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Technical Indicators: Types of Trades
Finance - Technical Analysis

Range bound trades, whipsaws and false signals



All technical indicators will fail in range bound stocks / markets and will generate whipsaws and false signals.



Whenever you can get a buy / sell within 10 days (order is immaterial), it means the stock is range bound. At this point, one should visually check the chart and identify areas of support and resistance. Only a break above these levels will create a new trend.



Support and Resistance levels / targets



This is nothing but a "peak" and "trough" based on 5% change. These levels form the basis for calculation of targets.



A break above a "peak" gives a resistance break. Similarly a break below a "trough" generates a support break.





Oversold and overbought stocks



Interpretation of this is difficult and should be done in the context of the prevailing trend.



Overbought means great strength. It does NOT mean stock will correct immediately. It is normal for a stock to remain overbought for considerable periods of time.



Oversold means great weakness. It does NOT mean stock will rally immediately. It is normal for a stock to remain oversold for considerable periods of time.



In an uptrend, oversold stocks present a good buying opportunity near supports (buy on declines). In a downtrend, one should exit overbought stocks (sell on rallies).

 
 

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