The McClellan Oscillator gives you a deeper look into the market than price charts alone ever could. It reveals how many stocks are actually driving the market and whether buyers or sellers are in control.
This market breadth indicator is particularly useful when the trend is unclear and the signals are contradictory. It assesses market breadth, market sentiment, and momentum strength, allowing you to identify reversal points or confirm the current trend.
The article covers the following subjects:
Major Takeaways
- The McClellan Oscillator helps identify market direction, not based on price performance but on the number of stocks advancing or declining.
- It is a market breadth indicator based on two exponential moving averages (EMAs), calculated from the difference between rising and falling stocks. The greater the difference between the EMAs, the stronger the signal.
- If the indicator reading is above zero, bulls dominate the stock market. Likewise, if it is below zero, bears prevail.
- The +70 and -70 levels indicate market overbought or oversold conditions, helping spot possible trend reversals.
- The oscillator works best with stock indices such as the NYSE and NASDAQ.
- The McClellan Oscillator formula is straightforward and can be easily customized manually or using a ready-made template in the trading terminal.
- The McClellan Summation Index is often used to identify long-term market trends.
What Is the McClellan Oscillator?
The McClellan Oscillator is a technical analysis indicator that reveals the trend direction. It measures the balance between buyers and sellers, indicating the strength of bullish or bearish momentum.
To calculate the McClellan Oscillator, the Advance/Decline Line is used. It reflects how many stocks are moving in step with the overall market trend. The oscillator’s values are compared with the zero line and the +70/-70 levels, giving traders clear reference points for analysis. By studying the McClellan Oscillator, you can grasp the basic principles behind similar indicators and learn how to interpret their trading signals more effectively.
McClellan Oscillator Formula: How to Calculate Market Breadth
The McClellan Oscillator is derived from the difference between rising and falling stocks. The Advance/Decline Line indicates the number of stocks moving the market and helps gauge the market breadth.
McClellan Oscillator formula:
Oscillator = EMA19(Adv – Dec) – EMA39(Adv – Dec)
Where Adv — number of advancing stocks, Dec — number of declining stocks, EMA — exponential moving average.
For example:
If 1,800 stocks rise and 1,200 fall, the difference is 600.
19-day EMA = 580, 39-day EMA = 520.
As a result: 580 – 520 = +60. A positive value indicates strong bullish momentum, while a negative value means bearish market sentiment.
You can apply the McClellan Oscillator to the chart for automatic calculation. Although the EMA lines are usually hidden, they can be easily added manually to visualize the calculation.
How to Read McClellan Oscillator Trading Signals
The McClellan Oscillator is relatively easy to interpret.
Determining market sentiment:
- An Oscillator above zero indicates increased buying pressure and a rising market.
- An Oscillator below zero shows stronger selling activity and a falling market.
- An Oscillator crossing the zero line may signal a shift in market sentiment or trend direction.
Overbought/oversold warning:
- A reading above +70 indicates that the market is overheated, and a downward reversal may occur.
- A reading below -70 means the market is oversold and an upward reversal is possible.
- These levels are not displayed by default in most cases and should be added manually to the indicator panel.
Signal strength change:
- The higher the oscillator rises, the greater the bullish pressure.
- The faster and deeper the decline, the stronger the bearish momentum.
- If the McClellan Oscillator line narrows toward zero, this may be an early sign of a slowdown in momentum and a potential reversal.
McClellan Oscillator Trading Strategies
This section covers three basic ways to use the McClellan Oscillator. A solid understanding of the signals generated by the oscillator can help you make informed trading decisions.
Overbought and Oversold Strategy Using McClellan Oscillator
The strategy involves using McClellan Oscillator (MO) signals to identify reversal points. When the indicator reading surpasses the +70 or -70 level, it may indicate weakening momentum.
How It Works:
1. The MO drops below -70:
- The market is considered oversold.
- An upward reversal is possible.
- When the oscillator goes below -70, the price often slides to the key support level, as traders start closing their short positions and planning to go long.
2. The MO climbs above +70:
- The market is considered overheated (overbought).
- The bullish momentum may fade, leading to a correction.
- Traders are closing their long positions at a profit and preparing to go short.
