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* What do you think of when use the terms “overbought” and “oversold?”

* Can’t go higher or lower.
* That’ WRONG.

* Not only is it wrong, but the truth is exactly the opposite.
* This is one of the reasons you’re getting stopped out all the time.
* You think all types of conspiracy theories:

* Brokers trading against me.
* Market makers know where my stops are and are taking them out.

* No, the actual reason is that when you trade OB, and OS signals, you’re actually trading AGAINST the dominant momentum of the market!

* Common indicator:

* Most oscillators are bounded. Common examples are RSI and stochastic:
* Stochastic

* When the indicator gets below the OS line and crosses above it.

* Because after gets above OS then, it’s out of the OS territory and into bullish territory.

* When K crosses above D.

* The heresy of this:

* The extreme levels actually are strength signals in that direction.

* When it gets “OB’ more likely to go up after that.
* When it gets “OS” more likely to go down after that.

* Professional traders know about stochastic pops and stochastic poops!

* WHY is this?

* These particular indicators, such as RSI and Stochastics have 2 important characteristics:

* They’re bounded.

* Remember, indicators are math equations.
* Mathematically they’re only allowed to go from 0 to 100.

* They measure “momentum.”
* Momentum is the strength of the market.
* So … let’s take stochastic for example. The first time that stochastic goes from the top of its range down to 0, is actually the MOST bearish momentum signal that George mathematically allowed the indicator to map on your charts.

* BUT what happens in many people’s trading experience is they’ve been taught to BUY, thinking it’s bullish, when actually it’s not only a BEARISH signal, but is the MOST BEARISH signal the indicator can give you.

* Then the market continues down after they buy, they get stopped out, and then the figure their broker is trading against them or the market makers are hunting their stops.
* NO! It’s simply that they’re trading against the dominant money flow of the market.

* Another one to be careful of is Bollinger Bands and on the next episode I’ll give you the inside scoop, and the way most traders trade it exactly wrong too.