≈ Tipping Points! ≈
There is a phenomenon in trading that involves the two evils of trading. Those evils of trading are fear and greed. We have talked many times about these two forces and the damage they can do to a trader’s psyche and their respective trading capital. This phenomenon involves the concept of balance when it comes to either a market, equity, sector or commodity. There is a natural balancing act in the markets and it comes from the psychological nature of the market participants. When things are getting heated up too much there is always a tipping point in which the market self corrects and returns to the mean. Now the evils of trading can drive markets to a point that one might not expect but everything reverts to the mean at some point in time. It is these unbalanced conditions that can present clear and present danger to traders.
This balance between normal and extreme conditions can be tricky to recognize and takes a keen eye to spot but once these conditions are recognized then swift action must be taken to prevent being on the wrong side of the movement. These conditions can be termed as overbought and oversold conditions. Overbought and oversold conditions happen all the time but it is when they get to extremes caution needs to be taken and usually taking the other side of the trade is a wise idea.
The question is how do we see extreme overbought and oversold conditions when they normally happen all the time? This is where we can gather more information to help us determine whether something is extremely overbought or oversold or whether it is your garden variety kind?
We can get this extra information from looking at certain indicators like the MACD and the RSI and we can also see extremes in volume patterns. When we become adept as recognizing these extreme conditions then we can improve our timing for making changes to our market posture.
So, if you want to be able to recognize the next tipping point be sure to get familiar with gathering the necessary information and building out the picture of the market or equity you’re looking at. Take some time to familiarize yourself with extreme conditions and patterns will begin to emerge and one can use this to your advantage.
Chart of the Day
Gamestop Daily Chart
GameStop Corporation (Ticker: GME) has seen very extreme conditions recently and the last thing you want to do is to end up on the wrong side of this trade. By using indicators and the volume patterns you can narrow down to when the equity might be reaching a tipping point.
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