"The indicator was first introduced by technical analyst Lee Leibfarth in the August 2008 issue of the journal of Stocks & Commodities".
- The script was update to version 4 of PineScript.
- Added support for diferents times frames.
- For example, now it's possible to stay in intraday and at same time see a weekly version of this indicator.
- Possibility to customize the thresholds.
Introduction to indicator:
"Stochastic oscillators have long been used to help traders and investors identify areas where trend changes are likely.
Leibfarth developed the PSO to take advantage of a standard oscillator's strengths while enhancing it to become more reactive to market activity.
The result is a faster indicator that provides earlier signals for potential trend changes".
- Added legends to lines
- Added overbought and oversold colored zones
- Changed default colors for easier viewing
When the indicator is in the 'overbought' or 'oversold' areas, the color will be highlighted.
Furthermore, I think I owed the more detailed description of how to use this indicator.
Then move on.
What to look for:
According to Lee Leibfarth's paper:
" the PSO is best suited for trading changes in market direction (countertrend trading)
The thresholds are defined by horizontal lines at +/-0.20 and +/-0.90.
These thresholds create two symmetric buy and sell areas with the following rules:
- Long trades: (1) Premier stochastic crosses below 0.90, (2) premier stochastic crosses below 0.20
- Short trades: (1) Premier stochastic crosses above -0.90, (2) premier stochastic crosses above -0.20~
However, we can adapt this indicator to our own trading system, and nothing prevents us from using a trend movement, instead of counter-trend mentioned by the author.
It is noteworthy that the probability of winning increases if we use this indicator in conjunction with other tools, such as using a longer timeframe in parallel along with a price-action analysis.
In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.