Psychological Line Indicator: Trading Strategy & Tips

Psychological Line (PSY) is an oscillator-type indicator that compares the number of rising periods to the total number of periods. In other words, it indicates the percentage of bars that close above the previous bar over the course of a given time period.

This indicator can be used on any timeframe (daily, weekly, monthly) and an asset. Read the full article to learn more about this magnificent indicator, how it works, and ways to use it in trading.

How does it work?

Being an Oscillator, Psychological Line fluctuates between 0 and 100. When the indicator is above 50, buyers dominate the market and the overall sentiment is believed to be bullish. When it is below 50, sellers are in control of the market, and the overall sentiment is believed to be bearish.

Like most other oscillators, PSY has overbought and oversold levels of its own. When its value is above 70, the asset is considered to be overbought. When the indicator is below 30, the asset at hand is considered to be oversold.

The higher the indicator, the stronger the positive trend. Conversely, the lower the indicator, the stronger the negative trend. Using the readings of this indicator you will be able to make sound trading decisions.

How to use it in trading?

As any other indicator, Psychological Line is used either to provide trading signals of its own or to confirm signals received from other indicators. There are several ways to use it in trading. The most important thing to understand about this indicator is that it is a complementary tool and should not be used on its own. Even when Psychological Line acts as your primary indicator, its readings should always be confirmed by indicators of other types.

For those of you trading with the trend, opening a BUY deal when the indicator is in the green zone (above 50) and a SELL deal when the indicator is in the red zone (below 50) is the most commonly used strategy.

Overbought and oversold levels (70 and 30 respectively) can also be used in trading. When the price crosses the 70 lines from below, the asset is overbought. Since the asset cannot stay in the overbought position forever, it will have to leave it sooner or later. A new negative trend can, therefore, be expected. The same applies to the asset that stays in the oversold position for too long. Sooner or later, the price will have to go back up. One thing the Psychological Line cannot do is predict the exact moment when the reversal is expected. You will have to pinpoint it by yourself by using other indicators and your experience.

There is one more signal type this indicator is capable of sending. Like any other oscillator, when PSY moves in one direction and the asset price demonstrates counter-movement, a divergence is observed. The latter is often associated with an upcoming trend reversal.

No matter how you use it, remember that Psychological Line, like any other indicator, cannot be accurate 100% of the time and will provide false signals. You, as a trader, will have to learn to get rid of them and take into account only the correct readings.

How to set up?

Setting up the Psychological Line indicator is easy. Go to the ‘Indicators’ by clicking the corresponding button in the bottom left-hand corner of the screen.

Go to the ‘Other’ tab and choose Psychological Line from the list of available indicators.

Click ‘Apply’ without changing the settings. Or you can adjust the number of periods used for the calculation. The higher this number the less sensitive PSY will be. The lower the number of periods, the more sensitive the indicator will become (but remember that the number of false alarms will also go up).

The indicator is ready to use!

Now, when you know how to set up the indicator, you can go to the platform and give it a try. Chances are it will become an integral part of your trading strategy. But even if not, you will get a chance to broaden your trading horizons and learn something new.