Hi

This is 4th part of the “How to be a better than average Investor” series of articles . Today’s lesson is on Oscillators .

What are Oscillators : Oscillators are the indicators which move from overbought to oversold area , generally from 0 to 100 . when they are nearing 100 it means stocks are overbought and “expected” to go down now . when they are nearing 0 , it means , stocks are in oversold area and fresh buying can come and move the stock up .

hey .. wait a min , did you vote on the poll upper right side , I have asked on what all topics do you want me to write . Please select topics from them , so that you also get to read your favorite thing some time  cheers … go ahead ..

I will discuss just 2 oscillators which Investors can use to make better BUY AND SELL decisions .

Let take a time frame of 6 months and see how indicators gave signals of buy and sell . We will see 2 indicators here RSI and Slow Stocastics (SS) (Read what is RSI and What is Slow Stocastic ) .

Rules

When its overbought , we SELL the share .
When its oversold , we BUY the share .

SS BUY signal = when blue color line crosses down the Red line .
SS SELL signal = when blue color line crosses above the Red line .

RSI BUY signal = when RSI has moved below 30 and starts moving up .
RSI SELL signal = when RSI has moved above 70 and starts falling down .

To make signals more stronger , we will use both the indicators signal and take BUY or SELL only when both shows same kind of signal .

OVERBOUGHT = when RSI and SS both are overbought
OVERSOLD = when RSI and SS both are oversold .

Note

At any point of time, markets may be in any of 3 state .

- Uptrend
- Downtrend
- Side ways Movement

Understand that these signals work best in range bound market , like we had for last 6 months . When market were moving in range of 3100-2600 . If markets are in strong Uptrend or Downtrend , these indicators will generate many false signals .

Hence , In different markets we have to use different strategies .

Uptrend Market : IN Uptrend , you should avoid selling the stock , when there is small correction , Indicators can fast move in oversold region , that is the time you should BUY . But not SELL when prices are in over bought market .

Downtrend  Market : In Downtrend , you should avoid Buying the stock , only SELL when the indicators are in overbought region .

Sideways Market : In this market , you can buy and sell both .

Lets see some examples for last 6 months . This was a Sideways market (but still downward bias was there , so be careful with BUY , you can take SELL easily) .

DLF  Chart

ICICI  Chart

RELIANCE CAPITAL

Some Important things to NOTE (very important)

Oscillators should not be used in Isolation alone , You should also confirm it with other things like Support and resistance to make your BUY or SELL more stronger .

For example : If prices are near the Overbought , but you see that prices have broken the resistance point , its tells you that you should not BUY . because Oscillators are secondary thing , prices are primary .

Also , If prices are near support and not breaking it , and oscillator are in over sold area , then its safe to BUY . Never rely just on Oscillators , they are only helping tools used with other signals .

Lets see one Chart of JaiAss for testing what you have learnt .

Questions for you

- Tell me where are the buying and selling opportunities .
- Tell me where you should have avoided the signals .
- What according to you can help along with these oscillators . 
- Can you come up with some other oscillator of your own which can measure some important thing )

JAIPRAKASH  ASSOCIATES CHART

ok , So finally we end the 4th part of this series of articles on Technical Analysis . I hope you have learnt some things from me .

Earlier Posts

Part 1: What is Fundamental and Technical Analysis and which should be used When

Part 2 : How to use Support and Resistance to BY and SELL ?

Part 3 : How to use Trendlines to find Support and Resistance ?

Understand that we are not learning how to trade , we are learning some trading tools which can be used by long term traders to make better Buy and Sell decisions .

Incase you want to trade stocks/futures/options just after learning from these 4 articles , I must tell you have you have not learned even 1% required for trading . 99% is still there to be learned and over all knowledge of markets , technical analysis blah blah is just 10% . 90% is Psychology , yourattitude and your Discipline .

Trading is risky and not easy to do for long term .