Tag: RSI

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Forex Daily Topic Forex System Design

Trading Algorithms IX – RSI Failures System

Trading the naked RSI system depicted in this series’s previous video as an overbought/oversold signal generator is too risky, and its long-term results questionable. The system is profitable only in sideways movements. Thus, a trending filter or a detrending step will be needed to avoid the numerous fake signals.

Trading the naked RSI system depicted in this series’s previous video as an overbought/oversold signal generator is too risky, and its long-term results questionable. The system is profitable only in sideways movements. Thus, a trending filter or a detrending step will be needed to avoid the numerous fake signals.

Trading the naked RSI system depicted in this series’s previous video as an overbought/oversold signal generator is too risky, and its long-term results questionable. The system is profitable only in sideways movements. Thus, a trending filter or a detrending step will be needed to avoid the numerous fake signals.

Divergences and Failure swings

Welles Wilder remarks on two ways to trade the RSI: Divergences and Top/Bottom failure swings.

Divergences

A divergence forms when the price makes higher highs (or lower lows), and the RSI makes the opposite move: lower highs (or higher lows). RSI divergences from the oversold area show the market action starts to strengthen, an indication of a potential swing up. In contrast, RSI divergences in the overbought area show weakness and a likely retracement from the current upward movement.

Failures

An RSI Top failure occurs with the following sequence of events:

  1. The RSI forms a pivot high in the overbought area.
  2. An RSI pullback occurs, and an RSI pivot low forms.
  3. A new RSI pivot high forms, which is lower than the previous pivot high

Fig 1 – RSI TOP failures in the EURUSD 4H 2H Chart

An RSI Bottom failure occurs with the following sequence of events:

  1. The RSI forms a pivot low below the oversold area.
  2. An RSI pullback occurs, and an RSI pivot high forms.
  3. A new RSI pivot low forms, which is higher than the previous pivot high.

Fig 2 – RSI Bottom failures in the ETHUSD 1H Chart.

According to Welles Wilder, trading the RSI failure swings can be more profitable than trading the RSI overbought-oversold system. Thus, we will test it.

The RSI Failure algorithm

To create the RSI Failure algorithm, we will need to use the Finite State Machine concept, presented in this series’s seventh video.

The Easylanguage code of the RSI system failure is the following:

inputs:  Price( Close ), Length( 14 ), OverSold( 30 ), Overbought( 70 ), 
takeprofit( 3 ), stoploss( 1 ) ;
variables: state(0), state1 (0), state2(0), state5 (0), state6(0), rsiValue(0),
 var0( 0 ), rsi_Pivot_Hi(0), rsiPivotHiFound(False), 
rsiPivotLoFound (False),rsi_Pivot_Lo(0)  ;

rsiValue = RSI(C,Length);

If rsiValue[1] > rsiValue and rsiValue[1] > rsiValue[2] then
      begin
         rsiPivotHiFound = true;
         rsi_Pivot_Hi= rsiValue[1];
     end

else
     rsiPivotHiFound = False;

If rsiValue[1] < rsiValue and rsiValue[1] < rsiValue[2] then
      begin
         rsiPivotLoFound = true;
        rsi_Pivot_Lo = rsiValue[1];
     end

else
     rsiPivotLoFound = False;

If state = 0 then
      begin
        if rsiPivotHiFound = true and rsi_Pivot_Hi> Overbought then
             state = 1    {a bearih setup begins}
     else
           if rsiPivotLoFound = True and rsi_Pivot_Lo < OverSold then
                 state = 5; {a bullish Setup begins}
     end;

{The Bearish setup}    

If state = 1 then
      begin
         state1 = rsi_Pivot_Hi;
         if rsiValue > state1 then state = 0;
         if rsiPivotLoFound = true then
             state = 2;
     end;
    
If state = 2 then
      begin
         state2 = rsi_Pivot_Lo ;
         if rsiValue > state1 then state = 0;
         if rsiPivotHiFound = true then
         if rsi_Pivot_Hi< 70 then state = 3;
     end;

If state = 3 then
     if rsiValue < state2 then state = 4;

