Using Oscillators Profitably In ThinkOrSwim

[MerryDay]

Definitions:
All "bound" oscillators have upper and lower boundaries.
Which are called
"overbought" upper boundary
"oversold" lower boundary

1. Overbought and Oversold refer to the relative extreme levels reached by an asset's price.
2. Indicators: Common indicators like the TMO, and the Relative Strength Index (RSI) and Stochastic Oscillator are examples of bound oscillators with overbought and oversold boundaries.
3. Interpretation:
   • Overbought: the asset's price has risen and is now considered overvalued relative to its recent average. No entry is recommended if the oscillator is in the overbought zone.
   • Oversold: the asset's price has fallen and is considered undervalued to its recent average. No entry is recommended when the oscillator has fallen into this basement zone.
   • The textbook entry zone is when the stock is above the oversold boundary but below the midpoint and is trending upwards.

There are three conditions to observe when using Oscillators.

1. Zero-crossing (Delta of Price): bullish when crossing above midpoint (the midpoint is 'usually' zero but can also be 50 or something else).
2. Signal Line Crossing (Variance in Price): bullish when crossing from below to above the oscillator's moving average.
3. Direction Change: bullish reversals, as long as not overbought.

They are generally used together.

• Direction Change Trading is the most traditional use of oscillators. New traders call this: going from red to green.
• Zero-crossing is used to verify that the triggers from your other indicators now have momentum.
• Signal-crossing, when an oscillator crosses its average, is a sign that a change is a-coming but only works when not in chop. (not to be used on the lowest timeframes due to lag).

On a lower timeframe you might look for Zero-crossing and then
On a middle timeframe, encroaching on Signal-crossing.

It is important to take the time to coordinate the input settings to optimize the oscillator lines w/ your strategy and with your other indicators.
To determine if an oscillator brings value, analyze it over different timeframes, across history and with multiple instruments.

Pros: When a stock trends, oscillators provide the best profitable entry / exit zones.
Cons: When a stock is ranging; when price has no support and there is no trend; oscillators are rife with perceived false signals.

Trend and support are a day traders catalysts
https://usethinkscript.com/threads/must-know-market-drivers-catalysts.20243/
What new traders call "false signals" occur when using oscillators incorrectly!
Oscillators must have: confirming trend and price support and not at resistance on your other timeframes.

Backtesting of Oscillators is not necessary. Results for all oscillators are approximately the same. They are highly successful when a trade has support and trends; and not successful without these elements.

Signals are more accurate on higher timeframes (less noise).
Use of chart timeframes of 5-min or lower will yield suboptimal results.

More reading:
https://usethinkscript.com/threads/...-profitably-in-thinkorswim.11497/#post-151218

Success rates can be increased by the addition of non-collinear studies

 

[useThinkScript]

These are oscillators.
While oscillators provide significant profitable entry / exit zones; they are perceived to throw "false signals" because traders do not utilized them correctly.

Moving averages and oscillators are good for reviewing trend, ranges, and spans.
And to provide confirmation for your strategy's entry point.
And as such are a valuable tool in analysis.

Trend is ALWAYs reviewed on the higher and lower of your three timeframes.

Your trading chart is where you analyze the pullback.
Think about it. If the pullback has just occurred there is NO new trend yet, to be observed.
So generally, you will only see glimmers that the trade is setting up.


On your lower timeframe, you want to see the oscillator/trend to be all bullish, supported and confirm that the pullback has reversed.

You want to verify that your entry has support and is not hitting resistance on your lower and middle (trading chart) timeframes, as determined by your drawn support and resistance zones.
https://usethinkscript.com/threads/support-resistance-your-trade’s-make-or-break.20534/

Review that your trade is in the same direction as the market and the market has trend
https://usethinkscript.com/threads/vip-supertrend-trendmagic.20201/

Review that your highest timeframe is showing higher highs and higher lows, which will support your trade's retracement
https://usethinkscript.com/threads/the-vip-linear-regression-channel.20522/

Trend and support are your catalysts (unless you have some other exterior catalysts)
https://usethinkscript.com/threads/must-know-market-drivers-catalysts.20243/
Perceived false signals only occur when trend and support are not present.

Read more:
https://usethinkscript.com/threads/how-to-read-an-oscillator-in-thinkorswim.11497/
https://usethinkscript.com/threads/lagging-indicator-accuracy-in-thinkorswim.15624/

 

[pupu]

Thank you MerryDay!

