FOREWORD
The following article is about the WAVE OSCILLATOR, an indicator created by Mario D. Conti in 2008.
MDC Securities Pty Ltd and Mario D. Conti offer this oscillator for free to the trading community, as many experts did in the past (Bill Williams, George Lane and others) based on the belief that the more we trade, the more liquidity and business we create for everyone.
WARNING
We warn everybody from patenting/registering this indicator or any algorithm based upon it or part of it. You will be prosecuted.
LAST ARTICLE REVIEW: 05/03/2018
DISCLAIMER
This information is exclusively for educational purposes and doesn't constitute an investment advice. What you do with this information is at your own risk and responsibility. Please read our GENERAL DISCLAIMER before using the information below.
NOTE: This indicator is NOT a miracle indicator nor it's a trading panacea. Occasionally, it provides entry signals followed by exit signals soon after. On manual trading you may incur in some losses.
Also, extreme volatility caused by the news can be detrimental to the performance of your trading. This is why it's preferable NOT to use the Wave Oscillator build on the lower time frames (1-hour, 30, 15 and 5-min charts)
Also, extreme volatility caused by the news can be detrimental to the performance of your trading. This is why it's preferable NOT to use the Wave Oscillator build on the lower time frames (1-hour, 30, 15 and 5-min charts)
THE WAVE OSCILLATOR
- to "visually" display the Entry/Exit signals in a more clear way.
- to clean up the way from fake setups and premature entry signals.
- to visually display the size of the "initial stop loss" and the subsequent trailing stop.
- to be used without charting knowledge or technical analysis expertise.
- to be used specifically with the automated trading systems.
COMPARISON WITH THE OTHER OSCILLATORS/INDICATORS
What didn't convince me about the other indicators:
- they provide only vague signals. There's no clear entry/exit.
- they are based mostly upon a close/open price which:
- it's determined "artificially" for stock indices running 24/5.
- it's totally artificial within intra-day charts.
- it's absolutely artificial with currencies and commodities running 24/5 as well. - they are based upon the difference between present and past volatility. This kind of comparison is flawed at his core and was never proved true.
- they are cumbersome and subject to personal interpretations.
BACK TESTING AND ALGORITHMS:
This oscillator has been tested on real trades since 2012, both on manual and automated trading.
After refining many algorithms based on the wave oscillator, we came up with a number of very successful versions with outstanding results.
However, for more information, please contact Mario D. Conti at "info[(aatt)]fxtutors.com.au".
WHAT THE WAVE OSCILLATOR IS BUILT UPON:
The Wave Oscillator (WO from now on) is made out of four (4) displaced moving averages.
More exactly, they are four lines, each one build upon a "7-periods Exponential Moving Average (EMA)" based exclusively on HIGHS or LOWS as follows:
- two displaced EMAs based on highs
- two displaced EMAs based on lows.
This means that two EMAs are graphically shifted two periods forward and the other two are graphically shifted two periods backward.
HERE'S HOW IT LOOKS:
Click to enlarge
The candles in the background are intentionally displayed with dull colours to highlight the action of the Wave Oscillator.
NOTE: You don't really need the chart in the background to trade with the Wave Oscillator.
SETTING THE WAVE OSCILLATOR
FIRST SET OF MOVING AVERAGES.
- M.A. 1: 7-periods E.M.A., shift: +2, apply to: LOW, colour: red
- M.A. 2: 7-periods E.M.A., shift: -2, apply to: HIGH, colour: red
SECOND SET OF MOVING AVERAGES.
- M.A. 3: 7-periods E.M.A., shift: -2, apply to: LOW, colour: black
- M.A. 4: 7-periods E.M.A., shift: +2, apply to: HIGH, colour: black
THE BASICS
There are lines inside and lines outside. The pair of lines sitting outside form the TRADING BAND. The pair of lines sitting inside form the SIGNAL LINES.
In essence, the Wave Oscillator is built upon two line pairs:
- The red pair, or the red EMA pair
- The black pair, or the black EMA pair
For the sake of simplicity, the black pair and the red pair are referred to as "pairs of opposite colours"
The black pair and the red pair periodically swap their position inside and outside the trading band according to the type of trend (uptrend or downtrend).
The black pair and the red pair periodically swap their position inside and outside the trading band according to the type of trend (uptrend or downtrend).
