In a July 1995 paper for Technical Analysis of Stocks and Commodities, Mel Widner, Ph.D., came up with the projection bands. These bands are the basis for the Projection Oscillator indicator. As a momentum indicator, the Projection Oscillator considers both the projection band’s extremes and the linear regression’s slope. The trader has control over the mechanism (EMA) and period durations. As the oscillator rises, the price moves closer to the top band, and as it falls, the price moves closer to the lower band. This in-depth analysis provides further detail on its meaning and strategy.
What is the Projection Oscillator?
The projection oscillator displays the current price at its lowest and highest values over time. In contrast to the stochastic oscillator, the lowest and highest prices are modified according to the upward or downward slope of the regression line for the prices. The Projection Oscillator is an indicator that is based on the Projection Bands and shows where the closing price falls within the bands.
- A value of 0 indicates that the close corresponds to the bottom band.
- The mid band has a value of 50.
- A value of 100 signifies the top band.
The projection oscillator is more dynamic than the stochastic since it incorporates a regression line component into its calculation rather than just the raw highest and lowest values. The projection oscillator indicator may help you find overbought and oversold situations and price divergences. When the moving average crosses above or below the trigger line, it can be used to decide whether to buy or sell. The Projection Oscillator works best when paired with a bias toward a trend or momentum on a higher timeframe.
Projection Oscillator Strategy
The simplest strategy to trade with the projection oscillator is to buy and sell a currency pair when the oscillator hits extreme levels. Therefore, a sell signal is triggered when the oscillator drops below 50. In contrast, a price movement over 50 would create a buy signal. The projection oscillator should be used with other technical indicators like the exponential moving average (EMA) and the simple moving average (SMA) to create trading strategies for scalping, day trading, and swing trading.
The projection oscillator may be interpreted in different ways;
- Overbought/oversold: If the oscillator drops below a certain threshold (i.e., 20) and then rises above it, you should buy; if it climbs above a certain threshold (e.g., 80) and then falls below it, you should sell. High values (i.e., more than 80) imply an exaggerated degree of optimism. Values below 20 show an extreme degree of pessimism. But before you trade based on strict overbought and oversold levels, you should first check the market trend with tools like r-squared or CMO. When these indicators point to a non-trending market, trades based solely on overbought or oversold levels tend to fare well. If the oscillator indicates a trending market, you may use it to place trades in the direction of the trend.
- Crossovers: You may buy when the oscillator rises above its trigger (dotted) line and sell when it falls below its trigger line. If you want to be more selective about your trades, you may require that the crossovers be either above or below the 70 or 30 levels, respectively.
- Divergences: If prices are making a string of new highs but the oscillator fails to exceed its prior highs, you may want to consider selling. You may also consider buying if prices are creating a series of new lows and the oscillator is failing to beat its prior low. To make a trade, you can set conditions such as the divergence being either greater than 70 or less than 30.
Buy Signal
- You may open a buy order when the dodger blue line of the Projection Oscillator forex signal breaks over the 50.00 mark.
- You can exit all open buy positions if the dodger blue line of the Projection Oscillator indicator goes below the 50.00 level during a continuing bullish trend.
Sell Signal
- You may enter a sell position when the dodger blue line of the Projection Oscillator forex indicator falls below the 50.00 mark.
- You can close all sell orders when the dodger blue line of the Projection Oscillator forex indicator rises over the 50.00 mark during an ongoing negative trend.
Projection Oscillator Pros & Cons
Pros
- Bands may be used to trade short-term responses against the primary trend during trends.
- Bands may be employed to trade overbought/oversold levels in range-bound markets.
Cons
- It does not consider the momentum of the stock or the current market conditions.
Conclusion
Projections Bands function similarly to other bands. Any time prices are close or above the top band, excessive bullish motion is signaled, and a reversion to more reasonable levels should be expected. Conversely, if prices are approaching the lower band, it indicates that the market is very bearish and that buyers should be on the lookout for entry possibilities to purchase at higher prices. It is advised that all band-generated signals be validated by other indications. The projection oscillator, like the stochastic, shows the relationship between the current price and its lowest and highest prices over time; however, the projection oscillator adjusts these levels upwards or downwards based on the slope of the price’s regression line.
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