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 135

20 designate overbought and oversold. One reason the stochastic oscilla-

tor is more sensitive an indicator than RSI, which is why the overbought

and oversold levels are more extreme (80 and 20 for stochastic as opposed

to 70 and 30 for RSI). Similar to RSI, the real reversal signal does not occur

until the oscillator crosses back below 80 (for sell signals) and back above

20 (for buy signals).

Lane himself advocated using his indicator primarily to spot diver-

gences in order to anticipate reversals (in conjunction with Elliott). As

was mentioned previously, divergence does warn that the probability of

the trend continuing is not as high as previous, but divergence can remain

in place for a long time. The result is that traders try to sell the top or buy

the bottom too early in almost all instances. When an oscillator is in ex-

treme territory, take advantage of the trend by remaining with i t instead of

attempting to sell the top, which is what the majority of losing traders do.

The idea of maintaining a bullish bias as long as RSI has crossed above

60 and not yet crossed below 40 and maintaining a bearish bias as long as

RSI has crossed below 40 but not yet crossed above 60 was a good one; the

charts indicate that. Let’s do the same thing with the stochastic oscillator. ...