Another trick would be to wait for momentum highs and lows to hit overbought and oversold conditions, and wait for the indicator to move out of these conditions.
The reason for doing this is similar to that of waiting for a crossover – you really don’t have any idea when momentum will begin to shift.
Let’s say you’re looking at a chart and you notice that the Stochastic has formed a new low while the 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 the price continues to fall and make a new low.
You would have been pretty bummed out as the 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.
This might sound a little ridiculous since you would normally draw trend lines only on price action.
But this is a nifty little trick that we wanna share with you. After all, it doesn’t hurt to have another weapon in the holster right? You never know when you might use it!
This trick can be particularly useful, especially when looking for reversals or breaks from a trend.
When you see that the price is respecting a trend line, try drawing a similar trend line on your indicator.
You may notice that the indicator will also respect the trend line.
If you see both price action and the momentum indicator break their respective trend lines, it could signal a shift in power from buyers to sellers (or vice versa) and that the trend could be changing.
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