The Andean oscillator calculation is based on two steps:
Estimate price upper/lower extremities.
Determine the degree of variation of each extremity.
The Andean Oscillator can return multiple information to the user. Its core interpretation is given by the bull and bear components.
A rising bull component indicates the presence of bullish price variations while a rising bear component indicates the presence of bearish price variations.
When the bull component is over the bear component market is up-trending, and the user can expect new higher highs. When the bear component is over the bull component market is down-trending, and the user can expect new lower lows.
The signal line allows a more developed interpretation of the indicator and can be used in several ways.
It is possible to use it to filter out potential false signals given by the crosses between the bullish and bearish components. As such the user might want to enter a position once the bullish or bearish component crosses over the signal line instead.
Rules For Trend Trading
Users wanting to use the indicator to perform backtests or paper trading can use the following trading rules:
Long : bullish component cross over bearish component
Short : bearish component cross over bullish component
Exit Long : bullish component cross under signal line
Exit Short : bearish component cross under signal line
Exits rules are optional.
A filter for false signals can be introduced by using the following long/short conditions instead:
Long : bullish component cross over signal line once per detected trend
Short : bearish component cross over signal line once per detected trend
Note that while this might prevent trading certain false signals it will induce a worse timing compared to the first proposed long/short conditions.
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