If state = 4 then
      begin
        sellShort this bar on close;
        state = 0;
     end;


{The bullish setup}

If state = 5 then
      begin
       state5 = rsi_Pivot_Lo;
       if rsiValue < state5 then state = 0;
       if rsiPivotHiFound = true then
             state = 6;
     end;


If state = 6 then
      begin
         state6 = rsi_Pivot_Hi;
         if rsiValue < state5 then state = 0;
         if rsiPivotLoFound = true then
             if rsi_Pivot_Lo > OverSold then state = 7;

     end;
           

If state = 7 then
     if rsiValue > state6 then state = 8;

 If state = 8 then
      begin
         buy this bar on close;
         state = 0;
     end;
   

If state > 0 and rsiValue < OverSold then state = 0;
If state > 0 and rsiValue > Overbought then state = 0;    

{The Long position management section}

If marketPosition =1 and close < entryprice - stoploss* avgTrueRange(10) then
    sell this bar on close;

If marketPosition =1 and close < entryPrice + takeprofit* avgTrueRange(10) then
    sell this bar on close;


{The Short position management section}


If marketPosition =-1 and close > entryprice + stoploss* avgTrueRange(10) then
     BuyToCover this bar on close;

If marketPosition =-1 and close < entryPrice - takeprofit* avgTrueRange(10) then
     BuyToCover this bar on close;

The results, measured on the EURUSD, are not as brilliant as Mr. Welles Wilder stated.

The trade analysis shows that the RSI Failures system, as is, is a losing system. This fact is quite common. It takes time to uncover good ideas for a profitable trading system. In the meantime, we have developed a practical exercise using the finite state machine concept, handy for the future development of our own trading ideas.

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Forex Indicators

RSI: The Best Forex Indicator?

Far from being something that will help you operate profitably, the usual use of Forex indicators really causes more losses than gains among inexperienced traders. However, if you are going to use them, then you should know that the best Forex indicator is the RSI (Relative Strength Index). What is the RSI (Relative Strength Index)? […]

Far from being something that will help you operate profitably, the usual use of Forex indicators really causes more losses than gains among inexperienced traders. However, if you are going to use them, then you should know that the best Forex indicator is the RSI (Relative Strength Index). What is the RSI (Relative Strength Index)? […]

Far from being something that will help you operate profitably, the usual use of Forex indicators really causes more losses than gains among inexperienced traders. However, if you are going to use them, then you should know that the best Forex indicator is the RSI (Relative Strength Index).

What is the RSI (Relative Strength Index)?

The RSI reflects the momentum and it is well known that following the momentum in the foreign exchange market increases the chances of profits. The RSI is an indicator of momentum in the Forex market and, in fact, it is the best indicator of momentum. If you are willing to use the RSI, probably the best way to use it is to go long when it is above 50 in all time frames, and operate short if it is below 50 in all time frames. It is best to always operate with the trend of the last 10 weeks or so. The formula of the relative strength index was created in the 70s, as were many other concepts of technical analysis. 

Relative Strength Index – Forex Indicators

The calculation of the relative force is performed by calculating the ratio of upward changes per unit of time to downward changes per unit of time during the review period. The actual calculation of the indicator, however, is more complex than we need to know here. What is important to know is that if we look back over a period of, say, 10 units of time and each of those 10 candles closed upwards, the RSI will show a number very close to 100. If each and every one of those 10 closed candles, the number will always be very close to 0. If the financial asset is fairly balanced between drops and raises, the RSI will show 50. The relative force index is defined as a pulse oscillator. Shows whether bulls or bears are winning in the review period, and this period can be adjusted by the trader.

Technical Analysis of the Relative Force Index

The RSI indicator is normally used in forex trading strategies in the following ways:

  1. When the RSI is above 70, a price drop should be expected. A drop below 70 after having been above 70 is taken as confirmation that the price is starting a downward movement.
  2. When the RSI is below 30, a price increase should be expected. A rise above the level of 30 after having been below 30 is taken as confirmation that the price is starting an upward movement.
  3. When the RSI crosses above 50 after being below 50, it is taken as a sign that the price is beginning a bullish movement.
  4. When the RSI crosses below 50 after being above 50, it is taken as a sign that the price is beginning a bearish movement.

