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Chapter 12, Part VI. Detrended Oscillator and Momentum Indicator. Page 6

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 20, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Combination of Overbought/oversold and Support/resistance levels

    This strategy is relatively simple. Joe DiNapoli calls it “Stretch”.

    1. If the market reaches overbought based on DOSC value right at some resistance (simple line or Fibonacci level) – then there is high probability, that the market will bounce down from this area or at least turn to sideways, despite the trend direction, that could be strongly upward.

    2. If the market reaches oversold based on DOSC value right at some support (simple line or Fibonacci level) – then there is high probability, that the market will bounce upward from this area or at least turn to sideways, despite the trend direction that could be strongly downward.

    3. It counts that this combination is still in play, until DOSC will not reach zero level. So, if you have taken this signal and entered, say, short from (overbought + Fib resistance) combination – you will have to close position when DOSC will reach the zero level, despite at current profit or loss on your position. Because the market can stand in the range but DOSC moves to zero anyway. In this combination you will probably get some loss.

    Check this chart and all will become clear:


    Chart #5 | EUR/USD weekly DOSC(7) and SMA(25)
    [​IMG]

    Look – trend is bullish, because market is strongly above 25-period SMA. But here you suddenly see that market has hit 0.618 Fib resistance and DOSC hit at the same time high extreme. So market is overbought at a Fib resistance level! You’ve entered short. When DOSC decrease to zero - you’ve exited from short trade – trend is still bullish! So you have no reason to hold short position any longer.

    By the way – this is weekly chart, so 300 pips for couple of weeks, not bad ha?

    4. Since this kind of trade is always in opposite direction to the major trend – you should exit quickly. In fact, we may call it a “scalp” trade compared to the time frame. In other words – this trade is just an attempt to play on retracement under some predefined circumstances - a combination of DOSC extreme and some support/resistance level at the same time. If something goes wrong – exit immediately – because your position here is against the major trend!

    5. This signal works better if there is a combination of 0.618 level rather than 0.382 Fib level
     
    Hamza Samiullah and fran alvarez like this.
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