Stocks & Commodities V. 26:1 (18-26): Profit Locking And The Relative Price Channel by Leon Wilson

Stocks & Commodities V. 26:1 (18-26): Profit Locking And The Relative Price Channel by Leon Wilson
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Profit Locking And The Relative Price Channel by Leon Wilson

Here’s a technique that will help you identify sustainable price action and overbought periods, and strong breakouts.

In the July 2006 STOCKS & COMMODITIES, I introduced the concept of applying conventional indicators such as the relative strength index (RSI) to price action. For details, please refer to that article. For now, adapting range-bound indexes to price action highlights the bilateral relationship between price direction and price bias. In order to fully appreciate the correlation between dynamic bias and price action, you must draw a corresponding yet singular relationship between price and the indicator.

The moving average convergence/divergence (MACD) defines the dynamic relationship between two moving averages while moving averages are relative to price behavior and direction. The fluctuation in price is reflected within moving average dynamics, while the disparity between moving average values is quantified by the MACD. The MACD becomes a tertiary link to price. Naturally, price action is the primary source of data while moving averages from which the MACD is derived is the connecting link to price.


The problem with bias-based range-bound indexes such as the RSI involves having both primary and tertiary data but no connecting link between price and index. Adapting such indicators to prices allows you to perform analysis in accordance with price dynamics. As the RSI defines bias within price dynamics it is logical to use this relationship to define a point of unsustainability against price itself. So how do you solve this problem?

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