Using overbought/oversold indicators - II

One of the reasons why transactions based on these indicators can not
be taken against the trend, being that these indicators can remain in
the extreme region for a long time along the trend. Many a traders,
including yours truly, have tried to take these extremes and trade
against the trend to our grief.

So never use these indicators against the trend, unless you have
reasons to believe the market is in a range. For range trading these
indicators may be used both ways.

But of course when is the market in a range? and by the time we
realize so may be it is time that the range is broken and a new trend
starts?

So always take the signals of these and any other indicators with a
pinch of salt and do, please DO provide special attention to the
prices itself. After all prices are the primary data and indicators
are derivatives.

And we all have seen how derivative trading can land the bigg
operators also in a soup.

Using overbought/oversold indicators

One way of trading is using the indicators such as RSI, Stochasitcs etc.
When these indicators move between 70/80 - 100 markets are thought to be overbought.
When these indicators move between 30/20- 0 markets are thought to be oversold.

You can get some idea about the indicators here.

Not many books may tell you that the indicators are to be used only in the direction of the main trend.

e.g. In a daily uptrend, only take signals of RSI in the oversold region to buy and vice versa.

There are many more nuances to this but about that some other time!

Keep it simple

Multiple time frame analysis is required to trade the markets effectively. This makes it a little complex to analyze. 

After deciding the trends, it is essential that one plays with simple tools to keep one's sanity.

Most indicators are rehash of the price and its relationship with itself at a point in time.  So trying out many indicators is looking at the same data in  many ways. Our mind starts drawing pretty pictures of the data to suit our directional bias.

Knowing what the market is doing / telling is more important than what one wants it to do.

Best way of not falling for this trap is to stop anticipating and start reacting to changing market conditions.

So one way of making it happen is to not rush the market to do something that you desire. Let it set its pace, wait for it to come to you.

May not look charming to a knight-errant, who goes out of his way to rescue a damsel in distress and marry her.

Markets are a place where you wait for the fair maid to come and fall in to your arms. Just hang around there lazily and she will come. (no pun intended!)