Sunday, April 13, 2008

Reversal Indicators

There are several indicators which we can used to determine the reversal point, among them including the Bollinger bands, Japanese Candlestick, Relative Strength Index (RSI), and MACD/Stochastic combination.

Bollinger Bands

As I have discussed before the Bollinger bands will signal a reversal when the movement deviate to far off outside the band which they called overbought/oversold situation. See the picture below.

bollinger bands overbought

Japanese Candlestick

Reversal signals from Japanese candlesticks charting can be studied on the chart patterns formation as discussed earlier post "Candlestick continuation & Reversal Signals". Example of reversal formations are the morning star, hanging man, evening star, and hammer which are actually very identical to each other. See the picture below.

japanese candlestick reversal patterns

Relative Strength Index (RSI)

Another reversal indicator we can use is the relative strength index (RSI) to determine the future direction of the market. This indicator is also called a leading indicator because it predicts the future direction of the ahead of real time market movement. Usually traders will used RSI signal by the rule they called 70/30 rule. This means that when the RSI signal line move from 50 up to 70 it will likely make a reversal back to 50 which is the normal movement. Likewise if the RSI signal moves down from 50 to 30 or below it will likely reverse upward back to 50 normal movements.

RSI up

RSI down

MACD & Stochastic Combination

As discussed earlier a strong movement of the market will only proceed successfully when both MACD and slow stochastic move in parallel direction. Read here…

MACD stochastic combination

In summary using these indicators individually without solid integration from other indicators' signal can only bring temporary success. The ability to integrate them together in the manner that it will give the best signal is far more important to success. And also in-depth understand of multiple time frames will increase the precision to your trading decisions.

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