What is the 3-10 oscillator? Way back in my earlier days when I started StockManiacs on 2009, I got this idea of 3-10 oscillator from AfraidToTrade blog. So the credit goes to Corey Rosenbloom who is a CMT (Chartered Market Technician). I have seen that many patterns of 2009 have been working on 2017 as both the markets are a bull market of same nature. Hence I thought to re-check this indicator now and found that trend reversal patterns are really made easy with this oscillator.
Corey has shown that 3-10 oscillator can be created by changing the normal MACD period of 12-26-9 to 3-10-16. In his post on the 3-10 oscillator, Corey has shown an example of creating the oscillator on the Dow Jones chart with hiding the price and using 3-period EMA and 10-period EMA on the upper pane and side by side using the 3-10-16 MACD indicator in the same chart on the lower pane. What is noted that this 3-10 oscillator can spot the divergences much earlier than a normal 12-26-9 MACD indicator.
I have seen this oscillator can spot the trend reversal patterns clearly and easily than the normal MACD indicator. The best of the trend reversal patterns is divergence. Check how 3-10 oscillator can spot divergence easily. This is the screenshot of 29th December 2016, Bank Nifty index closing price is 18033.20.
So as per divergence trading Bank Nifty was a buy as per the end of day charts of 29th December 2017 at the closing price of 18033.20. Now let’s check the actual result.
As expected Bank Nifty index has bounced back from the lows. If you have bought after 29th December 2016, you can be on the long trade till the 3-period EMA stays above the 10-period EMA on the upper pane. Here it crossed back on 23rd March 2017 and it marked an exit long at a price of 20895.50. So it’s a profit of 20895.50 – 18033.20 = 2862.30 points. If we multiply by lot size of 40 it’s a profit of Rs. 1,14,492 per lot.
Now, let’s check the 3-10 oscillator histogram. You can check the oscillator alone and that also gives a clear picture of the divergence. Check the image below:
We can see the histogram can give signal even before the 3-10 oscillator crossover. I have used all screenshots using Amibroker software. You can also try other charting platforms like Zerodha Kite for using this indicator.