The OM3 Indicator is one of the first indicators that I created and is featured in every edition of the ETF HQ report. Over the medium term time frame trying to constantly hold a long or short position on any one stock or fund is a losing battle or at best a very difficult way to go about making money.
There will simply be periods when high probability trading opportunities are not available and these periods usually occur during crab markets. For this reason I am a big advocate of systems that are highly opportunistic or involve fund rotation in order to identify areas where trends do exist.
Despite any individual security lacking favorable trading opportunities at times, the OM3 Indicator is designed to always provide a clear indication of direction based on historical probabilities. This is useful becuase it is easy for ones analysis of market direction to be influenced by the positions that are being held at that time. Using the OM3 Indicator helps one to maintain objectivity regardless of personal bias.
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How It Works
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Markets trend and cycle and there are indicators designed to perform in each environment. The challenge comes in knowing when the market is trending and when it is cycling so that the appropriate indicator can be used. The OM3 Indicator measures both so it is able to stay in the market during a prolonged trend, provides early warning when the trend is changing and survives during a crab market.
The indicator consists of two parts the ‘Signal’ and the ‘Alert’. The ‘Signal’ can be a Strong or Weak, Buy or Sell – which is self explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.
The alerts let you know if the cycle is speeding up or slowing down, so when there is a ‘Strong Buy, Bear Alert’ for instance; it simply means that the criteria for a Strong Buy is still in place but the cycle reading for this week is weaker (or more bearish) than last weeks reading (the same is true in reverse).
Example:
Here you can see that the cycle has been turning up for three weeks but the criteria for a ‘Buy’ signal has only just been achieved.
The number of weeks that a signal has been present is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16. These numbers give you an idea of the statistical life expectancy of each signal.
This is an indicator NOT a mechanical trading model. It is useful to assist in the objective analysis of the market but for the best results should be combined with commonsense and support/resistance levels etc.
very confusing what you are talking about in your explainations of signals.
You call it a “crab” market because crab goes sideways or it sounds like crap .
Haha, because crabs go sideways.
Derry, thanks for the good explanation of OMB. Hope you can keep it on your website somewhere so we can refer to it at times.
Here is a question: In your writings, you tell of doing much research to find the best moving average indicator. That turned out to be the WEEKLY 75 ema over time. Is this just for very long term investing, as it seems you don’t use this indicator for the current newsletters. Your work is much appreciated!
francesq
Hi Frances,
That is a great question. The 75 Day EMA was the most effective exponential moving average in our tests when used in a mechanical system. When trading using discretion, popular moving averages such as the 50 Day SMA produce support and resistance levels. Therefore with discretionary analysis such as that presented in the ETF HQ Report we use a variety of SMAs.
So far the most effective moving average that we have found for use in a mechanical system is actually the FRAMA – http://etfhq.com/blog/2010/10/09/frama-is-it-effective/
Cheers
Derry