Emini Trading - Interpreting Oversold And Overbought Conditions

Emini index futures traders live in a fluid and volatile environment where conditions change depending on the mood of growling bears and snorting bulls. Trading everyday in turbulent conditions can be overwhelming for market participants that are ill prepared for the competitive world of futures trading.

Learning to interpret market volatility can be difficult for those who lack the experience necessary to be successful. However, there are tools that can enhance your trading system and alert the trader to possible direction changes in the market. Indicators and oscillators have long been tools utilized by traders in ever financial market - including the index futures markets.

Most traders are familiar with charting software with Japanese candlestick charts being the most popular. Trend lines, channels, moving averages, Bollinger bands and myriad of other trading options can be added to the chart to help the trader determine market direction. There are also other tools that can be added to your charting software that reside below your chart screen that can alert the trader to overbought and oversold conditions and possible market reversal.

RSI (Relative Strength Indicator)

The Relative Strength Indicator is specifically designed to determine the strength of the market in the current direction. The RSI has a reading that is scaled between zero and one hundred with a line that moves back and forth between these two points. When the market moving upward, the line will move upward toward 100. As the line moves closer to 100, it will very often pass through the 100 reading indicating a severely overbought market. This should alert the trader the possibility exist for the market to pullback and offer the trade the option of opening a short position.

In the reverse, when the market is trending downward toward the zero mark, the trader should be alert that conditions are becoming oversold and the opportunity to open a long position exist. The RSI is used in tandem with the charting screen to help the trader determine possible trade entry and helps to stay on the right side of the market.

Stochastic

The Stochastic is similar to the RSI in is also helps determine oversold and overbought market conditions. This indicators also has a reading between 0 and 100, however, conditions are consider to be nearing overbought when the Stochastic line reaches the 70 mark. When the market is moving down, it is considered to be nearing overbought conditions when the line reaches the 30 level on the scale. The Stochastic is also best used in conjunction with charting software

NYSE TICK

The New York TICK is another indicator employed by emini index futures traders to determine overbought and oversold conditions in the market. The TICK measures the amount of up ticking stocks versus down ticking stocks. Extreme overbought conditions exist when the TICK reaches plus 1000 and the trader should be alert for possible pullback as bulls catch their breath.

Extreme oversold conditions exist when the TICK reaches minus 1000 with the trader being alerted that conditions are ripe for growling bears to calm down and begin to close short positions as bulls begin to win the battle for the time being.

All three of the indicators are best used in conjunction with charting software and should not be used alone since they are barometers of the market. However, they do provide relevant market information for the trader to determine market direction and possible trade setups to help the market participant capitalize on potential market direction changes. Learn more about emini signals and how they can help you improve your emini index futures trading.