleys.I consider about six months of the most recent daily data.Average Overbought/Oversold is a value judgment, not a strict mathematical calculation.If I have three Overbought peaks as in Chart 7-3 with values of 96.85, 101.00, and100.70, I'd take approximately 98.00 as an average Overbought.Chapter 7 Overbought & Oversold Oscillators 117CHART 7-3I'll typically have my order resting in the market at a price equivalent to approximately90% of the Oscillator's average Overbought level.At that point, I say "adios" to thetrade.You might choose a lower or higher percentage.A resting day order is always bestto take advantage of unexpected news or large traders pushing the market around for theirown purposes.If it doesn't get hit, you cancel it or just let it expire.Okay, so you have the Oscillator value in mind where you wish to take your profit.Youcan't call the floor and tell them to take you out at a seven day Detrend of 88 (90% of98); you need a price.To get that price ahead of time, you need the OscillatorPredictor"! which I'll describe in some detail at the end of this chapter and in Appendix G.If you don't have the Oscillator Predictor"! to precalculate price levels which correspondto the Detrended Oscillator levels you wish to act on, you have another option.Someanalysis software (Aspen Graphics"! and TradeStation®, among them) will allow you toset an alert at a given level on an indicator.You hear a beep, you exit the trade.Whilethis is acceptable, the problem with setting an alert on the indicator is that you might missthe trade by the time you hear the alert, act on it, and contact the floor.These price levels118 DiNapoli Levelsare by definition unstable.These prices typically do not last for long, unless the market isin a runaway mode.It is conceivable that if you give a price order when the alert goesoff, that you will only get out in runaway markets, i.e.those situations that would enhanceyour profit by staying in! So, if you use an indicator alert to get your exit point, simplyexit at the market, and hope for the best.Those Mercedes and Jags in the basementparking garage of the Chicago Merc aren't there by accident.Market orders are one ofthe reasons the locals are able to buy them, so beware.If profits were taken each time extremes were reached in Overbought, as shown on Chart7-3, you would not suffer the draw downs of the subsequent pullbacks.These pullbacksare where most traders would have been stopped out by improperly tightening their stops.These pullbacks are for reentering against Fibonacci retracement levels.They are not forexiting!When you employ the strategy of utilizing Logical Profit Objectives properly, yourpercentage of winning trades should increase dramatically, but you may not be there if themarket really takes off and keeps going.You could, of course, hold multiple contractsand take Logical Profit Objectives on only a portion of the contracts you hold.It mightinterest you to know that I have run parallel accounts in which I have taken LPOs on allpositions, partial positions, and none at all.Over time, the hands down winner is takingLPOs on all positions.There's a corollary for Strategy 1.Let's say you're trading an intraday TimeFrame and you are using Fibonacci Profit Objectives.The strategy would be totake close-in Objectives (COP's), when operating at or near these extremes inprice, as defined by the Detrended Oscillator.A variation of this technique is usedeven by floor traders I've taught.Their actions in the pit change significantly asthese Overbought and Oversold levels are approached.Your actions can changetoo.Think about it.If a market reaches 70% to 90% of average Overbought on agiven day, it is likely that the market will meet resistance and at a minimum,consolidate for the next several days.Under these circumstances, avoid "buystopping" old highs.Look for, and position yourself, on dips intraday, againstFibonacci support areas [ Pobierz caÅ‚ość w formacie PDF ]