For example:
The chart below shows +70 and -70 levels.
- After entering the oversold zone, values begin to increase. In a few days, the price also turns upward.
- In the overbought market, the indicator reverses downward. Subsequently, the price declines.
The McClellan Oscillator helps identify upcoming changes in market direction. Although it does not provide precise entry points, it allows you to understand the current market phase.
McClellan Oscillator Divergence Trading Method
The McClellan Oscillator divergence method helps identify potential turning points. This approach compares price behavior with McClellan Oscillator values. If the asset exceeds its extreme values, but the indicator does not confirm this move, a correction or even a trend reversal may occur.
This discrepancy between the price direction and the oscillator values is called divergence.
Bullish Divergence
- Price: the second low is below the first low.
- Oscillator: the second low is above the first low.
- The asset may rise.
Bearish Divergence
- Price: the second low is above the first low.
- Oscillator: the second low is below the first low.
- The asset may drop.
How to Use Signals
- Find two consecutive price extremes (low or high) on the chart.
- Compare them with the corresponding oscillator points.
- If divergence occurs, the trend may reverse.
Before opening a trade, wait for a confirming signal such as:
- a candlestick pattern,
- a trendline breakout,
- a breakout from a sideways trend.
The chart above shows the price forming two lows, the second below the first. At the same time, the McClellan Oscillator displays the opposite setup, with the second low above the first one. This is a bullish divergence, indicating a diminishing bearish momentum.
What to do: Look for an entry point once the second low forms. Open a long position after a confirming candlestick pattern appears or the price breaks above the nearest resistance level.
The chart above demonstrates that the price hits a new high, while the Oscillator forms a lower high. This indicates that buyers are losing momentum.
What to do: When the signal is confirmed by a bearish candlestick or a breakout of the support level, you can consider short trades.
Zero Line Cross Trading Strategy
The zero-line crossover strategy is built on a simple idea: when the McClellan Oscillator crosses the zero line, the price may change direction. This approach helps identify when a new trend is beginning.
How It Works:
- When the oscillator crosses above the zero line, it generates a buy signal.
- When the oscillator crosses below the zero line, it gives a sell signal.
Such signals are particularly effective when a consolidation or correction phase ends.
On the chart below, the McClellan Oscillator crosses above the zero line, which is the first buy signal. After that, the price steadily rises. Such crossovers help traders open positions at the very beginning of the trend.
Risk Management
Proper risk management is the cornerstone of successful trading. While the McClellan Oscillator can assist in spotting entries, the results ultimately depend on the trader’s discipline.
- Do not risk more than 1–2% of the deposit per trade.
- Set stop-loss orders, especially if the price is approaching a key support or resistance level.
- Aim for a risk/reward ratio of at least 1:2.
- Lock in your gains on time. You can use take-profit orders. Do not hold onto losing trades.
Setting Stop Losses with McClellan Oscillator Signals
Although the McClellan Oscillator offers valuable insights into market sentiment, it does not pinpoint precise stop-loss levels. Therefore, set stop-loss orders based on the price chart while considering the indicator’s signals.
How to Set Stop-Loss Orders for Different Strategies:
Setting a stop-loss order based on an overbought or oversold condition
A stop-loss order can be placed beyond the nearest swing low or high after the signal appears in the ±70 range.
- To open a short trade, place a stop-loss order just above the recent high.
- To open a long trade, place a stop-loss order just below the recent low.
Once a divergence occurs, you can place the order beyond the second price extreme. For example, if the price reaches the second low but the MO forms a higher low, place your stop-loss order below the second price low.
Setting a stop-loss order based on a zero line crossover
If you enter a trade when the oscillator crosses the zero line and there is no reversal candlestick, set your stop loss at the nearest key support or resistance level, or use the average range of the previous price impulse.
A stop-loss order should not be placed too close to the entry point. Otherwise, any market fluctuations might trigger it, causing you to exit a trade that could have turned profitable. It is often wiser to allow for a moderate drawdown than to close a position prematurely and miss out on high profits.
Position Sizing Based on Market Breadth Strength
The McClellan indicator accurately reflects not only the market’s direction but also the signal’s strength, which should be considered when determining trade size.
