McClellan Oscillators

 

Market width

Initially McClellan Oscillator was designed to determine the width of the stock market. Market width is the number of shares growing in price relative to the number of shares falling in value. The market width indicators are the tools of the analysis that determine the direction of the trend, help to understand the mood of the market, whether it is growing, falling or neutral.

Such indicators for Forex assess the strength of the influence of buyers or sellers to increase or decrease the price and thus determine the strength of trend support and the likelihood of its continuation. Indicators of market width can be very useful, to provide information that can not be obtained with the help of other indicators. Apart from McClellan Oscillator, the market width is marked by such indicators as the Growth/Fall Line, the On-balance Volume Indicator (OVB) and the Arms Index (TRIN). These oscillators are also adapted for Forex trading, but not all of them are popular with traders.

In 1969, Sherman and Marianne McClellan developed the McClellan Oscillator (fig. 1) and the McClellan Summation Index and described them in the book «Profitable patterns: the oscillator and the McClellan Summation Index». In the same place, they set out the principles of interpretation of the information tools.

McClellan oscillator for Forex trading

Fig. 1

McClellan Oscillator and McClellan Index are among the most popular tools on the stock market, they are the main ones for the New York Stock Exchange (stock exchange). But they cannot be called frequently used in the Forex market (the whole truth about Forex). Most likely it happens because they do not have any unique functions and traders do not use more common indicators of the same action.

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McClellan oscillator

McClellan Oscillator shows the width or spread of the market, that is, the market range, allows you to mark upward and downward trends. The indicator is built into specialized terminals for trading on the stock market. Later McClellan Oscillator was adapted for Forex, in particular, to calculate the short-term overbought or oversold conditions in the market. For the Forex market McClellan Oscillator is rare, but there are some opportunities to use it here.

McClellan Oscillator is based on the difference between fast and slow EMA with periods of 19 and 39. It can be used to develop Forex strategies in combination with other indicators. This tool refers to the indicators of market width, which are initially based on the data on the dynamics of shares, coinciding with the overall trend dynamics. If the number of growing shares is noted, the trend is upward. But if this growth is supported by a small number of shares, it indicates a weakening trend and soon we should wait for a reversal. Similarly, if the downward trend is supported by a small number of falling shares, it indicates that soon the bearish trend may be replaced by a bullish one.

McClellan Oscillator in MetaTrader 5 platform

McClellan Oscillator and McClellan index do not refer to standard tools in trading terminals. For MT5 the oscillator can be downloaded here. You can integrate Forex oscillators into the terminal in several standard ways. For example, the MQ5 boot file is downloaded to your computer. It should be opened in MetaEditor and added to the program. When you open the trading terminal, it will be already in the list of custom tools in the navigation panel on the left.

Pre-defined settings of the indicator: the base currency is the American dollar, fast MA with the period of 19, slow MA with the period of 39. There is no need to change the settings, because the oscillator works optimally with the existing parameters. Having mastered the methods of trading with the indicator, you can add additional levels to the chart, but it is not necessary, because the oscillator is not designed to determine the areas of overbought and oversold, the built-in zero level is enough.

McClellan oscillator signals

In the classical variant, McClellan Oscillator demonstrates the signal to buy when the oscillator’s values fall into the oversold zone, usually between 70 and 100, and turn upwards. Placement of the oscillator in the overbought zone from +70 to +100 and reversal down is considered a signal to buy.

The exit of McClellan Oscillator above +100 or below -100 indicates the extreme overbought or oversold market and confirms the continuation of the formed trend. If there is no strong trend in the market and MC reaches +100 or -100, it is a signal of the formation of a certain trend. The signal to buy is a fall of McClellan Oscillator to 90 and upward reversal. Falling below 100 warns of a possible long-term downward trend and warns against buying. For sell signals the oscillator monitors the mirror situation.

McClellan is characterized by the same Forex signals as many other oscillators. If the oscillator line crosses the zero level from the bottom upwards, it is a signal to buy. If the oscillator line crosses the zero level from top to bottom, it is a signal to buy. Divergence is also a classic signal – the divergence between the oscillator and the price dynamics. But in any case, it is recommended to use McClellan Oscillator when trading on Forex only with other indicators.

