So, I've been getting my fair dose of education from this forum on price action and naked chart trading. I gotta say, didn't know much about it before coming to FF but it's interesting and hey, if it works why not.
For the last 6 months, I've been transitioning from day trading stocks to creating a new strategy and account management system for Forex. I like the 24/5 market time, the liquidity so you never have to find a buyer, no worries of bid whacking or ask slapping, fake L2 walls, the trading on %'s rather than capped fiscal gains. In the stock world though, trading naked is almost unheard. The first advice anyone gave back and the advice I've been passing on is know your charts.
SO, I see there's very active threads like:
"Price is Everything"
"Intraday Point and Figure Trading"
"Swimming With the Current"
"The pitfalls of money management"
"Candlestick Trading"
But there's NOTHING about trading the economics! I'm talking about the supply and demand! Volume of buyers and sellers! Overbought and oversold. Admittedly, I'm only about 6 months fresh in the Forex world but profitable, but 2 years deep in general equities/options/futures trading. I'm surprised the FX world doesn't follow it as much as the other venues do, and I see those laws working on all time frames for the major pairs.
The reason for trading laws of economics is because then you have an understanding of why the price is what it is, and an educated idea of where it's going to go. It allows you to crack out that crystal ball and get a fairly accurate statistical prediction of where the market should head. Many of the "false signals" and "random price movements" that people attribute to ob/os oscillators and indicator failures, are simply because the laws of economics must apply through the higher time frames as well. I've often seen in stock forums that a person may be attempting to play a 5 minute bullish breakout pattern but surprised to see it whacked down by sellers. A look to the hour or daily chart may show that the price is currently in a bearish phase and therefore bullish patterns do not apply. A 5 minute CCI could tell you oversold oversold, lift me up lift me up but the hour and daily say it's overbought and the price must come down. Therefore though the price may rise to consolidate the 5 minute os, ultimately the price and trend is weighted in the direction of the sellers.
Measuring overbought and oversold is relative to the time frame and period. Popular indicators include RSI (Relative Strength Index) and CCI (Commodity Channel Index). In my experience CCI is often mis-used as a "quicker signal" ob/os oscillator to an RSI, when it was really designed for cyclic swing trading where the period is equal to the number of bars between bottoms or tops. Other indicators such as Stochastic RSI can inform you of the strength of a signal cross. When a MACD is combined with an ob/os oscillator, it's typically seen that a high positive value MACD indicates overbought and a high negative value MACD indicates oversold. There are many indicators of ob/os they just have to be properly applied (like CCI) and ignored on lower time frames when the economics of larger time frames are at work (Ex. A daily EUR/USD chart remaining overbought for a period of time, while a weekly chart would show it continued until the weekly was also overbought).
So, here's the rules I listed in another thread:
1. Price oversold: Too many sellers, price is deflated so buyers step in. Shorts covered.
Price overbought: Too many buyers, price is inflated so sellers step in to take profit. Shorts taken.
2. Addition of buying/selling power reverses the trend until the same occurs.
3. The length and weighted-direction of the trend is determined by the same economics of the higher time frames. Artificial buy-sell points such as the 20MA hold for all time frames. Ex. EUR/USD play is a weekly chart breakout, this pullback/top comes at the monthly 20MA resistence. This higher time frame explains why the daily chart was able to remain overbought for the last month while the price still increased.
Purpose of this thread I was hoping to be like many of the others, a place to post about trades using the overbought/oversold psychology. I'm not sure there are many people on FF who trade this way tho!
Thanks to all the threads for expanding my trade psychology knowledge. Maybe I can help expand yours.=)
For the last 6 months, I've been transitioning from day trading stocks to creating a new strategy and account management system for Forex. I like the 24/5 market time, the liquidity so you never have to find a buyer, no worries of bid whacking or ask slapping, fake L2 walls, the trading on %'s rather than capped fiscal gains. In the stock world though, trading naked is almost unheard. The first advice anyone gave back and the advice I've been passing on is know your charts.
SO, I see there's very active threads like:
"Price is Everything"
"Intraday Point and Figure Trading"
"Swimming With the Current"
"The pitfalls of money management"
"Candlestick Trading"
But there's NOTHING about trading the economics! I'm talking about the supply and demand! Volume of buyers and sellers! Overbought and oversold. Admittedly, I'm only about 6 months fresh in the Forex world but profitable, but 2 years deep in general equities/options/futures trading. I'm surprised the FX world doesn't follow it as much as the other venues do, and I see those laws working on all time frames for the major pairs.
The reason for trading laws of economics is because then you have an understanding of why the price is what it is, and an educated idea of where it's going to go. It allows you to crack out that crystal ball and get a fairly accurate statistical prediction of where the market should head. Many of the "false signals" and "random price movements" that people attribute to ob/os oscillators and indicator failures, are simply because the laws of economics must apply through the higher time frames as well. I've often seen in stock forums that a person may be attempting to play a 5 minute bullish breakout pattern but surprised to see it whacked down by sellers. A look to the hour or daily chart may show that the price is currently in a bearish phase and therefore bullish patterns do not apply. A 5 minute CCI could tell you oversold oversold, lift me up lift me up but the hour and daily say it's overbought and the price must come down. Therefore though the price may rise to consolidate the 5 minute os, ultimately the price and trend is weighted in the direction of the sellers.
Measuring overbought and oversold is relative to the time frame and period. Popular indicators include RSI (Relative Strength Index) and CCI (Commodity Channel Index). In my experience CCI is often mis-used as a "quicker signal" ob/os oscillator to an RSI, when it was really designed for cyclic swing trading where the period is equal to the number of bars between bottoms or tops. Other indicators such as Stochastic RSI can inform you of the strength of a signal cross. When a MACD is combined with an ob/os oscillator, it's typically seen that a high positive value MACD indicates overbought and a high negative value MACD indicates oversold. There are many indicators of ob/os they just have to be properly applied (like CCI) and ignored on lower time frames when the economics of larger time frames are at work (Ex. A daily EUR/USD chart remaining overbought for a period of time, while a weekly chart would show it continued until the weekly was also overbought).
So, here's the rules I listed in another thread:
1. Price oversold: Too many sellers, price is deflated so buyers step in. Shorts covered.
Price overbought: Too many buyers, price is inflated so sellers step in to take profit. Shorts taken.
2. Addition of buying/selling power reverses the trend until the same occurs.
3. The length and weighted-direction of the trend is determined by the same economics of the higher time frames. Artificial buy-sell points such as the 20MA hold for all time frames. Ex. EUR/USD play is a weekly chart breakout, this pullback/top comes at the monthly 20MA resistence. This higher time frame explains why the daily chart was able to remain overbought for the last month while the price still increased.
Purpose of this thread I was hoping to be like many of the others, a place to post about trades using the overbought/oversold psychology. I'm not sure there are many people on FF who trade this way tho!
Thanks to all the threads for expanding my trade psychology knowledge. Maybe I can help expand yours.=)
