I had the opportunity to catch up with Dave Toth, Market Insights Senior Analyst with RJO’Brien (Dave has served as a technical analyst for over 30 years) during a meeting in Denver. Dave was hosting the meeting to discuss technical analysis.
By definition, technical analysis is the perspective that trading decisions are determined simply through a reading of the charts. If you use things like RSI, MACD, Stochastics, CCI, trendlines, Fibonacci, etc in your reading of charts, then you are applying a form of technical analysis.
At one point in the evening, Dave got on a soapbox (foaming rant) about technical indicators. He described how he wished that we could strike the idea of “overbought” or “oversold” from our vocabulary. He has a good point. The metrics many traders use to describe something as “overbought” or “oversold” are through the use of momentum indicators that they overlay onto a chart. Those indicators are derivatives of price, so their value needs to be kept in context.
The reality is that a trading product can remain “overbought” or “oversold” for much longer than you can remain solvent (if, for example, you are using those conditions to trigger a counter perspective trade).
Years ago I struck “overbought” and “oversold” from my vocabulary. I’d encourage you to do the same.
Instead of thinking about “overbought” or “oversold” think about “acceptance.” “rejection,” and “exhaustion.” These latter concepts focus on how the auction is digesting price and that is very relevant to your trading decisions. When coupled with the profile, they become very powerful indeed.
A question to ask yourself, “How often am I using “overbought” or “oversold” in my trading set-ups? How well is that working for me?”