You might have heard it said "the biggest risk anyone can take in the stock market is not being in the market." Although this is somewhat of a controversial statement, and there are times when itâ�,��"�s not true (2000-2002), it does enlighten us to the fact that the stock market presents us with great opportunities to improve our wealth. Our job is to figure out how to find the best opportunities and how to best take advantage of them, and this is sometimes quite a challenge. In a market that has all sorts of different behavioral patterns, we as astute investors have to know how to react to different situations, whether they are bullish, bearish or sideways. And this is where oscillators come in.

Oscillators 101

Oscillators basics are relatively easy to grasp; they attempt to determine two things that we would all love to know: overbought and oversold levels. Since oscillators typically fluctuate within a defined range (your predetermined overbought and oversold levels) and around a central line. If oscillators are successful in doing what they are designed to do, they provide us with the opportunity to take advantage of the swings in the market before most other investors realize what is happening. Today, we will examine three popular oscillators: Momentum, RSI and Stochastics.

Popular Oscillators

Although Momentum does not fit the exact criteria of moving within a specific overbought/oversold range, it still oscillates. Momentum is pretty basic and easy to understand; the underlying concept being the difference in price in a certain period (price action). To build a 5-day Momentum line, we take the price from 5 days ago and subtract it from today. This will result in either a positive or a negative number, and therefore Momentum is plotted around a "zero line". If the line crosses into negative territory, bottoms out and starts moving upward (still below the "zero line"), then we can recognize the "momentum" of the negative trend is slowing down (note: it is slowing down, but it is still negative. Momentum can be a very useful indicator that lets you see price movement that is impossible to see otherwise. Some analysts like to use Momentum in conjunction with other oscillators, such as RSI or Stochastics.

RSI (Relative Strength Index) is a little more complex than simple Momentum, although RSI itself can be described as a momentum oscillator. RSI, just like Momentum, is calculated over a certain number of periods (typically days) to determine overbought and oversold levels. RSI operates on a scale of 0 â�,�“ 100, which leaves the individual investor to determine where he is comfortable determining his overbought/oversold levels. In times of milder movement, 30-70 might be adequate, whereas in a more volatile period (where discernment is of more importance) levels of 20-80 will shield us from insignificant crossovers.

Stochastics (just like the name itself) is a little more complex. Based on extensive formulae, Stochastics uses two lines that display price action (the high-low of the day) over a certain number of days and relates this to closing price. These two lines, based on different time periods, results in a faster and a slower line, which will indicate when a stock is changing direction. If this occurs â�,��"out of boundsâ�,� (above or below your overbought/oversold levels), we are left with a pretty distinct and clear signal.

If you look at these three oscillators, you will see that they all have an adjustable element that will determine their effectiveness. This element â�,�“ the number of periods (or days) that you use to calculate price action â�,�“ will allow you to make rapid short term or slower, long-term decisions. Although a lot of investors use the default lengths that the founders of these indicators provided, these are not necessarily to optimal levels that we can determine today. If we tweak and adjust these lengths, we can come up with our own optimal length that will provide maximal profit.

Understanding how these different oscillators work lets us see how each one gives us a different perspective on price action. If an investor understands the significance of each oscillator, then putting them together to form a solid strategy becomes a feasible option. Using Momentum, RSI and Stochastics in conjunction enables an investor to make thorough decisions based price action, overbought and oversold levels. This knowledge will greatly aid an investor in taking advantage of a fluctuating market that has so many unrecognized opportunities.

Make Money With Oscillators

Now letâ�,��"�s look at some action steps here. After thorough testing, weâ�,��"�ve found that RSI, which usually has a default length of 14, works much better when you lower that length to less than 8. Thatâ�,��"�s when this indicator becomes effective. Stochastics on the other is typically used with a default length of a 14 as well. Weâ�,��"�ve found that you change the length of Stochastic slow to over 20, the effectiveness of this indicator increases significantly. Give it a try.

So the next time you are at a social event and someone starts talking investing and throws the line about â�,��"being in the market,â�,� you can let them know a little more about all the opportunities they are missing.

Price Headley is the founder and chief analyst of BigTrends.com.