A common technique used by traders with oscillators is to
initiate long or short positions on crossovers above and below
the center line. While this is a popular method, it can limit the
effective use of the KVO. The dominant characteristic of the
KVO is the velocity at which it precedes price, alerting the
trader to short-term price extremes. With the use of a trigger, trades can be initiated prior to the crossover of the center line
and a price reversal. For the best signals, the following
guidelines should be followed:
1 The most powerful use of the KVO comes when the
indicator reaches an extreme reading either above or
below the center line and reverses direction. This signals
an exhaustion of the prevailing trend and warns of an
impending reversal in price (Figure 1). Observe how the
KVO capitulated coincident with the price peak at 27 in
September and then reversed direction, activating the
2 The most reliable signals occur in the direction of the
prevailing trend. Trades against the trend tend to be highrisk
ventures. Note how the KVO gave a buy signal in July
against the prevailing trend but required more basing,
accompanied by a rising volume force and a change in
trend, before a more meaningful trade resulted in September
3 The most important signal occurs when the KVO diverges
from price action, especially on price extremes, either in
overbought or oversold territory. When a security makes
a new high or low for a cycle and the KVO fails to confirm
this, the indicator is warning that the trend is losing momentum and nearing completion (Figure 3). Note how
the KVO peaked in early May, warning of an impending
reversal that was confirmed later in the same month when
the stock peaked and the KVO made a lower top.
4 For investors with a longer-term horizon, the KVO can
easily be converted to a cumulative oscillator using the
following custom formula in MetaStock. Figure 4 is an
example of the KVO (cumulative). Note how it smoothes
the indicator, resulting in fewer buy and sell signals, at the
same time reflecting the longer-term flow of money into
and out of the security.
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The red line is the "signal" and the blue line is the "KO". I'm going to read the script and the article togather so I can understand how these interact. Just from the cursory level I'd say I'd love a "signal " line that changes color based slope. I'd love to know if there was a way to smooth the "KO" without lag wrecking the early warning volume flip. I wonder if there is a way for some universality of "extreme condition" and if there could be a horizontal line in the sub graph to mark that level.
So what are you thinking or wondering after reading the article and viewing the basic chart?
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EMA's of the KVO are already smoothed. The blue line, from the extremes anyway, should lead price action. But the line is kind of jagged for me...and extremes needs to be quantified, universal and marked by a visual reference point.
I wonder what a MACD of the values would produce? Is that right thinking in the direction of a better visual?
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