Oscillators oscillate -- I know that sounds like a ridiculously obvious point, but this is really where people go wrong when they try to develop an oscillator index in Microsoft Excel.
To further explain, I will quote John J. Murphy, the godfather of technical analysis.
The momentum chart has a zero line. Many technicians use the crossing of the zero line to generate buy and sell signals. A crossing above the zero line would be a buy signal, and a crossing below the zero line, a sell signal.
But how do you go about creating this zero line? You need to establish a "baseline" around which the oscillator gyrates. Let's view Murphy's formula for rate of change, which is defined as follow:
- Rate of change = 100 (V/Vx)
Murphy further explains:
In this case, the 100 line becomes the midpoint line. If the latest price is higher than the price 10 days ago (price are rising), the resulting rate of change value will be above 100. If the last close is below 10 days ago, the ratio would be below 100.
To construct the foundation of your oscillator using rate of change, simply enter the below formula in an empty cell (assuming cell B2 is V, and cell B11 is Vx):
- =100(B2/B11)
And that's it! Copy down this formula and you will establish a rate-of-change oscillator for your particular data set.
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