FOREX THEORY
Momentum Tricks
Moving out of overbought / oversold
Let’s say you’re looking at a chart and you notice that the
stochastic has formed a new low while price hasn’t.
You may think that it’s time to buy because the indicator is
showing oversold conditions and divergence has formed. However, selling
pressure may remain strong and price continues to fall and make a new low.
You would have been pretty bummed out as trend didn’t
continue. In fact, a new downtrend is probably in place as the pair is now
forming lower highs. And if you were stubborn, you might have missed out on
this down move too.
If you had waited patiently for more confirmation that the
divergence had formed, then you could have avoided losing and realized that a
new trend was developing.
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