Sign in     Like us on Facebook Follow us on Twitter Watch us on YouTube

News and Blog

Join 5000 other sharemarket traders for regular blog updates!

Browse to a category

Blog Search

And knowing this helps how?

I have attached a chart below that I grabbed off the web from a finance site. This chart comes courtesy of The Chart Store and it combines two of my least favourite implied TA concepts – the notion of overbought/oversold and the prediction that this implies.

I agree that crowds fatigue, this is simply a function of natural group dynamics. A simple example is next time you are sitting in an audience that is clapping you will notice that at first the clapping is discordant and lacks rhythm and after a very short period if time the clapping begins to synchronize.  The clapping then ebbs and flows, it is occasionally reinvigorated but eventually everyone tires and buggers off. This is a natural dynamic of groups and can be thought of as a metaphor for trends, at first they are halting and hesitating but eventually they find a stability that enables them to last often for very long periods.

However, at no point during this cycle can you predict when the trend is going to end and by definition you cannot predict how far it will go. So the notion of overbought implies a form of prediction – if you know by how much a trend is overbought then you will know when it is going to end. Look carefully at the chart I have attached, price can spend and awfully long time in what could be called an overbought state.

It would be a long time to be in pain if you had foolishly shorted the market based upon your presumption that the market had overcooked itself and had to reverse.

email

Speak Your Mind

*

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.

email