Simple Indicators and Setups #3: Using Oscillator Levels

I'd like to talk about something that is probably the most criminally under-discussed part of being a technical trader: levels. It's great to learn what indicators work for you, how to scope out price supports, price resistance, trend lines , and things of that nature for sure-- but that's not everything. Being able to use oscillator levels to your advantage as part of a holistic approach to your active trading strategy is, in my opinion, a huge step missing from many technical trader arsenals.

To start, some people believe they're using levels with oscillators because they read that X is overbought and Y is oversold. This is complete bull. That's not how stocks work. A level that screams overbought for one stock doesn't mean jack for another. This is one reason I'm such a proponent of asset stables where you track limited assets you get to know over time. It gives you the context you need to know what price action normally looks like with the stocks you track, giving you an inside edge. It also helps you understand what "oversold" and "overbought" really look like on stocks that matter to you.

So let's get to it.

This is AMEX:SPY from 2018 through mid-2020, daily candles.

When I refer to oscillator levels I don't mean the 70/30 numbers you hear trotted out as a baseline for RSI . What I mean is looking historically at the asset to see what the lowest points and highest points have been and set horizontal lines (levels) at those points. What I like to do personally is set two: one for closing and one for entry.

On the image above, you'll see that when $SPY hits a historically low level on my momentum oscillator (the True Momentum Indicator by hCaosTrader here on TradingView) of around -92.13, this is historically a good pivot point in momentum and a good opportunity to go long. There is normally an upswing in bullish momentum at that level historically speaking.

When I say I have one level for closing and one for entry, I mean that you need to know where you're going to get out if you get into a trade. You have to have a plan for capturing profits and levels can help you get there. I'll go over my personal rules here. Keep in mind that I'm NOT just looking at momentum, I'm looking at it in the context of the chart. So if the rest of my indicators and price action say one thing but momentum says something else, I won't just dive into the trade.

Zooming in on one instance of this level being hit from the above image:

Price action dumps below the lower Bollinger Band and simultaneously hits the lower end of the momentum oscillator. This looks like a good buy to me due to the historically low pivot point and price being so violently outside the lower Bollinger (I covered how I use Bollinger Bands in a previous post). Given how violently the price ran down, I'd say this was a price volume gap fill.

My personal levels for profit taking are half at 0 (unless the rest of the chart is flaming crap then 100%) and the rest at the first opposing level. So if I am going long, the rest of my profit would be taken off the table at the first upper level on momentum.

This is a good example to use because it shows why that isn't always the case and why you have to look at everything in context with the rest of the chart. So on this one, I would have sold before hitting 0 because the price was approaching the midline of the Bollinger Bands , which is often reasonable support/resistance . So I capture 50% a little before 0 on the momentum oscillator. The final profit taking is again before the first upper level on momentum because price was approaching the 200HMA which is often VERY strong support/resistance . The price continues to go up but I don't care because I captured my profits and I'm not chasing trying to squeeze every cent out of every play.

This doesn't always work out so well. Here's an example:

As you can see the oscillator hits its historically very overbought level and there's definitely some gains up through the 0 level. In our model you would sell half at 0 on the oscillator not only because that's the target but because you're looking at the chart in context and see the price approaching the Bollinger midline. After that, the price kind of bumps around a bit but doesn't really move as we'd hope it would. Since the price rides the Bollinger mid, we close out the rest of the position and wait for a better setup. You don't make as much profit, maybe risk losing your initial gains, but if it turns out to be a loss it's not so bad and honestly normally ends up just being a break-even play.

Creating these levels is easy enough to do but you definitely want to do it on multiple timeframes. I like the 1, 5, 65 minute and 1 day candles personally. I only use the 1 minute candles for last hour entertainment but to each their own. When you're on the correct timeframe you just want to zoom out far enough to get a decent sample size of candles and use the TradingView horizontal line tool in the oscillator to set your levels. When you set these up yourself you'll be surprised at how commonly those levels are hit and what an amazing pivot point they create. If you only want the horizontal line to show up on one timeframe you can double click on the line and click on the "Visibility" tab to turn the line on or off for certain time frames. You may want to do this if you set up levels on multiple time frames because if you don't things can get pretty cluttered.

Always remember:
  • you have to look at everything holistically
  • levels provide a great target

As with anything in technical trading, the more you can quantify what movements are meaningful and which you can ignore, the better off you are. Using levels is a way for you to confirm or disconfirm whether you're seeing what you think you're seeing on a chart in a way that's simple and allows you to get lots of historical context without much work.