- In an uptrend, the black pair sits inside an the red pair sits outside to outline the trading band.
- In a downtrend, it's the red pair that sits inside whilst the black pair sits outside to outline the trading band.
NOTE: The entry and exit signals DO NOT occur when the price of the candles/bars crosses through the EMAs.
Only the interaction between the EMA pairs generates the entry price (see further ahead in this book).
I might sound repetitive but, to trade with the Wave Oscillator, we don't really need the candles/bars in the background.
THE SIGNAL TO ENTER A TRADE
According to their purposes, traders may use different methods to enter a trade:
1) Direct Entry, used by short term traders.
2) Early Entry, used by short term traders who want to capture the trend from the very beginning and are willing to take additional risk.
3) Cascade Entry, used by position traders.
1) DIRECT ENTRY (recommended for short term trading)
With the DIRECT ENTRY, an Entry Signal occurs when:
A BUY SIGNAL occurs when both the black lines cross inwards the red lines and sit inside the red trading band. This is the "buy inwards crossover".
Buy Signal. Click to enlarge
In order to have a valid buy signal, one condition must be met:
- Both black lines must cross inwards the red lines. The inward crossover of only one black line over a red line is not sufficient for a valid buy signal.
Similarly, a SELL SIGNAL occurs when both the red lines cross inwards the black lines and sit inside the black trading band. This is the "sell inwards crossover".
Sell Signal. Click to enlarge
CONDITIONS FOR A VALID SELL SIGNAL
Clear Sell Signal. Click to enlarge
- A pair of EMAs moves inside the trading band by crossing over the EMA pair with the opposite colour.
- This "Inwards Crossover" provided by the Wave Oscillator is our entry signal.
Let's see a demonstration of some real cases:
INWARD CROSSOVER PROVIDING A BUY SIGNAL
A BUY SIGNAL occurs when both the black lines cross inwards the red lines and sit inside the red trading band. This is the "buy inwards crossover".
Buy Signal. Click to enlarge
CONDITIONS FOR A VALID BUY SIGNAL
In order to have a valid buy signal, one condition must be met:
- Both black lines must cross inwards the red lines. The inward crossover of only one black line over a red line is not sufficient for a valid buy signal.
INWARD CROSSOVER PROVIDING A SELL SIGNAL
Similarly, a SELL SIGNAL occurs when both the red lines cross inwards the black lines and sit inside the black trading band. This is the "sell inwards crossover".
Sell Signal. Click to enlarge
CONDITIONS FOR A VALID SELL SIGNAL
In order to have a valid sell signal, one condition must be met:
- Both red lines must cross inwards the black lines. The inward crossover of only one red line over a black line is not a valid sell signal.
- Both red lines must cross inwards the black lines. The inward crossover of only one red line over a black line is not a valid sell signal.
Clear Sell Signal. Click to enlarge
THE LATENCY OF THE ENTRY SIGNAL
Traders will quickly notice some latency between the entry signal and the start of the new trend.
When the entry signal appears, the stock/commodity price is generally higher (or lower) than the price at which the crossover occurred and traders feel they just missed out their entry.
It might be an unsettling feeling, but this should not deter traders from placing their orders, despite the latency.
Unless a closing signal occurs immediately after the opening signal (see further ahead: "how to close a trade"), the trader should trust the wave oscillator and go ahead with placing the order.
Furthermore, each oscillator/indicator involves some inherent latency but this does not deter traders from learning to use them correctly.
Practice is paramount.
2) EARLY ENTRY (trading off additional risk for an early entry)
The Early Entry takes advantage of the early symptoms of an incoming trend. It is used by those traders whom are willing to trade off some additional risk for the chance of exploiting a new trend from the very beginning.
Whilst the Direct Entry is a system based on an inward crossover, the Early Entry is based on a sudden divergence of the lines running inside the trading band. This divergence occurs just before the inward crossover.
Note: the lines running inside the trading band for an ongoing trend are:
- The red pair for an ongoing downtrend
- the black pair for an ongoing uptrend
Consequently, we are looking for a 90 degree divergence of the red pair (which is following a downtrend) in order to place an "early entry BUY".
Conversely, we are looking for a 90 degree divergence of the black pair (which is following an uptrend) in order to place an "early entry SELL".
