Different ROC Periods

But here’s what’s interesting: the author suggests using three ROCs regulated for different periods, so we already have the 9, we can add a ROC12 and a ROC18. Why is that? Because, for example, if the price breaks a trendline and you see all three ROCs confirming the trendline breakout, you have the weight of evidence telling you that the breakout was successful and accompanied by momentum. But if one of these ROCs does not confirm the trendline breakout, or two, or all three, you start to doubt that movement. Isn’t that interesting? If it’s adding value, give it a like to help me out; if it’s not, you can dislike it too, it’s your right, but I appreciate those who can give a like.

When you analyze an oscillator, you observe oversold and overbought conditions, divergences between the oscillator and the price, you see trendline breaks as we just discussed with ROC, and moving average crossovers can also be used. So, if the price moves below the moving average, it may be reversing from an uptrend to a downtrend. You see if there is momentum in this movement, using the teachings of this lesson.

Momentum and Trend Reversal

Here’s the deal, “momentum typically reverses along with price, but often with a slight lag, but just because oscillators change direction, it doesn’t always mean prices will change direction too.” That’s in the first paragraph of page 253.

And then he explains that a reversal in momentum from the trend typically confirms evidence of a price trend reversal signal. In other words, the signals you pick up on the momentum indicator are a witness in favor of the thesis that the trend will reverse, it’s one more piece of evidence that Martin Pring talks so much about.

Analyzing overbought and oversold levels is the main way to interpret momentum. You can draw your own oversold and overbought lines on the indicator. Some indicators like the RSI and the Stochastic already come with these overbought and oversold lines because they were designed to emphasize this issue; ROC does not.

Overbought and Oversold Levels

It’s important to understand that when the price reaches overbought or oversold levels, it doesn’t necessarily mean there will be a reversal. Probabilities favor a reversal, but sometimes buyers’ enthusiasm is so strong that the price will continue to rise even in an overbought region. That’s why it’s recommended to wait for the entry signal in the operation in the price itself, as mentioned earlier.

The golden tip I’ll give you is this. Only use oversold and overbought signals while observing the direction of the primary trend because in an uptrend, the price is sensitive to oversold levels. What does that mean?

In a market where the primary trend is upward, we’ll have corrective movements against the main trend. Here, there’s a downtrend in the smaller timeframe, and these small downtrends are corrections of the larger trend. These downtrends can take the momentum indicator to oversold levels, and since the primary trend is upward, there will be sensitivity to these oversold levels.

The Correct Way to Use Oscillators

That’s why everyone uses oscillators wrong. What do people do? They see a strong uptrend, notice that the market has reached overbought levels, and sell. But the market keeps going up, even in overbought territory because the primary trend is upward.

The same applies in the opposite direction; if the primary trend is downward and the price corrects until it reaches overbought levels, the sensitivity will be high, and it won’t stay there for long.

But if this market goes to oversold levels, it won’t necessarily reverse because the primary trend is downward. If it’s a strong trend, it can stay in oversold territory for quite some time, so don’t try to catch a falling knife, which is buying when the price is in a downtrend. So, the limits that the price will reach in overbought and oversold regions depend on whether we’re talking about a primary or intermediate trend. There’s a lesson on this primary and intermediate issue on the channel; I’ll leave all the links in the description.

Oscillators and Market Sentiment

A signal to enter an operation supported by ROC or any other oscillator occurs when the indicator surpasses overbought and oversold levels for an extended period. So, looking back on the chart, you won’t see this level being reached frequently, but then you wait for the indicator to cross below the overbought or oversold level to enter the operation, as it is heading towards the zero level, where you can even fully or partially realize gains.

Martin Pring says there is a close connection between market sentiment indicators and oscillator characteristics. So, a change in market sentiment, whether it’s bullish or bearish, is always changing, and these variations in market sentiment are reflected in oscillators. I’m giving away the game, and you still haven’t liked the video.

Applying Momentum to Profit

And check this out. An overbought market can be evidence that the supply and demand balance has shifted in favor of the bulls, and we’re in a strong uptrend that will continue for a long time, so stop thinking you should only sell when the price is overbought.

You have to analyze the whole context, beyond the issue of larger timeframes in the uptrend and smaller timeframes in the downtrend. You also need to observe whether we’re at the beginning or the end of a trend, since:

“it is only when the uptrend is maturing, or during downtrend phases (corrections), that overbought levels can be reliable signals that an uptrend is about to be aborted.” 

And he continues:

“The very fact that an indicator fails to remain at, or even reach, an overbought condition for very long is itself a signal that the advance is losing momentum. The opposite is true for a downtrend.”