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This is an old thread, and there wasn't a huge amount of interest anyway, but it's a Sunday morning and I'm not doing much, so I'll put in half a cent, since it was recently revived.
I won't talk about whether you "should" use indicators, or whether they are "lagging," or any of those never-ending controversies... just something about how an indicator with an absolute high and low point is designed. For instance, RSI can't go higher than 100 or lower than 0. Williams %R (which is just a stochastic with the range reversed) can't go above 0 or below -100. Stochastics can't go above +100 or below 0.
The formula for %R and for stochastics is simply what is the percent of the current price, within the total range of x bars. It can't be higher than at the top of the range, since the range includes the current bar, and it can't be lower than the bottom of the range, for the same reason. The formula for RSI divides the current difference between rising and falling bars by the sum of the rising and falling bars. The difference could be 0 if price never moved, or it could be 100 if it's the same as the sum. It can't be more so it won't be over 100 (it will always be less in practice); it can't be less, so it won't be below 0.
These are calculation-based tricks, not anything else. We normally call them "bounded" indicators, as opposed to "non-bounded" indicators like MACD or CCI, which have no mathematically-imposed limits.
You can turn any unbounded indicator into a bounded one by finding something to divide it by that will make the result have a limit. Use stochastic percent of range type calculation on MACD, for instance: MACD is the difference between two EMA's, so take that difference and divide it by the range of MACD over x number of bars. Voila! Bounded! The current MACD reading can't be higher than the high of its current range, nor lower than the low.
Do the same thing with MACD and run it though an RSI calculation. Basically, just find the RSI of your MACD. This is not as nuts as it sounds. Since it's a slow day, here are some examples:
-First indicator: standard MACD, 12, 26, 9.
-Second indicator: same standard MACD, taken as the input for a standard slow stochastic -- most platforms let you do this with a few clicks. You just use MACD as the input instead of price.
-Third indicator: same standard MACD, taken as the input for a standard RSI.
Nothing has changed except the presentation. You can do this kind of thing with any oscillator.
Is it a good idea? Well, it does give you the "overbought" and "oversold" lines, but take a look at them.... do they tell you anything except that the indicator is pretty high or low now, compared to some recent value? In a trend, the indicator stays high (or low) for a very long time. Traders who use overbought as a sell signal and oversold as a buy in a trend simply fight the trend until they are stopped out or blow their account. But in a range, using them to sell/buy will work. So all you need to know is whether you are in a trend or a range and then trade accordingly.... (Duh)
If you think of them as high-postive-momentum and high-negative-momentum levels, and you can relate them to what price is doing, you may find a use for them. Or perhaps not. It's obviously up to you what you do with it.
I'm not against indicators, just against not knowing what they tell you, and making simplistic assumptions about what to do when there is a "signal."
So, to answer the original question, you can make any oscillator into a range-bound one. Will it help you with anything?
Sometimes.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
