A lot of information can be gleamed from the shapes and durations of the tops and bottoms in the indicator panel. How much time the currency pair stays overbought or oversold is an important factor in analyzing the strength of rallys and trends. Figure 5 shows several tops and bottoms. This figure is the same currency pair, time period, and indicator settings from Figure 4 on the previous page.
Figure 5 – Figure 4 is reproduced with a detailed look at shapes of the indicator's, not price's, tops and bottoms.
- A narrow and not very deep bottom means that sellers (bears) are weak in their attempt to control the price of the pair as buyers (bulls) stem the downward price movement. When bulls take control of the price the ensuing rally will be strong.
- Look at Buy 2.
- Broad, deep bottoms are a sign that the bears are strong and it took buyers a long time to wrest control of the price. The rally should be weak.
- No examples, except present moment in graph.
- If the top is narrow and does not reach very high above 80% then bulls are weak, and the bears’ attempt to wrest control of the price is successful. The ensuing contraction should be strong.
- See Sell 5.
- Very high, wide tops mean that the bulls are more powerful than bears and the ensuing reversal, a contraction, should be short lived.
- Occurs with Sell 1 and Sell 3. In Sell 3 Stochastic doesn’t even reach back to oversold levels before the contraction is reversed.
A couple of the tops and bottoms, such as Buy 3 and
Sell 4, are somewhat in between the examples described above and can go either way. In these situations (and in all of the situations in fact), one should use other indicators to give them a sense of the strength of the coming rallies and retractions.
