How Do I Create the 3/10 Oscillator?

Feb 20, 2009: 12:21 PM CST

One of the most popular questions I get on the blog refers to the “3/10 Oscillator.”  I thought I’d take a moment and share how it’s constructed and some basics about the Oscillator.

The following chart shows the theory behind the construction of the Oscillator:

Definitionally, the 3/10 Oscillator is the Difference between a 3 and 10 Period Simple Moving Average.  Technically, what I show in StockCharts.com is NOT the classic 3/10 because I’m manipulating the standard MACD which uses Exponential Moving Averages.  The difference is minimal.  Linda Raschke is famous for popularizing the classic indicator.

To replicate the 3/10 Oscillator, type in “3, 10, 16″ in the settings of your MACD Indicator.

The BLACK (oscillating) line in the indicator is derived from taking the difference in a 3 period SMA and a 10 period SMA, which is then plotted as a line.

The RED (‘trend’) line is derived from averaging the 3/10 Differential over 16 periods.  In essence, it ’smoothes’ out the 3/10 Differential and helps show a bit of insight into ‘trend.’

The ZERO-LINE refers to the crossover points between the 3 and 10 SMAs.  When the 3 SMA crosses above the 10 SMA (as occurred in late November 2008), then the Black (3/10) Line will Cross above Zero.  The 3/10 will cross beneath 0 when the 3 SMA crosses beneath the 10 SMA.

The HISTOGRAM is derived from the differential between the 3/10 (Black Line) Oscillator and the Red “Trend” Line.  When the 3/10 is ABOVE the Red Trend Line, then the Histogram will be above the 0-Line (vice versa for when the 3/10 is beneath the Trend Line).  The true 3/10 Oscillator does not use such a histogram.

A DIVERGENCE occurs when the differential between the 3 SMA and 10 SMA is larger at one point than it is at a second point.  Price makes a new low, but the difference between these averages is less, which has implications for analysis.  I have highlighted an example of the “insides” of a Divergence in the 3/10.  Although I’ve made price invisible, price did make a new swing low in November beneath the low of October (you can see this in the averages themselves).  Look at the dotted blue (horizontal) line to see how the divergence formed.

A NEW MOMENTUM LOW (or HIGH) occurs when the differential between the 3 and 10 SMAs is larger than it has been in the recent past (as in September and October 2008).  It also has short-term forecasting applications.

Here is an image of the actual 3/10 Oscillator at work from a chart (also of the DIA) I use in TradeStation:

Compare this construction to the above indicator in StockCharts.

Ultimately, most oscillators will show similar patterns, but I prefer the 3/10 Oscillator because I’ve become accustomed to its nuances and feel that one can use it as a “Three-in-one” Oscillator:  Momentum Oscillator, Swing Indicator, and Trend Indicator.

Corey Rosenbloom
Afraid to Trade.com

Register for free here to keep up with the Afraid to Trade.com blog.

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69 Comments

69 Responses to “How Do I Create the 3/10 Oscillator?”

  1. slait73 Says:

    Thans for your explanaiton, cuoul´d you explain how you use the oscillator in special what do you mean when you say the new momentum low hs shor therm trading applications.

    Saludos desde España.

  2. Corey Rosenbloom Says:

    Slait,

    I can’t give away all my secrets on the open blog, but I show the implications throughout my blog posts under the principle “Momentum Precedes Price.” Both through momentum lows/highs and divergences – both have short-term forecasting (edge) capabilities.

  3. Scott in Chicago Says:

    Corey-

    Thanks for the post-very informative! I like to see how someone else uses the Street Smarts ideas-I’ve been using them for years, in the futures markets. What’s your normal hold time for a trade? I’ve watched it in the past, but most of my trading is short term enough that the 3/10 never clicked with me. Do you ever use the 2 period momentum indicator she described? It often does a good job for swing trading in futures.

  4. AC Says:

    Looks like with the SPY closing under 802 today the we have completed Wave 5. Any thoughts?

  5. DaveB Says:

    Corey, do you have any recommendations on charting applications? As a new trader I’ve been using regular old stockcharts.com but am wondering if I’m missing out on any better services that have more bells & whistles.

    I do a lot of experimental trial and error TA… going over charts in various timeframes and with many different indicators and changing the settings on them, looking for potential ideas. I wonder sometimes if I’m completely missing out on something much better. I know, for example, there are some indicators that stockcharts doesn’t offer.

    You also mention above you can’t give away all your secrets on the blog, which I can’t blame you for! I’m sure you started out doing what I’ve been doing and over time the pieces came together. Can you remember a specific time where you’d say you “came of age as a trader”? If so, could you describe a little bit about it? Many thanks.

  6. Anonymous Says:

    Blue color EMA is 10 period or 3 period?

  7. Corey Rosenbloom Says:

    Scott,

    Glad to hear from you!

    I trade according to the patterns an examples I show in my intraday write-ups, so a normal hold might be 30min to an hour depending on the pattern off the 5-min chart. I’m usually playing for a retest of a high/low of some sort or a measured move.

