Our trader knows that following the market trend is the most important factor in beginning his technical analysis, but when will an oscillator be the most useful? During choppy markets, when prices move sideways for several weeks or months, oscillators will track the price movement very closely. Because the peaks and valleys on the price chart coincide almost precisely with the peaks and valleys of the oscillator, they look very much alike. However, somewhere along the way there will be a price breakout and a new uptrend or downtrend will begin. At the beginning of the breakout, by its very nature, the oscillator will already be in an extreme position. Should the breakout be to the upside, the oscillator will already be overbought, and to the downside, it will usually be oversold. Our trader is now wondering, should he or she buy the bullish breakout in the face of an overbought oscillator reading? Or if it’s on the downside, should the breakout be sold into an oversold market?

In these cases, it’s best the oscillator be ignored for the time being and the position taken. The reason? Oscillators often reach extremes very quickly in the early stages of a new trend and stay there for awhile. Basic trend analysis should be the main consideration until the trend begins to mature. Then our trader can give the oscillator greater weight. Many dynamic bull moves have been missed by traders waiting for their oscillators to move into an oversold position after seeing a major trend signal. In summary, give oscillators less attention in the early stages of an important move, and pay closer attention to its signals as the move reaches maturity.

Andy Swan is co-founder and head trader for DaytradeTeam.com. To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.