Flipping the Switch

As Tony Robbins says, you don’t have to know how electricity works. All you need to know is how to flip the switch to get the light to come on.

The same can be said for many of the technical indicators that are available to investors. You hear about oscillators, regression lines and channels, and so on and so forth. You could spend the rest of your life learning about every indicator technicians have come up with trying to gain an edge over other investors.

Oscillators, for example, are nothing more than overbought/oversold indicators. Each one has a level that is supposed to mark a turning point for the stock – a level that screams that the stock is overbought or oversold.

There’s nothing wrong with using indicators to help make your investing decisions. But I caution you not to get caught up in the mechanics of what goes into them. Just focus on the output you’re interested in.

For instance, I use a 10-unit RSI as my overbought/oversold indicator. RSI stands for Relative Strength Indicator. It measures a security’s price in relationship to itself on a scale of 1 to 100, with 50 being the norm. It’s rather simple, but I find it to be more reliable than most other indicators. If the RSI reaches 70, that is a sign that the stock is overbought. If it reaches 30, that’s a sign that the stock is oversold. I can buy when the RSI is at 30 and sell when it hits 70. Or I can sell short at 70 and buy back at 30.

It doesn’t get any easier than that. The actual calculation behind those numbers isn’t nearly as easy, but I don’t have to do the calculating. What matters is that I know what constitutes overbought and oversold.

Remember, don’t get caught up in the mechanics of technical analysis, get caught up in the results.