CONDITIONS FOR A VALID EARLY ENTRY SIGNAL
The two inner lines must diverge with an angle close to 90 degrees. Concurrently, See the images below
THIS ARTICLE IS UNDER REVIEW FROM THIS POINT ON
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2) CASCADE ENTRY (recommended for position trading)
To do that, we use a set of:
- three separate entry signals based on three different time frames:
- 15 min chart
- 1 hour chart
- 4 hours chart
GENERAL RULE FOR A CASCADE ENTRY
The entry method described below is a “cascade procedure” and it was designed specifically for Position Trading.
The "Cascade Entry" is based on the concept of
- entering the trade by using the Entry Signal based on a chart built on the lowest time frame (ie: 15 min chart) and
- exiting the trade by using the Exit Signal based on a chart built of an higher time frame (ie: 1-hour chart or 4-hour chart).
This allows you to keep the trade on for a longer time to exploit the whole downtrend/uptrend.
-------------FIX FROM HERE----------
Here is how it works:
Then, if an Entry Signal occurs in the 1-hour chart before any Exit Signal occurs in the 15-min chart, we stop watching the 15-min chart and we look for an Exit Signal in the 1-hour chart
Direct Entry System based on the 15-min chart.
After that, two conditions must be satisfied:
- An Entry Signal occurs in the 1-hour chart
- No exit signal occurs yet in the 15-min chart
If the above conditions are satisfied, then
The "Cascade Entry" is based on the concept of
- entering the trade by using the Entry Signal based on a chart built on the lowest time frame (ie: 15 min chart) and
- exiting the trade by using the Exit Signal based on a chart built of an higher time frame (ie: 1-hour chart or 4-hour chart).
This allows you to keep the trade on for a longer time to exploit the whole downtrend/uptrend.
-------------FIX FROM HERE----------
Here is how it works:
Then, if an Entry Signal occurs in the 1-hour chart before any Exit Signal occurs in the 15-min chart, we stop watching the 15-min chart and we look for an Exit Signal in the 1-hour chart
Direct Entry System based on the 15-min chart.
After that, two conditions must be satisfied:
- An Entry Signal occurs in the 1-hour chart
- No exit signal occurs yet in the 15-min chart
If the above conditions are satisfied, then
ENTRY SIGNAL FROM THE 15 MIN CHART
An Entry signal is originally entered by the Wave Oscillator build upon the 15 min chart which provides:
- the first ENTRY SIGNAL and
- the first STOP and TRAILING STOP
ENTRY SIGNAL FROM THE 1-HOUR CHART
An Entry signal is originally entered by the Wave Oscillator build upon the 1-hour chart which provides:
- the first ENTRY SIGNAL and
- the first STOP and TRAILING STOP
ENTRY SIGNAL FROM THE 4-HOUR CHART
After few hours, a further entry signal from the Wave Oscillator built upon the 4-hour chart is also generated.
This new entry signal will supersede the one from the 1-hour chart and the Wave Oscillator built upon the 4-hour chart will take over the ongoing trade.
This new entry signal will supersede the one from the 1-hour chart and the Wave Oscillator built upon the 4-hour chart will take over the ongoing trade.
Hence, the initial trailing stop will be replaced by the new trailing stop provided by the 4-hour chart.
NOTE: If no entry signal is generated by the 4-hour chart, there will be no take over and the trade will probably be closed by an exit signal provided by the WO built on the 1-hour chart.
ENTRY SIGNAL FROM THE DAILY CHART
After very few days, a further entry signal from the Wave Oscillator built upon the daily chart is also generated.
This new entry signal will supersede the one from the 4-hour chart and the Wave Oscillator built upon the daily chart will take over the ongoing trade.
This new entry signal will supersede the one from the 4-hour chart and the Wave Oscillator built upon the daily chart will take over the ongoing trade.
Hence, the 4-hour trailing stop will be replaced by the new trailing stop provided by the daily chart.
NOTE: If no entry signal is generated by the daily chart, there will be no take over and the trade will probably be closed by an exit signal provided by the WO built on the 4-hour chart.
ENTRY/EXIT SIGNALS - GENERAL PRINCIPLES
The ENTRY SIGNAL is given exclusively by the pair of EMAs with the same colour running inside the trading band.