A quick clarify on "Signal Line Crossing (Variance in Price)" - When you mean "signal line (its average)", do you mean in the classic RSI, the lines of overbought(70)/oversold(30) are the signal lines?

Or do you mean taking a Moving Average of the RSI value, and the MA is the RSI's signal line?

 

[MerryDay]

Thank you MerryDay!

A quick clarify on "Signal Line Crossing (Variance in Price)" - When you mean "signal line (its average)", do you mean in the classic RSI, the lines of overbought(70)/oversold(30) are the signal lines?

Or do you mean taking a Moving Average of the RSI value, and the MA is the RSI's signal line?

A signal line has traditionally been the moving average of the oscillator. When an oscillator 'speeds up' and cross over its average, it denotes a positive change might be a-coming.
As the oscillator slows down, it crosses below its average, a negative change, this way comes.

While many of the oscillators will offer a plot of the moving average, the ToS RSI does not. But it doesn't mean that it is not possible to do. We have several, here is one: https://usethinkscript.com/threads/moving-average-crossover-rsi-indicator-for-thinkorswim.185/

Overbought and Oversold denote whether it is above or below its intrinsic value

 

[JWH]

Let's say I have an indicator such as RSI, CCI, Stochastics, etc. and would like to add a configurable moving average of that indicator in the same pane. All of the averages I've been able to find seem to be locked onto price and offer no other options.

You can do this in your sleep in other programs, but so far I've been unable to work out how to do it here.

When I searched, one person said to "drag and drop", but when I do that I only seem to have two independent indicators in the same pane. I also took a crack at coding it from another suggestion, but it didn't work.

Is there a link to good instructions on how to do this? I've even looked in the OneNote archives, but if it's in there I missed it. I have to believe others could also benefit from having this readily findable on the site.

I'm willing to try Thinkscript given a working example. Even if there's an existing indicator from which I could extract the basic code, it would be a good start.

Thank you!

 

[MerryDay]

Let's say I have an indicator such as RSI, CCI, Stochastics, etc. and would like to add a configurable moving average of that indicator in the same pane. All of the indicators I've been able to find seem to be locked onto price and offer no other options.

You can do this in your sleep in other programs, but so far I've been unable to work out how to do it here.

When I searched, one person said to "drag and drop", but when I do that I only seem to have two independent indicators in the same pane. I also took a crack at coding it from another suggestion, but it didn't work.

Is there a link to good instructions on how to do this? I've even looked in the OneNote archives, but if it's in there I missed it. I have to believe others could also benefit from having this readily findable on the site.

I'm willing to try Thinkscript given a working example. Even if there's an existing indicator from which I could extract the basic code, it would be a good start.

Thank you!

Many of the ToS oscillators have the oscillator moving average already defined, IE: CCIAverage, StochasticMomentumIndex, MACDTwoLines, OnBalanceVolume_modified, etc.... You can click on any of them to see examples of syntax for oscillator moving averages.

If you have an oscillator w/o an ma definition, you will find this forum probably has a version with it's moving average, IE RSI .

The plot of an oscillator's moving average it is a fundamental identification of an increase in momentum. oscillator technical analysis
An excellent addition to your favorite oscillator.

The general format is

input AvgType = AverageType.EXPONENTIAL ;
input AvgLength = 30 ;
def YourOscillator = whatOscillator?? ; #put the oscillator plot name HERE
plot Oscillator_MA = MovingAverage(AvgType, YourOscillator,  AvgLength);

 

[TPTrades]

I would love to test out the indicators functions. What do the red zone and green zones represent?

 

[MerryDay]

I would love to test out the indicators functions. What do overbought & oversold zones represent?

All "bound" oscillators have upper and lower boundaries.
Which are called
"overbought" upper boundary
"oversold" lower boundary

1. Definition: Overbought and oversold refer to the relative extreme levels reached by an asset's price.
2. Indicators: Common indicators like the TMO, and the Relative Strength Index (RSI) and Stochastic Oscillator are examples of bound oscillators with overbought and oversold boundaries.
3. Interpretation:
   • Overbought: When an asset's price has risen and is now considered overvalued relative to its recent average. No entry is recommended if the oscillator is in the overbought zone.
   • Oversold: When an asset's price has fallen and is considered undervalued to its recent average. No entry is recommended when the oscillator has fallen into this basement zone.
   • The textbook entry zone is when the stock is above the oversold boundary but below the midpoint and is trending upwards.