Methods 3 and 4 described above in relation to crossing the level of 50 are generally higher than the first and second methods concerning 30 and 70. That’s because more long-term Forex earnings can be achieved by following trends instead of always expecting prices to bounce back to where they were: just be careful not to move the stop loss to the break-even point too quickly.

Forex Indicators

This is a point where we will pay more attention – if it is better to follow trends, or “diminish” them by doing trades against them. There are many outdated tips on this subject, most of which were in the years prior to 1971, at a time when exchange rates, although they were fixed at the price of gold or other currencies. In this era, trading was mainly in shares or, to a lesser extent, in raw materials. It is a reality that commodities and stocks tend to show markedly different pricing behaviour from the exchange rates of Forex currency pairs – stocks and commodities show trends more often, are more volatile, and follow longer and stronger trends than Forex currency pairs, which show a stronger tendency to return to average.

This means that when making Forex trades, most of the time, using the RSI to trades against directional moves using methods 1 and 2 described above, will work more often, but it will generate less utility than the use of Methods 3 and 4 to track trading trends in the direction of the strong prevailing trend, where such a trend exists. Although it may seem attractive to try to earn smaller amounts more often and use money management to increase profits quickly, It is much more difficult to build a cost-effective medium-reversion model than to build a cost-effective trend tracking model, even when trading with Forex currency pairs. The best way to operate at RSI 50 level crossings is to use the indicator in multiple time frames for the same currency pair.

Crossing The 50 Level In Various Time Frames

Open several charts of the same currency pair in several time frames: weekly, daily, H4, up to the minute. Open the RSI flag in all charts and make sure the 50 level is checked. Virtually all forex graphics programs or software include the RSI, so it should not be difficult to use it. A good period to use in this indicator is 10. It is also important that the market review period is the same in all different time frames.

If you can find a currency pair that in all the higher time frames is above or below 50, and in the lower time frames is on the other side of 50, then you can expect the lower time frame to cross again above 50 and should accordingly open an operation in the direction of the long-term trend.

The higher or lower the RSI, the better the operation. In the forex markets, it is a universal law: strong trends are more likely to continue and a reversal that then turns tends to move very well in the direction of the trend. This method is a smart way to use a forex indicator because it identifies setbacks within strong trends and tells you when the setback is likely to end.

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Forex Videos

Forex – Overbought & Oversold – Easy Market Reversal Strategy!

https://youtu.be/LdKrPWG-B44

https://youtu.be/LdKrPWG-B44


Overbought and oversold, how can you tell when the market will reverse? 

 

Thank you for joining this forex academy educational video.

In this session, we will be looking at when a currency pair is overbought or oversold and how to take advantage of this.

To try and gauge the best way wait to take advantage of when a market is overbought or oversold, we must first take a look at the biggest by volume currency pair traded in the forex market: the Euro against the US dollar, a so-called major currency pair. And this is a one-hour chart of recent price action.

To establish when a pair is oversold or overbought, there are a multitude of tools available. We will focus on one oscillator and price patterns. 

First of all, we have the stochastic oscillator.  This tool consists of two moving averages that crossover at certain points, and when they move up and cross the 80-line, an asset is said to be overbought, and when the moving averages move lower and under than the 20-line, it is said to be oversold.

One of the problems with the stochastic oscillator, as we can see here, if we draw a magenta coloured vertical line, the market is actually oversold at the halfway point between the peak and the trough of this move.  The pair continues to move lower after it is oversold. This is common with the stochastic.

…in this example, it has moved lower by a further 41 pips after showing as oversold, before price action eventually does turn around and move higher, and it is then when the stochastic begins to comply with the price action.

One way that professional traders will guard against using the stochastic oscillator to get into a trade too early is to wait until the indicator has gone above the 80 and its moving averages have crossed over and moved under the line before they enter a short trade, or have moved under the 20 line, crossed over, and moved up above the line before they will enter a long trade. 

