Equities have been all over the places over past few weeks. Prices have been moving sharply in one direction but only to reverse back later. During such times when there is more of mean reversion to the average rather than a trend it is better to adopt different trading technique.
Below is 60 minutes chart of Nifty that shows Channel along with RSI and Exponential Moving average:
The strongest of trend was seen post the Budget session on 29th February which lasted for only 3 days. After that the trend has been nothing but sideways with slight drift on upside.
Nifty 60 minutes chart:
As per mean reversion technique whenever prices move away from the average by a specific amount it is time to take opposite stand. However, this technique can be dangerous if a strong trend is about to emerge.
Now trading based on RSI works well during such scenario provided we have a channel to confirm the reversal zone on prices.
On above chart you can observe that RSI has been finding strong support near 30 and every time RSI reached near this zone the trend reversed back on upside. On the other side it has been 75 to 82 zone from where we have seen reversal on downside. Also such reversal has happened after a strong close or very weak close in previous session from channel support or resistance….
This gives important information on which technique is currently working. But please remember in case a trending move emerges one need to again change trading method.
Next one or two days of price action will confirm if market is still in non – trending environment following the mean reversion or it is now going to deviate significantly away from its average! These are interesting times so stay tuned!
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