Thursday, May 21, 2009

beware of long-term trend overbought oversold

Underestimating the market movement usually is the work of those who look for precision in trading. Unfortunately there is no 100% precision in forex. New traders most often over confidence of using their strategy or technical indicators and they tend to overlook the unforeseen danger of market power. As a result they got caught in the middle of long-term overbought oversold position making substantial losses not knowing why it happens.

A short-term overbought oversold situation is not so painful because even if you are wrong the market eventually will move back or make correction just in time for you to avoid losses.

However in long term overbought oversold situation is different as the market may stay that way for a long time like 1 or 2 weeks before making correction. By the time it retraces back you are already collecting a pile of rollover fees (losses). That is certainly not worth the deal as you are making big time loss. Not only you are losing on rollover fees but also the time and money which you may need to trade during the period of waiting the market to comeback. See the example below EUR-GBP pair it takes a month for the market to retrace back.

eur-gbp long-term overbought oversold position
How to avoid such situation from fooling you? There is no precise answer to this due to the unpredictable movement which caused by fundamental factors that is beyond our control to influence. The very least we can do in this situation is to watch over the price movement closely and check all the necessary indicators like MACD, Slow Stochastic, Bollinger Bands, and Candlestick. If the price movement defies the direction of all the indicators mentioned do not take your chances as the market is moving on a weak ground. Anything can happen either it will continue or reverse no one knows.

Until the market is fully corrected and price action moves according to the indicators direction then you are 90% safe to trade again. There is one indicator that can predict higher accuracy compare to any other in this situation and that indicator is candlestick patterns and counting.

The interpretation of candlestick patterns is when you smaller (shorts) candlestick patterns it indicates weakening market movement, which at this point you should anticipate the market might reverse. Secondly candlestick counting will help you to determine how many white or black candlestick has been formed. If it is 2 you should be aware of reversal might be just near.

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