Professional traders will very rarely use a single indicator such as the stochastic on its own to enter a trade.

In this A B C scenario, we have more clues about potential future price direction.  First, we have the stochastic showing oversold at position A, and when price action reverts higher to position B, price action appears to stay inflated and ignores the stochastic, initially. However, when price moves lower at position C, we have a divergence in the stochastic and price action, where the stochastic has moved lower to the 20% line, and price action at position C has not moved lower to the level at position A. It has formed a higher low, and this is an indication in itself that price action may be fading to the downside, especially when coupled with the hesitation to move lower at position B, and whereby a bear candle spike outside of the Bollinger band at position C is another hint that price action may move back inside the bands, because, as you will probably know, 95% of price action will revert inside the Bollinger bands if it spikes outside.

This setup, simply by using the stochastic to show oversold, where its moving averages have moved under the 20 line, then crossed over and moved higher than the 20-line, plus divergence in price action, and a higher low set up, and a candle spike outside the Bollinger bands has been the set up for this bull trade which saw 140 pips to the upside.

Simply look out for this setup in reverse to take on a bear trade.

 

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Forex Basic Strategies

The Best Tools to Trade Pullbacks Effectively

A Pullback is a pause, retracement, or consolidation of a price from the most recent peak during an ongoing trend. The pullback is widely seen as a trading opportunity after the underlying asset experienced a large upside or downside move. For example – Any forex pair is in a strong uptrend, and some healthy news came, and price action dropped back to the most recent support area that indicates the professional traders are booking the profits.

A Pullback is a pause, retracement, or consolidation of a price from the most recent peak during an ongoing trend. The pullback is widely seen as a trading opportunity after the underlying asset experienced a large upside or downside move. For example – Any forex pair is in a strong uptrend, and some healthy news came, and price action dropped back to the most recent support area that indicates the professional traders are booking the profits.

A Pullback is a pause, retracement, or consolidation of a price from the most recent peak during an ongoing trend. The pullback is widely seen as a trading opportunity after the underlying asset experienced a large upside or downside move. For example – Any forex pair is in a strong uptrend, and some healthy news came, and price action dropped back to the most recent support area that indicates the professional traders are booking the profits.

Pullbacks happen all the time, and if you learn how to trade them successfully, it can be a great skill as a trader. Trading the pullback is the easiest way to trade the market, sometimes you will recognize the high probability pullback trades and sometimes extreme volatile pullbacks, and you can enhance your repertoire and find many higher probability trades. If you are new in the market, then pullback trading is a fantastic and easy way to find superior risk-to-reward ratio trades. In this article, we will explore five trading strategies that provide excellent pullback trades.

Pullback Trading Strategies

Two-Legged Pullback To The MA 

Al Brooks popularized the concept of two legs pullback in his price action books. He explained most of the time, price action print two legs to reach the moving average. We backtested his strategy and found out that his techniques work very well in the trending market, but sometimes in the strong trending market, you will only witness one leg.

This is because most market operators are in a hurry to move the market; this may be because of any fundamental news. To filter out all the low probability trades, it is advisable to find a trending market and then wait for the price action to print the two legs towards the moving average, and when all the moves complete, take the buy entry.

The image below represents the buying trade in the EURGBP forex pair. The moving average indicates the buying trend in the currency. Price action pulled back to the moving average, prices responded from the moving average and goes a bit higher and end up printing the second leg. The second leg goes down to the moving average, but the strong buyers smack back up and close above the moving average. Furthermore, the price slows down a bit, and we took buying entry with the stops below the entry, and for taking profit, we choose the brand new higher high.

Candlestick Pattern + MA

This method will use the bullish engulfing candlestick pattern with a moving average to successfully trade the market.

Here we need two ingredients.

  1. Price action pullback to the moving average.
  2. The market forms a bullish engulfing pattern.

First of all, look for the strong trending market and wait for price action to approach the moving average. At this stage, if the price action prints the engulfing pattern,  it’s the right time for you to go for a buy entry. Otherwise, no entries are allowed for you. An  Engulfing Pattern indicates the sellers try to print the brand new lower low, but because of dynamic support of moving average prices pulled back and buyers end up eating all the sellers. As a result, we witnessed the Bullish Engulfing pattern.

