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The Art of Detecting Market Tops and Bottoms
Presenting a New Technical Indicator For Market Reversals
Previously, I have published K’s Reversal Indicator I on TradingView, this article discusses another indicator which follows the same path, that is: detecting decent market tops and bottoms (in a timely manner). The first section discusses the intuition of the indicator and the second section shows how it’s used.
The Fibonacci Trading Book is finally out! Filled with Fibonacci-based trading methods (tools, indicators, patterns, and strategies), this book will guide you through improving your trading and analysis by incorporating an important technical analysis approach that is Fibonacci [PDF Version available, see end of article).
The Intuition of the Indicator
Markets are said to move randomly and even though this has soe truth in it, we can’t help but develop tools to help us predict market tops and bottoms (whether local or global). Active trading strategies and algorithms tell us that there is predictability in some strategies (with solid risk management habits). Technical indicators on the other hand, are merely helpers and can enhance convictions.
Previously, I have published K’s Reversal Indicator I on TradingView, this article discusses another indicator which follows the same path, that is: detecting decent market tops and bottoms (in a timely manner). The first step in creating the indicator is to calculate a 13-period simple moving average, then mark every instance where the close price is greater than the moving average with the number 1. This means that if the market has been above the moving average for three consecutive periods, the counter is 3.
The next step is to sum the counters using a rolling period of 21. Finally, you divide the number of 1’s by 21, which will give you the percentage of times where the close price was greater than the moving average.
The way to use the indicator is as follows:
A bullish signal is generated whenever K’s Reversal Indicator II equals 0 with the previous value greater than 0.
A bearish signal is generated whenever K’s Reversal Indicator II equals 1 with the previous value less than 1.
Visualizing the Indicator
As its predecessor, K’s Reversal Indicator I, this indicator uses overlay signals on the chart to facilitate their detection. This means that green arrows represent bullish signals and red arrows represent bearish signals.
The following Python-realized signal chart shows the indicator in action:
The blue line accompanying the price action is the 13-period moving average. You can notice that even though there are interesting tops and bottoms detected by the indicator, there are a few false signals (in this chart, we can count 3 bad signals out of 10).
Naturally, as with every indicator or technique, they are better used with other indicators and with a full risk management system that prevents you from losing your capital. Over the long-term, the indicator has a decent predictive ability, but it must be accompanied with other tools.
The following Python-realized signal chart shows another chart:
The link to the Fibonacci Trading Book (PDF version):
K’s Reversal Indicator II does not have theoretical targets nor invalidation events which is why it can be fit into any strategy. This is a double-edged sword as using it with the wrong entry/exit methods will yield negative results. However, using it right could yield good results (preferably short-term FX pairs that are known to be more ranging nature than trending).
The indicator will be soon published in TradingView for ease of visualization.
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There is a conservative form of using this indicator but may provide lagging signals (as it filters the riskier ones). The trading conditions of the conservative form are as follows:
A bullish signal is generated whenever K’s Reversal Indicator II equals 0 with the previous value greater than 0 but only validated when the close price surpasses the moving average.
A bearish signal is generated whenever K’s Reversal Indicator II equals 1 with the previous value less than 1 but only validated when the close price breaks the moving average.