You must be getting impatient by now, wondering why I have yet not started the core topics of technical analysis which you hear so much about in the media. Well, for one, I think the topics which I am covering first are more core than the other core that we spoke about. I believe in building the basics solidly before putting up the rest . When you start trading, you will realise how much more well equipped you are than those who learnt only the tools of technical analysis. Now that you are satisfied that I am taking you on the right path, lets return to the present topic.
We are going to discuss some extremely important indicators which will be our crystal ball to foretell a change in sentiment of the market players. They are warning signals of a probable trend change. You may think, Oh no! not again! Of what use is it if you cant be sure? Well, as you have already been warned, the word “sure” does not exist in the stock market dictionary. But don’t be disappointed. These warning signals are very useful in preparing oneself to enter and exit.
It is a little difficult trading the contrarian way based on these indicators because humans always like stability and are in a constant quest for it. So shifting sentiments from bullish to bearish and bearish to bullish against the sentiments of the rest of the crowd is very difficult. More so because technical analysis teaches you to look for evidence before accepting that the trend has changed. For instance the DOW THEORY states that unless you have a "lower top and a lower bottom " the uptrend still exists AND unless you have a higher top and a higher bottom the downtrend still exists. But this is more theoretical than practical because, if you were to wait for the lower top and bottom to form the meaty part of the move is over.Also if you were to close your trades based on the theory then you may have already lost a substantial part of the profits.
"The crowd is right in the trends and wrong at the ends" the old Wall Street saying goes. This is because the crowd is not aware of the sentiment changes.
My next post will discuss the sentiment indicators.
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2 comments:
Regarding teh Dow theory , Its just a theory . It may or may not work . The major problem with the Dow theory is that IT JUST CANNOT IDENTIFY the MAJOR TURNING Points in the market . By the time ONE makes up his mind the market has sold off hugely .. and one gets stranded .
At the top of the global boom the dow theory didnt indicate any collapse which was so rapid that everyone globally was caught napping ..UNTIL IT WAS TOO LATE .
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natasha
I agree with you.
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