Entry Models - Part 6: Overbought Scalp
Basically part 5 continued.
As requested by a few readers, here is an instruction on the overbought scalp. It works exactly the same as the oversold scalp, except all the parameters are inverted.
I figured to use this opportunity to go a little bit more into detail around my thought process and decision making, which I think could be of help to those of you who have experienced success with the model. As you may have noticed, the model is the most effective when markets are basing, and appears less often during times of expansion.
Before we can begin to look for the scalp model, the M5 RSI has to be ‘overbought’. It is important to understand that ‘overbought’ doesn’t mean that investors have bought too many shares. All it means is that price has made an advance, and the indicator is temporarily giving an unreliable read. Price can stay overbought for many candles in a row, and the RSI can cool while price moves higher. This is called bearish divergence, but without a break down, the divergence ultimately dissolves through sideways consolidation, or even evaporates if price breaks higher against all odds.
So with that in mind, lets have a look at a short scalp from my trade recaps. On the left hand side, you can see a big wick = rejection off a level, on an overbought RSI. This is always the moment when the scalp watch initiates - I have standard alerts on the M5 timeframe RSI.
In preparation of the scalp, I immediately zoom out to see where possible target diagonals are, and then I decide if these are reasonable targets or not.
Currently, I see no reasonable target for any short. Price has created a liquidity void, and the nearest diagonal is well below the EMA’s and below the void. Price will never reach that lower diagonal in a straight line with all these obstacles in the way, so there is absolutely nothing to short here.
When price then breaks the trend, it may form an entry diagonal, but there is no diagonal to target, so whatever happens here, I am still not interested in shorting.
As price pulls back and recovers, it ventures higher while the RSI stays overbought and creates some bearish divergence. This is a sign of weakness. At the same time, the pull back gives a reasonable target diagonal. But as price breaks higher, the initial BoT is invalidated. We need a new break of trend.