Distinguishing trending from range-bound markets
Is there a good way to determine in advance when you are moving from a trading range to a trending market(UP or Down)?
As a matter of fact - yes. One of the best indicators for this purpose is the ADX:
The level of the black line indicates the strength of the trend - the higher it is, the stronger the trend. Usually, when it is below 20, this suggests that we have a trading-range market while if it is higher than that, it suggests a trending market. The direction of the trend is indicated by the -DI and +DI indicators. When +DI is above -DI, the trend is up; when -DI is above +DI, the trend is down. You would notice how when the trend is weak (i.e., ADX is below 20), +DI and -DI often flip-flop around each other.
Another indicator which can be used for this purpose is the Aroon. When the red line (AroonDown) is above the green line (AroonUp), the trend is down; when the opposite is true, the trend is up. The strength of the trend can be measured by the distance between the two lines. However, I am more comfortable with using the ADX myself - although I do keep an eye on Aroon, too.
Can you predict when the slow stochastic will be overbought or oversold and stay in that position for days or when the Fast % K will break the slow % D?
Usually, when the market is trending strongly (up or down) the overbought/oversold indicators like the stochastic would stay in extreme overbought or oversold positions for a long time. The proper way to trade them is in combination with a trend-detecting indicator. For instance, consider the following simple rules:
1) If the market is not trending, Cover/Buy when the overbought/oversold indicator comes out of oversold territory and Sell/Short when it comes out of overbought territory.
2) If the market is trending up, Buy when the overbought/oversold indicator comes out of overbought and sell when it comes out of oversold. (That is, do not attempt to trade counter-trend, i.e., while the indicator is starting to move towards oversold.)
3) If the market is trending down, Short when the overbought/oversold indicator comes out of overbought and Cover when they come out of oversold. (Again, don't trade counter-trend.)
It has been my observation that if it is between 80-100 for two full days the 3rd day is a down day even if the hourly stochastic is not overbought.Have you seen any similar observation?
I am afraid I can't be of much help here; that's too short-term trading for me and I don't have enough experience doing it.
Regards,
Vesselin
Is there a good way to determine in advance when you are moving from a trading range to a trending market(UP or Down)?
As a matter of fact - yes. One of the best indicators for this purpose is the ADX:
The level of the black line indicates the strength of the trend - the higher it is, the stronger the trend. Usually, when it is below 20, this suggests that we have a trading-range market while if it is higher than that, it suggests a trending market. The direction of the trend is indicated by the -DI and +DI indicators. When +DI is above -DI, the trend is up; when -DI is above +DI, the trend is down. You would notice how when the trend is weak (i.e., ADX is below 20), +DI and -DI often flip-flop around each other.
Another indicator which can be used for this purpose is the Aroon. When the red line (AroonDown) is above the green line (AroonUp), the trend is down; when the opposite is true, the trend is up. The strength of the trend can be measured by the distance between the two lines. However, I am more comfortable with using the ADX myself - although I do keep an eye on Aroon, too.
Can you predict when the slow stochastic will be overbought or oversold and stay in that position for days or when the Fast % K will break the slow % D?
Usually, when the market is trending strongly (up or down) the overbought/oversold indicators like the stochastic would stay in extreme overbought or oversold positions for a long time. The proper way to trade them is in combination with a trend-detecting indicator. For instance, consider the following simple rules:
1) If the market is not trending, Cover/Buy when the overbought/oversold indicator comes out of oversold territory and Sell/Short when it comes out of overbought territory.
2) If the market is trending up, Buy when the overbought/oversold indicator comes out of overbought and sell when it comes out of oversold. (That is, do not attempt to trade counter-trend, i.e., while the indicator is starting to move towards oversold.)
3) If the market is trending down, Short when the overbought/oversold indicator comes out of overbought and Cover when they come out of oversold. (Again, don't trade counter-trend.)
It has been my observation that if it is between 80-100 for two full days the 3rd day is a down day even if the hourly stochastic is not overbought.Have you seen any similar observation?
I am afraid I can't be of much help here; that's too short-term trading for me and I don't have enough experience doing it.
Regards,
Vesselin
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