The image below represents the buying trade in the EURNZD forex pair. As you can see, at the end of the downtrend, price action goes above the moving average, and we witnessed the engulfing pattern. The trading pattern closed above the moving average, which was a confirmation of buyers came back to the show and were expecting the brand new higher high.

Trendlines + Channel Trading

This one is the simple trading approach, which is not much popular, but it often generates wonderful trading results. First of all, you must draw the trend line to the ongoing trend, and when the price action pulls back enough, then draw the price channel to identify the oversold and overbought area. When price action approaches the trend line as well as the lower line of the price channel, it is an indication to go long.

The image below represents the buying entry in the AUDCHF forex pair. The trend line was the indication that the buyers are leading the show. During the pullback phase, when enough sellers approach the trend line and the lower channel line, it gave the strong buying candle. The reason we got the strong candle is because for the support and resistance trader, the zone was a dynamic support area to go long.

RSI + Stochastic Indicator

In this approach, we are using the two oscillators to trade the pullbacks. Stochastic and RSI both are oscillators, and they both oscillate between the significant levels. In an uptrend, wait for the price action to pull back. When the stochastic and RSI gave the oversold signal, it is a perfect time to go for a brand new higher high.

The image below indicates the buying trade in the AUDCHF forex pair. The pair was overall in an uptrend, and during the pullback, both of the indicators were showing the oversold signals, and the reversal at the oversold area was a great sign to go long. When both oscillators indicate the same sign, there is no point in going for more significant stops. When both oscillators gave the reversal signal at the significant resistance level, that’s a perfect time to close your trade.

Conclusion

All the pullback strategies share the same goal, which is to time the market. The better you master the skill of timing before the take-off, the more profits you will make. If you are a newbie trader, then master these strategies first on the demo and then apply to the live market because trying any of these strategies in the live market is dangerous without having any experience.

So never try anything on the live account. Instead, practice them on demo first and then make a profit on a live account. When you master these strategies, then you can very easily design a pullback strategy for yourself. Whichever strategy fits nicely into your trading approach, master it.

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Forex Basic Strategies

Pairing Significant S&R Levels With RSI Indicator To Generate Accurate Trading Signals

Introduction

Introduction

Introduction

In the previous set of articles, we discussed strategies based on trend continuation or trend reversal. Let us change the subject a little bit and discuss a strategy based on ‘Support and Resistance.’ Although we all know how to trade support and resistance, there is always a problem of consistency when it comes to trading using the conventional support and resistance strategy. We have a look into some of these issues by designing a strategy that provides not only decent risk-to-reward (RR) but also a high probability of success.

Markets are continually changing due to changes in market participants, global politics, and economic events. This means if we continue to trade the usual way, we could be in trouble. It is necessary that, along with markets, we, too, change our trading strategy in order to adapt to the changing market environment.

Time Frame

The strategy works well on the 1-hour, 4-hour, and ‘Daily’ time frame. Therefore, the strategy is suitable for the swing to long-term traders.

Indicators

We make use of only one technical indicator in the strategy, and that is the Relative Strength Index (RSI) with its default settings.

Currency Pairs

The strategy is suitable for trading almost all currency pairs listed on the broker’s platform. One thing we need to ensure before choosing a currency pair is that it should be volatile.

Strategy Concept

‘Cup and Handle’ is a powerful candlestick pattern that shows the prevalence of bullish strength in the market. It is a very reliable pattern that offers excellent trading opportunities. ‘Cup’ formation indicates that the price was unable to make a proper ‘lower low’ on the higher time frame due to a strong buyer who took the price up. The ‘handle’ indicates that the market was unable to reach the previous ‘low’ due to weak sellers where eventually buyers bought at a higher price and are in the process of making a new ‘higher high.’

