Aren't you using the 25MA divergence ratio the wrong way?

oversold、overboughtWhat do you use as an indicator of?

RSIYaRCI、StochasticsOscillator systems such as these are major, but the divergence rate with the 25-day moving average (25MA) =“25MA divergence rate”It is also often used.

andWhat makes wrong explanations even for professionals such as analysts and commentators is the “25MA divergence rate”It is.

At the 25MA divergence rate
・Overbought by +5% or more
・Oversold at -5% or less
It is commonly referred to as.

Therefore, it is explained that if the divergence with 25MA is +5% or more, it is overbought and will soon be on the ceiling, and if it falls below -5%, it is oversold and it will soon bottom out.

Is that really the case?
For example, consider the following two cases.

A pattern:
It has been in the range for 2 months, and the 25MA divergence rate has remained almost flat from -1% to +1%.
It began to drop rapidly from there, and it has dropped by 4% in the last 2 days...
With this, the 25MA divergence rate is -5%.

B pattern:
It has risen 2,500 yen in the last 2 months, fell 3000 yen, and although it went back 2000 yen, it has dropped 1500 yen. Yesterday today's 2 days down 4%, and now the 25MA divergence rate is -5%.

The current 25MA divergence rate for both A and B is -5%. Are they both equally “oversold”?

whereinWhat is important is the “variation” in daily closing pricesIt is.

A continues to be a small-range market, and the variation in the 25MA divergence rate is around -1% to +1%, which is a market where price movements are extremely small. On the other hand, B is a rollercoaster market with 2 round trips of 3000 yen up and down, 5,000 yen to 6000 yen even during the same range period, and the 25MA divergence rate also seems to be hitting a big wave from -5% to +4%.

In other wordsEven if today's 25MA divergence rate is the same, B is a much “uneven” and “highly variable” market price compared to AThat's it.

ThisvolatilityI say it.
There is also volatility in the 25MA divergence ratioThat's why.

Since the A pattern recently had little variation = little turbulence and the divergence rate jumped to -4% all at once, thisOverwhelmingly oversoldIt is.

On the other hand, in the B pattern, there is a large variation = large amount of turbulence, and -5% is an everyday occurrence.There is no doubt that it is the level at which it is being sold, but now is not particularly “oversold”。

Therefore, it means that the explanation “the 25MA divergence rate is oversold at -5%, so it's not strange if it bottoms out soon” in the B pattern is wrong.

Now, what is the Nikkei average futures like on 2024/7/26 at the time of writing?

The current 25MA divergence rate is -5.35%. Yesterday 25th was -5.89%. Therefore, it was explained that since it is 5% or less, it is oversold, and the decline has already stopped.

However, the 25mA divergence rate of -2σ on the 24th, the day before that, is -2.69% in white letters. In other wordsThe situation was “oversold” when the 25MA divergence rate fell below -2.7% on the 24thThat was it. The judgment that up to 5% is not oversold... is wrong.

andThe market always overheats and overshootsI will. -5.89% on the 25thA period where it's oversold, but I don't know how far it will drop due to the overshoot periodThat's it. It means that it is useless to decide that the decline has stopped at a place like this.

So when will it be determined that the decline has stopped?
ThisWhen the 25mA divergence rate is above -2σ, that is, it comes back within the green bandIt is.

This is where the yellow arrow is on 4/23.

Now let's take another look at the 7/26 situation.
As of 10:00 a.m. on 7/26, it rebounded to 37950 yen and came back. However, the 25 mA divergence rate has not yet returned above -2σ.

It attracts at least until the closing price on the 26th, and if it reaches around -2σ of the 25mA divergence rate, it will be determined that it is a long approach.

On a daily basis, if there is a fairly sudden rebound on the 26th, I think you can also see that the 25mA divergence rate will not return above -2σ. Also, it can be said that it is not strange if the mullet moves in the direction where it rises again = in the direction of falling.

like thisWhen judging the market price, it is important to think about the “variability” = “volatility” of the data ⇒ standard deviationIt is.
What is a simple fixed value of +5% and -5%Just a rule of thumbIt is,There isn't much evidence in terms of dataIf you know that part, I think you won't make a mistake in your judgment.

Of course, there is absolutely no market price; it's just a matter of probability theory and statistics, so there are times when the market price reverses at -5% or +5%. However, even so, if you are going to invest over a long period of time, you must bet on places that are data significant and have a high accuracy of even 1%.

If you bet using the wrong technical method, you will eventually lose in totalSo I want to be careful.