Technical Analysis and Indicators

[dcgrant08]

Hi, I've been reading up on technical analysis on investopedia ( Technical Analysis: Introduction ) , having learnt the basics of trading from FTSE beater's threads. I was just wondering if anyone could clear up for me what the RSI and Momentum indicators actually achieve and whether they can be used to accurately predict price movements and if so, how you can apply them to charts. I was also wondering what the consequences of a 'divergence' are.

Any help much appreciated

 

[craig_20]

i to would be interested in seeing ppl's responses here. Especially convergence / divergenge

 

[Masquerade]

No, all useless.

But RSI - as it gets close to 30 (or 20 some may use) this is supposed to mean it's "over-sold" in which case you're supposed to buy. As it gets to 70 (some go for 80) then it's supposed to be "over-bought" in which case you're supposed to sell. However in a bull/bear market it can stay at these levels for quite some time. RSI of 50 is considered to be support.

It's extremely vague for working out an entry - although looking back at the charts it looks like it works great; but don't be deceived. I guess some people here will swear by their indicators - the only swearing I do by them consists of 4 letter words and the occasional 5

 

[dcgrant08]

Thanks Masquerade, is that because you don't think technical analysis is the right approach or because unless its extremely elaborate its too vague? As you say, 70/80 means overbought but as RSI is supposedly a leading indicator will it precede a dip in price as shares begin to be sold? I have to agree with you when it comes to the charts used to explain it, it's easy to use indicators in retrospect.

 

[Masquerade]

I'm a fan of technical analysis - just not indicators. I've been through the process of trying out the indicators and getting myself confused. I found if you use enough indicators they all start to contradict themselves and it just got so complicated that I opted for a more simplistic approach after speaking with traders who don't rely on them.

I'd say it's important to have some fundamental analysis awareness though too - you don't need to be an economics expert. Just be aware of some data or announcements that are coming out and get a feel for the general sentiment in the market - this may help you understand a bit better why a market is moving up/down.

I think the general idea is you see 70/80, then sell and then the market will fall - in general the fall and the touching of 70/80 is supposed to occur at the same time. But as I said, a market may stay like this for some time - and if you watch it live it can stay this way for some time before it changes direction. Especially in these markets, so you'll need a more definite plan for such entry decisions. But if you can make it work consistently and it gives you definitive answers - then feel free to use it and don't let me put you off.

 

[Jaydee]

... whether they can be used to accurately predict price movements...

Hi dcgrant

I agree with Masquarade says and just wanted to add this regarding your comment above:

Nobody can predict the market - trading is about finding a method which gives a positive expectation over a large number of trades (sometimes called an edge). Use whatever analysis suits you best to achieve this but don't make the mistake of thinking you can ever predict the chaos - it simply isn't possible and never will be.

Best

JD

 

[Poet888]

The Commodity Channel Index does have certain predictive capabilities eg trend line breaks and certain repeating patterns. However I would leave CCI or any oscillator divergence well alone even if it does seem to work with hindsight - backtesting shows that it's suicidal to try and trade off divergence.