- A strong signal is generated when the oscillator exits the ±70 zone or when a confirmed divergence appears. In this case, a full-size position can be made in line with the risk management rules.
- A moderate signal occurs when the oscillator crosses the zero line and moves smoothly. Traders can enter the stock market with half of their intended position.
- A weak signal emerges when the oscillator fluctuates around the zero line. In this setup, trade with minimal position size or avoid entering the market.
How to Use McClellan Oscillator in Different Market Conditions
The McClellan Oscillator is a technical indicator that measures market breadth and market sentiment. It can be used in simple trading systems.
How to trade it:
- When the oscillator reading climbs above the +70 level, open short trades as the market is overheated.
- When the value falls below -70, make long trades as the market is oversold.
- When the oscillator crosses above the zero line, it is a buy signal.
- When it crosses below the zero line, it is a sell signal.
- If the price moves in one direction and the McClellan Oscillator moves in the opposite, a trend reversal is possible.
These simple steps allow traders to use the McClellan Oscillator to filter signals and mitigate risk.
How to Trade McClellan in Bull Markets
When the price starts to rise, it is crucial to spot the beginning of the trend and enter the market at the right moment, before the move gains full momentum. This timing is essential for an effective trading strategy.
How the McClellan Oscillator Works in an Uptrend:
- The oscillator holding above zero indicates a bullish signal.
- If the oscillator crosses above the zero line, it signals trend acceleration.
- A reading above +70 suggests the market may be overheated. It does not always signal a reversal, but it is a warning to stay cautious as growth could decelerate, or a pullback might follow.
How to Use Signals:
- Buy at the start of an uptrend. When the MO exits the negative zone and breaks above the zero line, it means a new impulse is forming.
- Hold your trade open as long as the oscillator remains in the positive zone and continues to increase.
- Lock in profits or reduce the size of your trade if the oscillator reaches the +70 level and begins to reverse downward.
Example: The price is growing, while the MO bounces off the -70 level, breaks above the zero line, and goes higher. This means that the momentum is strengthening. If the oscillator suddenly surpasses the +70 level, consider taking part of the profits. Moreover, you can tighten the stop-loss order so that the trade closes with a profit in case of a price reversal.
Bear Market Strategy
In a bearish trend, it is critical to determine whether the trend will continue or if there are signs of a possible reversal.
How the McClellan Oscillator Works in a Downtrend:
- If the oscillator crosses below the zero line, most stocks are declining, and selling pressure persists.
- If the oscillator plummets below the -70 level, it may indicate an oversold condition. You should be more careful, as a correction or even a trend reversal may occur.
- If the oscillator begins to increase in the negative zone, the price may rebound soon.
How to Use Signals:
- Short trades can be opened when the MO crosses below the zero line. This is a sign of an intensifying bearish momentum.
- If the oscillator remains in the negative zone and continues to decline, it is advisable to hold short trades open.
- Close the trade according to your strategy or prepare for a reversal when the MO slows down or starts moving in the opposite direction.
Sideways Market Trading
In a sideways market, filtering out false signals is especially important. The McClellan Oscillator helps you determine whether a move has real momentum or is just market noise.
How the Indicator Behaves in a Sideways Market:
- The MO usually fluctuates around zero and does not reach ±70 levels.
- Signals become less reliable as they are not supported by the movement of most stocks.
- The oscillator often moves back and forth across the zero line without developing a clear direction.
How to Use the Indicator in a Sideways Market:
- Avoid opening trades based on weak signals, such as when the MO crosses the zero line without confirmation.
- Focus on extreme readings (±70), as they can provide more accurate entry points even during flat markets.
- Confirm the trend with other indicators or candlestick patterns, as the oscillator alone can generate false signals.
Conclusion
Compared to the Stochastic Oscillator and Bollinger Bands, the McClellan Oscillator measures overall market breadth rather than the price movement of a single asset. It does not replace technical analysis but enhances its accuracy. Most importantly, the MO shows whether a rise or drop in a stock index is driven by the majority of stocks.
Furthermore, the McClellan Oscillator signals potential trend reversals and helps determine entry and exit points more precisely.
McClellan Oscillator FAQs
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