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Klinger Oscillator

Definition

The Klinger oscillator aims to identify money flow’s long-term trend, while simultaneously being able to determine short-term movements and ups-and-downs. This technical indicator compares security price movements to security volume and then transfigures these results to an oscillator. 

Its goal is to show the differences in two moving averages that are not only based on price, but on other factors as well. These moving averages are also based on timeframe and the periods that are most commonly analyzed remain periods 34 and 55. Traders and investors watch the oscillator closely for indicator divergence that may point towards security price reversals in the market.

History

The Klinger oscillator was first developed and introduced by Stephen Klinger.

Calculations

The formula for the Klinger oscillator and the steps on how to calculate it are as follows.

KO = 34 Period EMA of VF - 55 Period EMA of VF

Definitions:

KO = Klinger Oscillator

VF = Volume Force

Volume Force = V x [2 x ((dm/cm) - 1)] x T x 100

Definitions:

V = Volume

T = Trend

Trend = +1 if (H + L + C) > (H-1 + L-1 + Cv-1)

Trend = -1 if Above is < or =

Definitions:

H = High

L = Low

C = Close

dm = H - L

cm = cm-1+dm if Trend = Trend-1

cm = dm-1 + dm if Trend =/= Trend-1

  1. To begin the process, start by noting the volume for the period and the prices for the high, low, and close.
  2. Continue by comparing these values to the previous period in order to determine whether or not the Trend is positive or negative. 
  3. Next, go ahead and calculate the dm by using the current period’s high and low values.
  4. Continue by then calculating the cm by using the dm and previous cm values. If needed, you can use the dm value instead of the previous cm value in the first calculation.
  5. Then you will need to calculate the Volume Force (VF).
  6. After this, move on by calculating the 34-period and 55-period Exponential Moving Averages (EMA) of the Volume Force (VF).
  7. Finally, check below for the formula used by Stephen Klinger when calculating for the Exponential Moving Average (EMA):

EMA = (C x A) + (E x B)

Definitions:

C = Current period’s VF

A = 2 / (X + 1), where X is the Moving Average period (either 34 or 55)

E = Previous period’s EMA

B = 1-A

Takeaways

By analyzing the differences between two moving averages that are set at different timeframes (34 and 55 in most cases), the oscillator attempts to present the data and show traders how security volume can impact both short-term and long-term price direction.

The Signal Line

A 13-period moving average, also known as a signal line, is typically used to trigger buy or sell signals in the market. 

The Uptrend

When an asset or security is above its 100-period moving average and the oscillator is above (or is on its way to moving above) zero, this is a good example of an uptrend. Traders and investors might feel more inclined to buy when the oscillator moves above the signal line from below. It’s worth noting that Stephen Klinger himself found it most beneficial to take a long position when a stock was in an uptrend and then dropped to below zero only to move above the signal line yet again. This can often point towards a fall in prices. Keep this in mind when analyzing the markets with the Klinger oscillator indicator.

The Downtrend

When an asset or security is in a downtrend, it is reasonable for traders to consider selling or short-selling if the Klinger oscillator then moves below the signal line from above. It’s worth noting that Klinger thought this was especially important in the case of the indicator spiking above zero, going against its normal traits. This change from zero can often point towards a rise in prices.

What to look for

The oscillator uses divergence to determine whether or not its inputs are confirming the general trend direction of price movements. If the indicator value is moving upward even as the security’s price falls, it is considered a bullish sign. If the indicator value is falling, but the security’s price continues to rise, it’s considered a bearish sign.

Limitations

False signals can be quite common with divergence and particularly with the actions of this oscillator. It can be difficult to know which signals are true and which are obsolete, which is important to note when using this indicator. In addition, crossing above and below the zero line can be confusing to analyze as well, due to cases where an indicator crosses the zero line without maintaining its direction. An indicator may also have difficulties moving even when there is a change in price. This failure to alert the trader can result in lost money or missed opportunities for trades.

Also divergence can be quite handy in some cases, it can be premature. This could result in missed trend readings or the inability to end in a price reversal. It’s also key to mention that because divergence is not always available at price reversals, it is not a viable tool to use to determine when and where price reversals will take place. This is why it is crucial to use the Klinger oscillator with other technical indicators and indicators that specialize in price analysis.

Summary

The Klinger oscillator seeks to determine the long-term money flow trend, while also being able to spot short-term movements within the market. It compares security price movements to the volume of a security and then transfigures these results to an oscillator with the goal being to show the differences in two moving averages that are not solely based on price.