Forecast Oscillator

Parameters:

• Source: The data source for the calculation
  • Open Price: Uses the opening price of each period
  • High Price: Uses the highest price of each period
  • Low Price: Uses the lowest price of each period
  • Close Price: Uses the closing price of each period
  • Volume: Uses the trading volume of each period
  • Weighted: A weighted price is typically calculated as (High + Low + Close + Close) / 4
  • Typical: Calculated as (High + Low + Close) / 3
  • Median: Calculated as (High + Low) / 2
• Periods This parameter controls the number of periods used to calculate.

Style:

• Customizable options for visual representation (line color, style, etc.)

The Forecast Oscillator (FOSC) is a technical analysis tool that falls under the category of momentum oscillators It calculates the deviation of the current price from the forecasted price, typically using a linear regression over a specific period. The FOSC is expressed as a percentage and can help traders identify potential buy or sell signals based on the convergence or divergence from the price forecast.

How the Forecast Oscillator Works: The FOSC is based on linear regression, which involves fitting a line through the price data points over a set number of periods to determine a "best fit" line. This line projects the expected price, providing a benchmark against which the actual price can be compared.

Calculation of the Linear Regression Line: First, a linear regression line is calculated. This line represents the expected or forecasted prices at any given time. It is calculated based on past price data, usually closing prices, over a chosen period.

1. Calculation of the Forecast Oscillator: The FOSC is calculated by taking the difference between the actual closing price and the forecasted price (from the linear regression line), dividing this difference by the forecasted price, and then multiplying by 100 to express it as a percentage:

FOSC = (Actual Price - Forecasted Price) / Forecasted Price * 100

Key Aspects of the Forecast Oscillator:

• Momentum Indicator: The FOSC is a momentum indicator that shows how far the current price deviates from a forecasted trend. Positive values indicate the price is higher than expected, suggesting bullish momentum, while negative values indicate bearish momentum.
• Zero Line Crossover: The zero line in the FOSC is significant. If you see the oscillator crossing above zero, it signals that the actual price is moving above the forecasted price. This potentially reports a buying opportunity. Conversely, a cross below zero may indicate a selling opportunity.
• Trend Confirmation: The FOSC can be used to confirm the strength of a trend. If the price is in an uptrend and the FOSC remains positive and stable or increasing, it suggests the trend may continue. If the FOSC starts to decline or turns negative, it could signal a weakening or reversal of the trend.
• Divergence: A divergence between the FOSC and the price can signal a potential reversal like many oscillators. For example, if the price hits a new high but the FOSC fails to reach a new high, it may indicate a weakening upward momentum.

Limitations of the Forecast Oscillator:

• Lagging Indicator: The reliance on historical price data to calculate the forecasted price makes the FOSC a lagging indicator. It might not react swiftly to sudden price changes or market shocks.
• Sensitivity: The FOSC's sensitivity largely depends on the period chosen for the linear regression calculation. Shorter periods may lead to a more sensitive oscillator that produces more signals, some of which might be false. In comparison, more extended periods might smooth out too much detail, potentially missing shorter-term opportunities.
• Stand-Alone Use: Using the FOSC in isolation can be risky due to its nature. It is most effective when used with other indicators, such as volume indicators or other forms of price action analysis, to confirm signals.

Conclusion: The Forecast Oscillator is a unique momentum indicator that offers traders insights based on the deviation of actual price from a forecasted trend line. While useful, particularly in trending markets, its effectiveness increases when combined with other technical analysis tools to provide a broader perspective on market conditions and potential trading signals. This can help traders make smarter decisions and better manage risks associated with trading.