Which Way The Market Goes
Premier Stochastic Oscillator
by Lee Leibfarth
This indicator lets you respond quickly to changes in market direction.
AS with any business, trading requires researching unique ideas that can be used to develop and maintain an edge in the markets. One place that traders can find inspiration is modifying existing technical indicators to meet their specific trading needs. It was this type of research and customizing that created the premier stochastic oscillator (PSO).
The premier stochastic oscillator is a technical indicator that provides a quick response to changes in market direction. This highly sensitive indicator allows for early anticipation of price turns and can be used to establish definitive trading zones that identify potential trading opportunities. In this article, I will discuss the theory behind this unique stochastic variation as well as some possible trading applications that can be used in today's competitive emini futures markets.
The PSO is a rewired version of a short-period stochastic. Unlike a standard stochastic oscillator, this indicator is normalized to register neutral values at zero while providing greater sensitivity to short-term price moves. This indicator uses a central zero line as a reference point and will oscillate above and below this point as price fluctuates. In addition, the PSO is smoothed by using a double exponential moving average to provide a more even response to turns in the market. The price chart of the emini Russell 2000 in Figure 1 shows both the PSO and standard, eight-period stochastic indicators as a comparison.
...Continued in the August issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the August 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.
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