The logic behind the formation of the ‘Cup and Handle’ pattern makes it one of the most powerful patterns. But the pattern alone is not the basis for the strategy; we also use the RSI to take the highest probability trades. We apply the concept of ‘Cup and Handle’ pattern and RSI indicator at a long-term ‘Support’ level to execute low-risk ‘long’ trades.

The same concept applies when taking ‘short’ trades at long-term ‘Resistance’ level. Here we should look for the formation of the ‘Inverse Cup and Handle’ pattern at ‘Resistance.’ ‘Cup’ here indicates that the price was unable to make a proper ‘higher high’ on the higher time frame due to strong seller who crashed the price. The ‘handle’ indicates that the market was unable to reach the previous ‘high’ due to weak buyers where eventually sellers sold at a lower price and are in the process of making a new ‘lower low.’ We use the RSI indicator to take the highest probability trades by looking for ‘overbought’ and ‘oversold’ situations in the market.

Trade Setup

In order to use the strategy, we have considered the 4-hour chart of AUD/USD, where we will be illustrating a ‘long’ trade using the rules of the strategy.

Step 1:
The first step is to identify long-term support and resistance levels. By long-term we mean, support and resistance levels on the 1-hour time frame and above. Note that the greater number of touches, the stronger is the support or resistance. We would recommend at least three touches at the support or resistance to calling it a strong one. To raise the odds in our favour, we can look for trading at support level in an uptrend and resistance in a downtrend.
The below image shows long-term support being formed in the AUD/USD pair on the 4-hour chart.

Step 2:
Once we have identified the critical technical level, we will wait for the price to present the ‘cup and Handle’ pattern at support and ‘Inverse Cup and Handle’ pattern at resistance. Here we should make sure that when the price at support, the RSI indicates an oversold (below 30) situation in the market at least once and then shows up the pattern. On the other hand, when the price is at resistance, the RSI should cross above the level of 70, indicating an overbought situation and then show up the ‘Inverse cup and handle’ pattern.

Step 3:
After ensuring that the pattern is formed at the right place along with suitable indications from the RSI, we now discuss how to enter the trade. In a ‘cup and handle’ pattern, we enter ‘long’ right at the price break out above the ‘high’ of ‘cup’ pattern. In an ‘inverse cup and handle’ pattern, we enter ‘short’ when ‘price’ breaks below the ‘low’ of the ‘cup’ pattern.
The below image shows an example of we enter for a ‘buy’ at ‘support.’

Step 4:
After entering, it is essential to determine the stop-loss and take-profit levels for the trade. One of the primary reasons behind low risk-to-reward (RR) ratio is late ‘entry.’ Stop-loss is placed below the ‘low’ of the ‘handle’ pattern in a ‘long’ position and above the ‘high’ of the ‘handle’ pattern in a ‘short’ position. The strategy essentially says to enter when prices have travelled a decent amount of distance from support or resistance, which considerably reduces the risk-to-reward (RR) ratio.
The below image shows the result of the trade executed using the above strategy where the resultant risk-to-reward (RR) of the trade is 1:1.

Strategy Roundup

Although the ‘Cup and Handle’ pattern is a bullish continuation pattern, if we understand the logic of the pattern and apply at key technical levels, it can provide excellent opportunities for short as well as long-term traders. Using the RSI indicator along with the pattern gives an extra edge to the strategy, which makes it highly suitable in changing market environment.

Categories
Forex Basic Strategies

The Amazing Combination of ‘EMA & RSI’ While Trading The Forex Market

Introduction

Introduction

Introduction

Previously, we discussed several trading strategies that involved a combination of different indicators, but the number did not exceed two or three. In today’s article, we present a trading system that is based on five different Exponential Moving Averages, combined with the Relative Strength Index (RSI). This strategy will make a lot of sense to traders who are at an intermediate level of trading. It is totally mechanical in nature and requires a thorough understanding of technical indicators of MT4 or MT5.

Time Frame

The strategy can almost be used on any time frame, but a larger one is preferred, 1 hour or higher. This means the strategy is not suitable for trading during the day.

Indicators

As said, we will use five different Exponential Moving Averages and one Relative Strength Index (RSI). This is the reason we need to be well versed in the technical indicators.

