There we have the cardinal contradiction. For some a market situation is overbought, for others it is the beginning or resumption of a trend. Who is right? No one in general! That sounds natural, but it means that an overbought indicator or oscillator system has a systematic problem. It makes an unwarranted assumption about the market, namely that it will always come back. The opposite is true, because there is only one thing for sure and that is that the world will change.
Has the trend trader always the upper hand in this overbought or trend question? No, of course not, but he is able to select his trades with using the stop loss technique, and that after the matter of fact. If stopped out, it probably was no trend or the trend came to an end, and if the trade is still running, it still has the chance to evolve into a larger trend if it hasn’t done so already.
Trading trends with the stop method means being able to react to the market and to let the market decide. Trading overbought or oversold situations means hoping for the best – and sometimes getting the worst. Trading should never be hoping. This genre is reserved for investors.
The combination of a trend trading system with an overbought or oversold oscillator system may yield a system that seamlessly switches between long, short and cash positions. For some people this is the holy grail, a trend trading system requiring little effort and still making acceptable gains. For getting such a trading beast to work, more than adding trading tricks to it is necessary, I think.
A trending overbought oversold indicator system could work if enriched with a preselection of the right trends. As usual, I would like to point out the favorite trading motor of Penny Stock Alerts, which is a growth stock and a company of the future behind it. Alternatively one could choose specific economic situations and pick instead of stocks commodities or currencies at the right time.
Trying it without fundamental data is controversial, as indicated above. A trend that is falling back is cooling down and gaining in attractiveness for the oscillator trader. It approaches the oversold territory coming from the overbought zone and hypnotizes these types of bargain makers.
But at the same time the risk that the trend itself got damaged gets greater. Having here the virtual power of a fundamental reason that magically propelles the price again towards new highs would make waiting or hoping for inner cycles in the trend superfluous.
Trying to combine cyclical and anticyclical trading behaviors is often a critical trading mistake. Investors that try to become traders are prone to sit themselves between the chairs. Better try to combine systems synergicly. In the case of trend trading that would add onto the psychologic forces that makes a trend a self-fulfilling prophecy some real fundamental engine.