How to Filter Out Overbought or Oversold Conditions

Ever see a candle suddenly plot that is much longer than the others? Of course you have – and a loss may have resulted. These candles often indicate the market is exhausted. After a candle of exhausion, you’ll probably see retracement or “confused” movement. As you can imagine, such market behavior pokes holes into many day trading strategies, especially indicators. The Atlas Line can even fall victim unless you know how to filter out oversold or overbought market conditions. Watch the video above to see how John Paul calculates whether it’s worth trading under these conditions.

» Get 6 Months of the Atlas Line «

In NinjaTrader, set the ATR to a Period value of four. Take the current value of the ATR and double it. Remember the result. Next, subtract to determine the point distance between the entry signal (ex. – Dbl Bar Short or Dbl Bar Long) and the current price the Atlas Line is plotting at (the pink value on the right axis in the video). Remember this result. If the first result is less than the second result, you know the market is overbought / oversold and not worth trading. By not trading, you have filtered out a potential loss. Watch the video a couple times as the visual explanation helps a great deal more.

We still put overbought oversold trades on the Atlas Line Recent Trades Page. You can imagine how much more effective the Atlas Line is once you know all of the proper filtering techniques. You can see a four-month report of 2012 trading the Atlas Line here.

Leave a Reply