Overbought/Oversold Index

The Overbought/Oversold (OBOS) index is very similar to the Stochastic and the William’s %R studies. It relates the difference between today’s closing price and the period’s low closing price with the trade margin of the given period. Thus, it indicates the relative position of the closing price within the given period.

 

The OBOS indicator oscillates between the boundary marks 0% and 100%. An oscillator value of 0% means that the closing price is identical to the lowest closing value of that period. Correspondingly, a value of 100% means that the closing price is identical to the highest closing price of that period.

 

Highest Close/Lowest Close is used in the formula for OBOS. The period that is chosen when inserting the OBOS indicator refers to the period used to calculate the Highest Close/Lowest Close.

 

Pane: Bottom

 

Chart Types: All

 

Formula

 

OBOSt = ((Ct - LCt) / (HCt - LCt)) * 100
 

HCt = Highest Close of period

LCt = Lowest Close of period

 

Properties

 

Close.  The current Close of the contract.  The default is Close.

 

High.  The highest Close of the period.  The default is Close, but can be changed.  If changed to High instead of Close, the study will be calculated off of the Highest High of the period, instead of the Highest Close.

 

Low.  The lowest Close of the period.  The default is Close, but can be changed.  If changed to Low instead of Close, the study will be calculated off of the Lowest Low of the period, instead of the Lowest Close.

 

Period. The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. The application uses a default of 14.

 

Interpretation

 

The OBOS indicator suggests a market that is overbought or oversold. A correction is expected in an overbought market, and a rally in an oversold market. Readings above 80 show that the market is overbought, while values below 20 indicate an oversold situation. As with all Overbought/Oversold type of indicators, it is best to wait until prices turn away from extremes, as the indicator may stay in the overbought or oversold positions for a long period of time, in spite of the expected correction.

 

The OBOS analysis is very similar to the Stochastic and the Williams %R indicators, except that the %R is an inverted presentation and the Stochastic shows internal smoothing. In addition the OBOS is calculated exclusively on the basis of closing prices and not on highest or lowest prices.

 

Literature