Confused by all the trading indicators? Want a strategy that uses both price and time to forecast future movements? Look no further than the Forecast Oscillator! Tushar Chande’s powerful tool will show you how to identify trends, anticipate reversals and enter and exit for maximum trading success.

In this guide we will go into the nuts and bolts of the Forecast Oscillator, show you how it works and give you a step by step approach to adding it to your trading armoury.

What is the Forecast Oscillator?

The Forecast Oscillator is a technical indicator that measures the difference between the current price of an instrument and its forecasted price based on historical data. It’s reality (current price) vs expectation (forecasted price). This difference is then expressed as a percentage of the current price and is an oscillating value that moves above and below a zero line.

By looking at the position and direction of the Forecast Oscillator, traders can see trends, overbought/oversold conditions and enter and exit points for their trades.

How the Forecast Oscillator Works

The Forecast Oscillator compares the current close of an instrument to a statistically forecasted price based on its historical price movements. This forecasted price is usually calculated using linear regression, a mathematical technique that draws a straight line through past price data.

In other words the indicator calculates the percentage difference between “now” (current close) and “what if” (forecasted price based on historical trend). This difference is then expressed as a percentage of the current close and is an oscillating value that moves above and below zero.

Positive readings mean the current price is above the forecasted price based on historical data, a potential uptrend or overbought.

Negative readings mean the current price is below the forecasted price, a potential downtrend or oversold.

By looking at the position and direction of the Forecast Oscillator (up or down trend) traders can see into future price movements and make informed decisions to enter or exit trades.

Calculating and Plotting the Forecast Oscillator

The Forecast Oscillator (FOSC) has a two step process to get to the final value: calculate the forecasted price and then calculate the oscillator value as a percentage. Here’s breakdown:

• 1. Calculating the Forecasted Price:

  Most commonly, the forecast price is generated using linear regression. This method fits a straight line to a specific number of past closing prices (lookback period). Here’s a simplified representation:

  • n: Lookback period (number of past closing prices used for the forecast)

  • P(i): Closing price at period i (where i = 1 represents the most recent closing price)

  The forecasted price (F(t)) for the current period (t) is calculated using the following formula:

  F(t) = a + b * P(t-1)
  

  • a: Intercept of the regression line (calculated using statistical methods)

  • b: Slope of the regression line (calculated using statistical methods)

  2. Deriving the Oscillator Value:

  Once you have the forecasted price, the actual calculation of the Forecast Oscillator (FOSC) comes into play:

  FOSC(t) = (P(t) - F(t)) / P(t) * 100
  

  • P(t): Current closing price

  • F(t): Forecasted price calculated in step 1

  This formula essentially calculates the percentage difference between the current closing price and the forecasted price. The result is then multiplied by 100 to express it as a percentage.

  Plotting the Forecast Oscillator

  The calculated FOSC values are typically plotted on a separate oscillator window below the main price chart.

• The vertical axis of the oscillator window usually ranges from -100% to +100%. A zero line is displayed in the center to differentiate between positive and negative values.

  Interpreting the Plot

  Positive FOSC values: When the FOSC is positive, it indicates that the current price is trading above the forecasted price based on historical data. This suggests a potential uptrend or overbought conditions.

  Negative FOSC values: Conversely, negative FOSC values imply that the current price is trading lower than the forecasted price. This could signal a downtrend or oversold territory.

  Traders often use the FOSC’s position relative to the zero line and its directional movements (upward or downward trends) to identify potential entry and exit points for their trades.

Identifying Trading Opportunities with the Forecast Oscillator: Trend Reversals and Zero Line Crosses

The Forecast Oscillator (FOSC) is a great tool for finding trading opportunities, especially when looking at trend reversals and zero-line crosses. Here’s how to interpret:

Trend Reversals

Up Trend: When the FOSC is above the zero line and starts to drop from the top, it could be a sign of a weakening trend or a reversal. Short sell if confirmed by other indicators.

Down Trend: If the FOSC is negative and starts to rise from the bottom, it could be a break in the down trend or a reversal. Long entry if confirmed by other indicators.

Zero Line Crosses

Above Zero: When the FOSC crosses above zero from below, it’s a bullish signal, could be an uptrend or continuation of an uptrend. Long entry, but confirm with other indicators.

Below Zero: If the FOSC goes below zero from above, it’s a bearish signal, could be a down trend or continuation of a down trend. Short sell, but again, confirm with other indicators for a stronger signal.

Important Notes

False Signals: The Forecast Oscillator, like any other indicator, can produce false signals. Use it with other technical tools and consider the overall market conditions to make your trading decisions more reliable.

Confirm with Other Indicators: Don’t use the FOSC as sole entry and exit points. Look for confirmation from other indicators like price patterns, volume analysis or momentum indicators to strengthen your signals.

Overbought/Oversold: The FOSC doesn’t define overbought and oversold levels, but extreme positive or negative values can be considered as such. Use these values with other indicators to find trend reversals.

By understanding how the Forecast Oscillator behaves during trend reversals and zero-line crosses, you can get more insights into price movements and find better trading opportunities.

Remember, the FOSC is a tool, and its power is amplified by good risk management and a complete trading strategy.

Advanced Trading Strategies: Using Support and Resistance with the Forecast Oscillator

The Forecast Oscillator can be further enhanced by incorporating support and resistance levels. Here’s how you can leverage these levels for improved trading strategies:

• Visible Support and Resistance Lines: Analyze the FOSC chart for horizontal lines that tend to cluster around specific values. These areas of price congestion can act as support (when the FOSC bounces off the bottom) or resistance (when the FOSC struggles to break above).

• Breakouts: A breakout from a well-defined support or resistance level on the FOSC can be a significant indicator of a potential trend continuation. For example, a sustained break above a resistance level could signal a continuation of an uptrend, while a break below support might suggest a continuation of a downtrend.

However, be cautious:

• Single-Bar Movements: False breakouts can occur, especially when triggered by single-bar movements on the FOSC. It’s crucial to wait for confirmation.

• Price Confirmation: Only consider taking a trade if the underlying asset’s price also confirms the breakout. This means waiting for the price to convincingly cross above the resistance level for a long entry or below the support level for a short entry.

By combining the FOSC with support and resistance levels, you can gain a more comprehensive understanding of potential price movements and identify trading opportunities with a higher degree of confidence. Remember, always prioritize confirmation from the price action before entering a trade.

Conclusion

By mastering the Forecast Oscillator, you’ll gain a valuable edge in the ever-evolving financial landscape. Remember, no single indicator is a foolproof guarantee, so it’s crucial to combine the Forecast Oscillator with sound risk management practices and a well-defined trading plan. So, buckle up and get ready to unlock the potential of this potent trading weapon!

• FAQ

  Is the Forecast Oscillator a good indicator for beginners?

  The Forecast Oscillator can be a valuable tool for both beginners and experienced traders. However, it’s recommended to gain a solid understanding of technical analysis concepts before relying solely on this indicator.

  What other indicators can be used alongside the Forecast Oscillator?

  The Forecast Oscillator pairs well with various indicators like Moving Averages or Relative Strength Index (RSI) to confirm signals and strengthen your trading decisions.

  Where can I find the Forecast Oscillator on my trading platform?

  The availability of the Forecast Oscillator may vary depending on your platform. However, most charting software allows you to add custom indicators, and the formula for the Forecast Oscillator can be readily found online.