    I’ve never really tried the 2 ROC at all – I think I may have used it once or twice but it was just too ‘all over the place’ for me – it didn’t speak to me as much.

    The 3/10 to me more or less shows me structure and helps confirm trade set-ups based off the price usually as it behaves in relation to a moving average.

  8. Corey Rosenbloom Says:

    AC,

    No, for Wave 5 to reach a minimum target, SP500 would need to travel again to 741 which would give us a truncated 5th Wave.

    If W5 is equal to W1 (principle of equality) then the target would be somewhere in the low 700 range.

  9. Corey Rosenbloom Says:

    Anon,

    Blue EMA is the choppier 3 EMA and the red is the smoother 10. I may have mixed those up initially in discussing them but I’ve looked back at the post and it’s correct now.

  10. Corey Rosenbloom Says:

    Dave,

    Hmm, everything with bells & whistles costs money, usually in monthly fees which is fine but StockCharts does such a clean job of presenting charts and to get everything with it, it’s around $20 or $25 per month. There are great programs out there too, though.

    In my experience, you really have to go through phases to become a good trader. One of those phases is where you gather as much information as you can, use as many indicators as you can, and then narrow down from there to what works for you alone.

    I’m not sure anyone ever has an absolute “I’ve got it!” moment. I think I can count 3 or 4 times where I’ve gotten that cocky (where I thought I finally had all the answers) and probably the next day or week, the market shows me I’m not all that, which is humbling. I wish I could say “there will come a day when you figure it all out” but given that the market conditions change so much, you really have to change with them or be left behind.

  11. John Wittmore Says:

    Haveing subscribed to the LBR service far to long, I find the 3/10 to be a worthless indicator and the service seems to do no better than a flip of a coin as far as calling trades.

  12. NotAfraidofTrend Says:

    Corey, the fact that the same trader, using the same indicators, over a period of time, makes money sometimes and loses money at other times, proves that it is not the indicators that determine success in trading. It is the trader!

    Every trader needs to develop his own methodology that suits the trader’s personality. There is no magic methodology or indicator that could be suitable for everyone.

    Corey, I am glad you are offering personalized mentoring services to a selected few. I hope it starts with a psychological evaluation to keep out the gamblers.

  13. Corey Rosenbloom Says:

    John,

    I’m not an advocate for the LBR Service, and have never subscribed to it. Also, I incorporate Linda’s teachings as just part of my own trading methodology which is developed from a variety of methods and teachers. I use the 3/10 in my own way as part of a larger method of pattern recognition. Indicators are just that – indicators. We should know the ins and outs and trade-offs from using what we use.

  14. Corey Rosenbloom Says:

    NotAfraid,

    Good point – harsh, but good point!

    There’s hundreds of indicators available – it’s up to us to find the handful that make sense to us and then beyond that, how to incorporate it into part of a larger, personalized trading strategy.

    I’m enjoying the mentoring but I’ve had to keep it very limited to three at a time and I do send out a questionnaire before selecting a student. I’m looking for a personal match and other characteristics as well before taking on a pupil. The first lesson also is about risks, expectations, and goal setting. I make them do some personal analysis before starting with the lessons.

  15. Samir Ghadiali India Says:

    MR. Corey,
    Thanks for sharing your ocs. secret with us. I use 5/35 Osc. for wave third to wave 4 retracement I confirm that Osc. momentum must retrace upto 90% and maximum 140% from highest high or lowest low of Osc value to complete wave 4 and then draw trend channel at price whenever trend channel break i go for wave 5 its working good.Remember that 5/35 Osc have to retrace upto 90% for wave 4 to confirm. As you are good and very much interested in elliot wave check Dow weekly I post so many times that as per weekly chart we are clear wave 3 because 5/35 osc didnt retrace upto 90%.And after wave 5 there is always divergance occur & reverse wave counts begin.Please light up your view. Thanks again.

  16. Anonymous Says:

    Corey,

    Thank you very much for taking the time to share your knowledge and experience with us.

    Wish you a fortune in trading the market.

    Peter

  17. law6 Says:

    i use trade station and want to know what your whilte line input is for a black background?

    also I found a cool macd color filter for volume at traderslab.com and have for HistAbovezZeroUpColor and HisyaboveZeroDownColor as well as HistbelowZeroFallColor and HistaBelowZeroRiseColor

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  20. moneycometh Says:

    This is something I going to try to print out look over when I have time. Makes sense as I re-look at it over and over again. The red line trends are what interest me.

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  42. forexhug Says:

    nice lesson thanx

  43. Rick Says:

    Corey,

    Is the only difference between your use of the 3-10 and Linda's that you use ema's and Linda uses sma's?
    I have her book 'Street Smarts' and love it! Have been wondering if I was plotting it correctly or not.

    I personally use MACD 3, 10, 16 EMA. I've also used SLO STO 7, 16 to replicate the 3-10 Oscillator.

    Thanks,

    Rick

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