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

140 SENTIMENT IN THE FOREX MARKET

FIGURE 6.31 The bold bars indicate when price closes above the 1 standard de-

viation upper Bollinger band or below the 1 standard deviation lower Bollinger band

Source: Chart created on TradeStation

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The bias is determined as presented in this chapter. The tests were

for RSI(70, 30), RSI(60, 40), stochastic oscillator(80, 20), stochastic oscil-

lator(70, 30), Bollinger band(2 stdev), and Bollinger band(1 stdev). I ran

three more tests: one each for RSI, the stochastic oscillator, and Bollinger

bands, to illustrate that using them to trade reversals does not work so

well. For RSI and the stochastic oscillator, the rules are to sell at the low of

the bar once the indicator crosses below the overbought level (70 for RSI

and 80 for the stochastic oscillator). Similarly, a buy order is placed at the

high of the bar once the indicator crosses above the oversold level (30 and

20). I used 13 as the length for both oscillators. The Bollinger band reversal

strategy sells at the low of the bar once the price crosses and closes below

the upper band. A buy order is placed at the high of the bar when the price

crosses and closes above the lower band. I used a 21-week lookback pe-

riod and bands of 1 and 2 standard deviations. There ...