The Modern Art of Tape Reading: Part 3
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Merely knowing the importance of the RSI will keep you from raising the risk probability for any trade. Seeing a slow stochastic cross (the fast line crossing over the slow line) is not a buy or sell signal. In strongly trending bull or bear cycles the slow stochastic might do such crossings more than a few times, yet the stock or index in question does not react to that cross. Those are the times when the RSI did not confirm the cross! Thus the edge found here is in knowing that a trend is still in control until the RSI signals that the trend is in jeopardy of ending.
You will at times find the slow stochastic remaining very strong or very weak for what is felt to be an inordinate amount of time relative to your experience when analyzing a certain stock or index. I refer to such chart patterns as either being that of pressing up, or floundering down. When you encounter such a slow stochastic pattern avoid going counter-trend unless the RSI first turns counter-trend. Trying to predict that counter-trend move any other way is best left alone. Taking the contrary trade to a strong trend is equal in all respects to fighting the tape. You have a big edge in simply knowing not to do that!
I do not use other technical indicators such Money Flow, MACD, ROC, etc. My scrubbed list works for me. I keep technical analysis simple yet effective. I avoid indicators that I think of as being not relative to the way I trade as well as being possibly redundant information that is already priced into the RSI and slow stochastic. In addition the more you analyze the more time is taken up in the endeavor. Thus you might reach the emotional and mental point where you do not take the trade! Falling into that trap is known as paralysis from analysis. Avoiding that potential problem is in itself an edge.
Technical analysis is best considered as being a crude map. Never forget the humorous market adage that Columbus used maps. The edge is found in keeping the technical work simple yet effective. One more edge is having the wisdom and experience to know that the fundamentals will eventually trump the technicals.
Part 4 will focus on the edges found in Simple Moving Averages (SMA).
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