the wave oscillator


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: 01/03/2017

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) 




THE WAVE OSCILLATOR


Why the Wave Oscillator?  I (Mario D. Conti) created this indicator for a number of reasons:

  • 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 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 with 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 which, too often, doesn't necessary imply that a new trend is imminent.
  • they are cumbersome to use and subject to a personal interpretation.



BACK TESTING:


This oscillator has been tested on real trades since 2012. 
However, further tests from the trading community are very welcome. Please don't hesitate sharing your results and suggestions with mePlease 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 of four (4) displaced moving averages.


More exactly, they are four lines, each one build upon a "7-periods Exponential Moving Average (EMA)" based 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 displaced four (4) periods forward and the other two are graphically displaced four (4) periods backward.





HERE'S HOW IT LOOKS:






Click to enlarge



The chart in the background is intentionally displayed in faint colours to highlight the Wave Oscillator from the underlying graph.



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

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 a uptrend, the black pair sits inside and provides the entry signal. The red pair is sitting outside to outline the trading band.
  • In a downtrend, it's the red pair that sits inside and provides the entry signal whilst the black pair is sitting outside to outline the trading band.

NOTE: Theoretically, you don't need the chart in the background to trade with the Wave Oscillator.




HOW TO ENTER A TRADE



1) DIRECT ENTRY (recommended)


The Direct Entry is performed preferably on the Wave Oscillator plotted on a daily chart as the Wave Oscillator is proven more effective on a daily chart than on the lower time frames.

The ENTRY SIGNAL is given only whenever a pair of EMAs with the same colour moves inside the trading band and crosses over. The crossover is the entry signal.

There are two line pairs with the same colour:
  • The red pair
  • The black pair
On the other hand, whenever an EMA pair moves outside the trading band it’s no longer useful to our purposes other than visualizing the trading band.

Hence, our attention only focuses on the EMA pair inside the trading band. 

For manual traders the “DIRECT ENTRY on the daily chart” is recommended. To further understand how to enter a trade with the DIRECT ENTRY method see "ENTRY SIGNALS" below.


2) CASCADE ENTRY (for automated systems)


To do that, we use a set of
  • 3 separate entry signals
  • based on 3 different time frames:
- 1-hour chart
- 4-hour chart
- daily chart


GENERAL RULE FOR A CASCADE ENTRY




The entry method described below is a “cascade procedure and it was designed specifically for Automate Trading Systems (ATS).


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.

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.

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.



SETTING THE WAVE OSCILLATOR




FIRST SET OF M.A. 

  • 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 M.A. 

  • 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


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  


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.


click to enlarge







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.




click to enlarge





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







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. 
Note that in this case the trailing stop was slower that the outside crossover in triggering the exit.


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. 




click to enlarge