Trading strategies based on McClellan Oscillator

There are no specialized or popular strategies for the Forex market with the use of the oscillator, as it is not a popular indicator. When using it, the same principles are applied as in the stock market, but most likely with less efficiency.

McClellan Oscillator trading strategy can be based, for example, on one signal only – the crossing of the zero level. When the oscillator crosses the zero level from the bottom upwards, it opens a position to buy. When the oscillator crosses the zero line, it opens a sell position. Or a Buy position is opened if the oscillator exceeds -70; if the oscillator decreases from +70, a Sell position is opened. As an example of using the tool with other indicators, you can imagine a simple strategy with a simple moving average of 25 (fig. 2):

McClellan oscillator: trading strategies

Fig. 2

According to this strategy, buy positions are opened when prices are above the moving average, and the indicator line breaks through the zero level. Accordingly, sell positions are opened when prices are placed below the moving average.

The work with McClellan Oscillator implies the obligatory setting of pending orders and stop-losses when implementing any strategy. One of the strategies for trading on a short timeframe implies the use of McClellan Oscillator, an exponential average of 10-period and an exponential average of 50-periods on the price chart: (fig. 3):

Strategy with McClellan oscillator

Fig. 3

The signal to buy or sell will be the crossing of McClellan Oscillator, and the EMA is needed to confirm the signal. Thus, to buy an asset EMA (10) should cross the EMA (50) from the bottom upwards, to sell the signal will be the EMA (10) crossover from the bottom upwards EMA (50).

 

McClellan Summation Index Oscillator

McClellan’s Summation Index (fig. 4) is based on McClellan Oscillator values and represents their sum. The index acts as an oscillator, but for long-term trading:

McClellan Summation Index Oscillator

Fig. 4

McClellan Summation Index can be calculated in two ways. The first principle of calculating the McClellan Summation Index is that the 10% (19-day) and 5% (39-day) exponential moving averages of the EMA (difference between rising and falling values) are subtracted from the MC value. The full formula of its calculation looks like this:

The summation index = McClellan Oscillator index – (10 x 10% trend) + (20 x 5% trend) + 1000; where

  • 10% trend – 10% EMA from the difference between the growing and falling indicators;
  • The 5% trend is the 5% EMA of the difference between the rising and falling indicators.

Level 1000 was introduced by the authors of the oscillator in the precomputer era. The summation index moved in the range from 0 to 2000, the McClellans introduced a certain average neutral level of 1000 to make it easier for traders to use the indicator.

The second method of calculating the Index is to calculate the increasing sum of McClellan Oscillator values using the formula:

Stack index = yesterday’s summation index + McClellan Oscillator.

McClellan Index oscillator in MetaTrader 5 platform

Installation of the indicator is also standard. For example, after downloading a zip-file with the McClellan index to your computer, you need to unpack it in MetaEditor. For example, you can download the file here. When opening the trading terminal, the indicator will be already in the program. Its settings are also not recommended to change, especially if the formula of its calculation is not quite clear.

Trading strategies based on McClellan Index

Strategies based on the McClellan Summation Index indicator are carried out in the same way as with the oscillator. It can be used to develop strategies as a tool to identify longer-term trends. For example, when the market descends to -1300 index, one can expect divergence. If the indicator exceeds +1900 after increasing to +3600, we can talk about the formation of an ascending trend.

 

Summary

McClellan Oscillator is not standard for Forex, as well as the McClellan Summation Index. But there are traders who use them in their work. It is known that McClellan indicators can be used quite effectively in trading if you know their drawbacks and use additional tools.

McClellan Oscillator has its specific drawback – it generates a lot of false signals and, in general, gives not very accurate signals when trading Forex. Traders also note that McClellan Ocsillator can stay in the extremum zones for a long time during the expressed trends of high strength, which makes it difficult to apply it at these moments. Also, it does not work very effectively on a strong upward trend.

To a greater extent, these tools can be used by experienced traders, as they are quite difficult to interpret. Information on the intricacies of McClellan’s trading tools can be found in publications on trading in the stock market. In addition, there are quite popular strategies with McClellan indicators to trade binary options.


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