Currency Pairs

This strategy can be used with any currency pair. Also, with few commodities as well. Liquidity will not be an issue here since we are trading on the higher time frames.

Strategy Concept

Firstly, we use 80-period EMA to identify the major trend of the market. If the price is above 80 EMA, we say that the market is in a bull market, while if it is below the 80 EMA, the market is in a bear market. Secondly, we use the 21-period and 13-period EMA to point out the current trend direction, meaning, the current minor trend within the major trend. If the EMA with a shorter period is above the one with the longer period, we have a minor bull trend, and vice versa.

Third, we use the other two EMAs with even shorter ‘periods’ in conjunction with the Relative Strength Index (RSI) to generate entry signals. These are the 3-period EMA and 5-period EMA. The crossing of these two EMAs supported by the appropriate value of RSI, tells us whether to go long or short in the currency pair.

However, a more conservative approach would be by ignoring the entry signals, which are in the opposite direction of the major trend. Therefore a ‘long’ entry signal would be generated when the 3-period EMA penetrates the 5-period EMA from below and starts moving higher. Also, the 80-period EMA must be below the price action discussed above, and RSI must have a value exceeding 50. We execute the trade once the signal bar closes beyond the 5-period EMA.

Conversely, a ‘short’ entry will be taken when the 3-period EMA penetrates the 5-period EMA from above and continues lower. This must be coupled with an RSI value below 50, and 80-period EMA be above the price action.

Trade Setup

In order to explain the strategy, we have considered the 4-hour chart of USD/CAD, where we will be applying the rules of the strategy to execute a ‘long’ trade.

Step 1

Since this a trend-based strategy, the first step is to identify the major direction of the market using the 80-period EMA. It is important that the price remains above the EMA for at least four consecutive higher highs and higher lows before we can call it an uptrend. Likewise, the price should be below the 80-period EMA for a minimum of 4 lower lows and lower highs.

The below image shows a clear uptrend visible on USD/CAD on the 4-hour chart.

Step 2

Once we have identified the trend, we need to wait for a price retracement that could give us an opportunity to enter the market and ride the trend. We need to evaluate if this a true retracement or the start of a reversal. In this step, we should wait until the price develops a ‘range’ or the 80-period EMA becomes flat. This partially confirms that the retracement is real, and the price could be making a new ‘high’ or ‘low.’

In the example we have taken, we can see how the price starts to move in a ‘range’ along with the flattening of the EMA. Next, let us discuss the ‘entry’ part of the strategy.

Step 3

We shall enter the market for a ‘buy’ when all the smaller EMAs cross the 80-period from below. The 3-period EMA should penetrate the 5-period EMA and start moving forward to generate a reliable ‘buy’ signal. Along with this, at the entry bar, the RSI should be above the 50 levels, and both the 3 and 5 periods EMA should cross the 13-21 EMA channel. Once all of these conditions are fulfilled, we can take a risk-free entry into the market. The same rules apply while taking a ‘short’ trade but in reverse.

The below image clearly shows the ‘entry’ where all the conditions mentioned above are met.

Step 4

Once we have entered the trade, we need to determine the stop-loss and take-profit levels. For this strategy, the take-profit and stop-loss are placed in such a way that the resultant risk-to-reward of the trade is 2.5. The RR is derived mathematically, where we have taken into consideration the possibility of a new ‘high’ or ‘low’ as we are trading in a strong trending environment.

Accordingly, we have set the take-profit and stop-loss in our example, as shown below.

Strategy Roundup

Combining two or more technical indicators has always proven profitable for traders. The above-discussed strategy considers the trend of the market, momentum, strength of the retracement, and shift of ‘highs’ and ‘lows,’ which makes it an amazing strategy to be used while trading part-time or full-time. Since there are many rules and requirements for the strategy, the probability of occurrence of trade-setup is less, but once formed, it can provide amazing results.