On the other hand, whenever an EMA pair moves outside the trading band it’s no longer useful to enter trades.
Hence, to enter trades, our attention focuses exclusively on the EMA pair inside the trading band.
ENTRY SIGNAL - UPTREND
INSIDE CROSSOVER OF THE BLACK PAIR
In an uptrend, the entry signal is given by the crossover of the black pair whenever any black line crosses over the other black line inside the trading band.
Note: the black pair must be inside the trading band made of the red pair. Also, other inside cross overs of the black pair usually occur following the first inside crossover. These new signals must be discarded.
EXIT SIGNAL - UPTREND
EXIT SIGNAL - UPTREND
OUTSIDE CROSSOVER
In an uptrend, the exit signal is given by the crossover of any of the black lines with any of the red lines (outside crossover).
What usually happens:
- Often, the two black lines don't cross the red lines simultaneously. Whichever cross occurs first, it constitutes a valid exit signal.
- Both black lines will cross the red lines from inside the trading band and move outside the trading band.
- At least one of the black lines usually crosses over with an angle of intersection of 60-90 degrees.
- The outside crossover is usually preceded by a wide divergence of the black pair.
DIVERGENCE
At the very end of an uptrend a sudden wide divergence of the black lines occurs. The major uptrend - still on course - will soon come to an abrupt end.
Basically, the black lines suddenly point towards the outer boundaries of the trading band.
This divergence precedes the outside crossover.
click to enlarge
ENTRY SIGNAL - DOWNTREND
INSIDE CROSSOVER OF THE RED PAIR
In an downtrend, the entry signal is given by the crossover of the red pair whenever any of the red lines crosses the other red line inside the trading band.
Note: the red pair must be inside the trading band made of the black pair. Also, other inside crossovers of the red pair usually occur following the first inside crossover. These new signals must be discarded.
EXIT SIGNAL - DOWNTREND
OUTSIDE CROSSOVER
In an downtrend the exit signal is given by the crossover of any of the red lines with any of the black lines (outside crossover).
What usually happens:
- Often, the two red lines don't cross the red lines simultaneously. Whichever line crosses over first constitutes a valid exit signal.
- Both the red lines will cross over the black lines from inside the trading band and move outside the trading band.
- At least one of red lines usually crosses over with an angle of intersection of 60-90 degrees.
- The outside crossover is usually preceded by a wide divergence of the red pair.
DIVERGENCE
At the very end of a downtrend a sudden wide divergence of the red lines occurs. The major downtrend - still on course - will soon come to an abrupt end.
Basically, the red lines suddenly point towards the outer boundaries of the trading band.
This divergence precedes the outside crossover.
STOP LOSS
The Wave Oscillator provides a clear indication of the “initial stop loss”.
HOW TO CALCULATE THE INITIAL STOP LOSS
THE STOP LOSS IN THE UPTREND
In an uptrend, the initial stop loss is the difference between the crossover point of the inside lines and the lowest low of the trading bands. See the image below.
THE STOP LOSS IN THE DOWNTREND
In an downtrend, the initial stop loss is the difference between the crossover point of the inside lines and the highest high of the trading bands. See the image below.
click to enlarge
click to enlarge
WHEN TO SET YOUR TRAILING STOP
Once your initial stop loss is in place, you must set your trailing stop immediately to protect your future profit.
Without a trailing stop you wouldn't be able to secure your future profit or protect your trade from excessive volatility.
Sometimes the trailing stop triggers an early exit without waiting for the outside crossover. There's nothing wrong with. It's just an early "take profit"
Other times the exit is triggered by an outside crossover.
SIZE OF YOUR TRAILING STOP
The size of your trailing stop is calculate by doubling the size of your initial stop loss. The Wave Oscillator provides an optimal size of the regular stop loss. Just double it. Hence, if your stop loss is $15 or 126 pips, your trailing stop should be $30 or 252 pips.
SEE THE TRAILING STOP IN ACTION
In the examples below, the size of the trailing stop is calculated by doubling the size of the initial stop loss.
UPTREND
See the image below of a trailing stop in an uptrend.
click to enlarge
DOWNTREND: See the image below of a triggered trailing stop in an downtrend. In this case as well, the trailing stop was slower that the outside crossover in triggering the exit.
