Sunday, August 10, 2014

What is Really Oversold / Overbought Level?

Have you ever wondered a security going low, after hitting Oversold?

When I was a novice trader, I had spun my head around this oversold and questioned why this pos does not reverse as the theory say. Remember market feeds on novice traders.

The key to trading oversold pattern is getting one concept straight in your head. Instead of watching one time period indicator, do it on a multi-time frame. Because "Oversold" is subjective, to take any advantage, the underlying needs a strong trend or momentum in one direction.

If you guys have seen the video on RSI 3 pullback and push back technique, that is one way to take the oversold and overbought level trades in a strong trending market.

Now there is another way to attack these levels, when the stock is moving sideways. But this also requires you to know some math and behavior of two other indicators. (just 2)

1. Bollinger Band 
2. %Bollinger Band

If you have no idea about SMA vs EMA please learn them as well.

3. SMA
4. EMA

Before I proceed with the strategy, I have to remind you, Set your target and stop losses based on price action itself, not based on indicators, unless you want to loss your account to others.

Firstly, you need to understand the Squeeze. Which is nothing but the Bollinger band contracts inside Keltner channel.

1. The indicator is simple Bollinger band on %Bollinger band.

Chart Settings and Chart Looks Like This.

For those who need further help, this is how I set it up.

Now here is the interesting part.

1. Do not use this setup and trade if the Squeeze has recently fired. Typically when the squeeze fires, take the trade based on the squeeze direction. If you take the opposite side, that's a great way to burn yourself with squeeze fire. (Learn about the Squeeze Duration, and the Squeeze Momentum, google it "TTM Squeeze Explained")

2. While the Stock is in a Squeeze (same time period or higher time period). the %BB line is outside the %BB Bollinger Band (lower - oversold and upper - overbought). Its a good time to plan your trade based on the traditionally spoken theory on oversold and overbought, and execute the plan.

3. While the stock is in a strong uptrend and the there is no squeeze, take the trade using the same oversold and overbought theory for a good bounce trade in the same direction as the trend.

This strategy is good for any time period, Although, Swing Scalpers (1-3 Days) can use Daily Chart, Swing traders (3-10 Days) can use weekly charts. Try and stay away from 1 mins-60 mins, unless you can be nimble and mechanical enough to cut losses

Trading is risky, keep stops at meaningful levels.

Ofcourse, the charts are here.

Use the following Chart to try and understand.

Again, this is another trick for me to read the oversold and overbought levels. I dint want to hide it any longer. ENJOY. The Stretch Indicator will have these levels taken into account, will not have anything on the squeeze.

Good Luck Folks. Arm yourselves better. 

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