INDICATORS
Get A Feel For The Markets
Index Of Chart Sentiment
by Viktor Likhovidov
This new concept can improve your intraday trading.
Those who trade stocks or derivatives may
rely upon a number of so-called sentiment indicators such as the put/call
ratio, the number of odd-lot sales, and the number of investment advisors
who are bullish versus bearish. These indicators can give useful hints
about the plans and intentions of market participants. But currency traders
have no such additional indicators, and the only source of information
is the price chart itself. In this article, I will discuss the index of
chart sentiment, a new approach that can improve your intraday trading
systems.
INTRADAY TRADING AND ITS PROBLEMS
Any trader who attempts to trade short time frames learns quickly that
common technical analysis and money management rules alone will not make
his trading successful. One of the universal rules in trading is the old
saying, "The trend is your friend." A trend is formed when the
market undergoes some evident movement. Buying the trend is a natural reaction,
as is immediately taking a loss if the trend reverses. Another well-known
statement about the markets is that any rally will inevitably be accompanied
by a pullback of some degree. Just when you are ready to buy, others are
beginning to sell. This causes the market to retreat, and may cause your
stop-loss to be executed. Those who have finished selling will buy again,
and the trend resumes. Sound familiar?
Detecting new trends during their early stages can certainly aid in
efficient trading. But doing so is difficult, mainly because the price
chart is really a lagging indicator of the trend. When the market begins
to show a turnaround, you don't know whether the trend is reversing or
if the move is merely a retracement. When the trend reasserts itself, it
is usually too late and too dangerous to join it.
Figure 1: index of chart sentiment. Here you see how the index
performs on the hourly chart of the yen during April-June 2000.
...Continued in the September 2003 issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the September 2003
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2003, Technical Analysis, Inc.
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