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Understanding

I trade without indicators almost all of the time. If, when, I choose to use an indicator, it is done so with complete understanding of what the indicator is showing me and what it is good for.

There are countless times when I've seen traders looking for confirmation by using multiple indicators that measure the same thing. Can you get true confirmation by using RSI to confirm what Stochastics, %R, and Momentum indicators are showing you? Not a chance! They are all measuring the same thing, momentum.

Can you obtain real confirmation by using CCI and RSI together? Yes! Why? Because CCI is a volatility indicator, and RSI is a momentum indicator.

Most traders use CCI as a momentum indicator. That is totally wrong. CCI cannot show you momentum. Why? Because it is not range bound. The values for CCI are theoretically infinite, whereas momentum indicators have finite values. RSI is range bound.

To be correct, CCI should be plotted in the same way as Bollinger Bands (BBs). If plotted that way, CCI would show you when the mean deviation of typical prices (the outer bands) was statistically set to return to a moving average of typical prices. At 2 or 3 mean deviations, prices are highly prone to move back toward the moving average.

With that in mind, you would look at RSI to see if the indicator line if momentum was beginning to flatten, indicating a change in momentum and a move by prices in a new direction.


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Tuesday, 07 December 2021

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