Saturday, August 22, 2009

Trend followers and indicators

To a trend follower, the concept of overbought and oversold markets has no meaning. Because of this, indicators such as RSI, stochastics etc are an alien concept. Trend followers use one indicator - price. If the price is going up, you buy. If it's going down, you sell short. Simple but effective.

The rally in the markets since March has had traders and bloggers screaming that the markets are overbought, the top is in, now is the time to go short etc. In a trending market, that sort of attitiude would cost you a lot of money.

I know of some traders (via their blogs) who made lots of money from the market slump in 2008, but have been trying to time the top of this years' rally and have repeatedly been entering short positions at varying levels, only to be stopped out. The market will tell you when it's time to exit long positions - when the trend of the price changes.

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