August 2008
Intermediate to advanced
208 pages
6h 50m
English
book
Sentiment in the Forex Market: Indicators and Strategies to Profit from Crowd Behavior and Market Extremes
by Jamie Saettele
Content preview from Sentiment in the Forex Market: Indicators and Strategies to Profit from Crowd Behavior and Market Extremes
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c06 JWBK195-Saettele June 5, 2008 19:35 Printer: Yet to come
The Power of Technical Indicators 125
The next example (see Figure 6.16 again) is also of the EURUSD but
from the bullish side. The decline that began at 1.3666 ended at 1.1640
in November 2005. On May 3, 2006, the 13-day EURUSD rate of change
stood at 4.30. This was the highest reading since December 2003. The
May 3rd closing price was 1.2630. Much like the previous example, many
traders probably tried to fade the momentum extreme only to see the rally
extend to 1.2970 by May 15th. As it turned out, the momentum extreme
in May 2006 was the kickoff for the EURUSD rally that would eventually
challenge 1.5000.
I have used the term momentum extreme a lot, so a definition is
in order. A momentum extreme occurs when rate of change is greatest
(plus or minus) over a specified amount of time. The amount of time
specified and the power of the signal are directly correlated. In other
words, a three-year momentum extreme is more powerful than a one-year
momentum extreme. Of course, this technique can be applied to any
time frame. For example, a 120-hour rate of change covers five days.
In this instance, you are looking for a five-day momentum extreme in
order to determine a bias. If using momentum to trade reversals, then the
momentum extreme must be made in the direction opposite the preceding
trend. For example, Figure 6.17
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