The Art of Detecting Market Tops and Bottoms

Presenting a New Technical Indicator For Market Reversals

Sofien Kaabar, CFA

--

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 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.

Contrarian trading is a form of art that requires specialized tools. Learn how to improve your contrarian trading using Python in my book!

--

--