Categories
Forex Basic Strategies

An Exclusive Strategy To Trade The Fiber (EUR/USD) Currency Pair

Introduction 

Introduction 

Introduction 

In the previous article, we discussed a trading strategy that was a combination of EMA and RSI. Presuming that all the readers easily understood it, we will now discuss a trading strategy that is a combination of three technical indicators. Today’s article will acquit us with another useful and reliable trading system that is based on the combination of Simple Moving Average, Stochastic Oscillator, and Relative Strength Index (RSI).

Time Frame

This strategy is only applicable on the 1-hour time frame. This is because all the indicators tend to sync in this time frame. Therefore, the strategy may not be suitable for day traders.

Indicators

The strategy consists of three indicators – a 150-period Simple Moving Average (SMA), Relative Strength Index (RSI) with period 3, and a Full Stochastic Oscillator with standard settings. The overbought and oversold levels for the indicators stand at 70-80 and 30-20, respectively.

Currency Pairs

As the name suggests, this strategy is exclusively meant for ‘EUR/USD.’ The liquidity and volatility of EUR/USD are extremely supportive of this strategy.

Strategy Concept

We first identify the direction of the market using the 150-period SMA and then establish a channel in the same direction. This is the first condition that has to be met before we can initiate a ‘trade.’ One could also this is a ‘channel’ based strategy as it involves going ‘long’ at the bottom of the channel and ‘short’ at the top once the indicators generate signals.

For a ‘long’ entry, we need to see if the Relative Strength Index drops in the oversold area. Once it drops, we look for a bullish crossover of the Stochastic lines, while they are also within their oversold zone. In simple words, we need a channel in a bull trend with both the indicators indicating that the market is oversold and with the Stochastic displaying a bull reversal.

Conversely, a ‘short’ trade is generated when the price starts moving in a downward channel in a bearish trend. The RSI and Stochastic should be in the overbought area that will later display a bearish reversal. As soon as the Stochastic fast and slow lines make a bearish crossover, we enter for a ‘sell’ on the next price bar. All of the above price action must happen below the 150-period SMA.

The strategy offers a high degree of capital protection as we place our stop-loss at the most recent ‘swing low’ or ‘swing high.’ As far as the ‘take-profit’ is concerned, we can use a fixed profit target, or we could scale out as the market approaches our target and protecting it with a trailing stop. An exit signal is also generated by the Stochastic indicator, which we will be discussing in the upcoming section of the article.

Trade Setup                     

In order to explain the strategy, we have considered the 1-hour chart of EUR/USD, where we will be applying the rules of the strategy to execute a ‘long’ trade.

Step 1: First of all, open the 1-hour chart of EUR/USD and establish the trend of the market. Plot Simple Moving Average (SMA) with a period of 150, Stochastic and Relative Strength Index with their default settings on the chart. If the price is above the 150-period SMA, we say that the market is in an uptrend. Whereas if the price is below the 150-period SMA, we say that it is in a downtrend. Next, draw a channel within the trend. It is better to have an upward channel in an uptrend and a downward channel in a downtrend.

Step 2: This is the crucial step of the strategy, where we align the three indicators together to generate a signal. After the identification of the trend and channel, we need to wait for the price to come at the extreme of the channel. In an upward channel, the price should be at the bottom of the channel, while in a downward channel, the price should be at the top.

Once the price reaches these extremes, we should watch the Stochastic and RSI. We enter ‘long’ when we notice a bullish crossover in Stochastic and an oversold circumstance of RSI (below 40). This means that the price might be putting up a ‘low’ that will result in a reversal. Similarly, we will go ‘short’ in the currency pair when we notice a bearish crossover in Stochastic along with an overbought condition of RSI (above 60).

The below image shows an example where the above step is being accomplished.

Step 3: In this step, we shall determine the Stop-Loss and Take-Profit for the trade where both these levels are derived mechanically. We place the stop-loss just below the ‘swing low’ from where the reversal took place. It will be above the recent ‘swing high’ in a ‘short’ trade. When speaking of the take-profit level, there is no fixed point for it. We take our profits when Stochastic reaches the opposite overbought/oversold level. At this point, we can either exit the trade, scale-out, or use a trailing stop. This can help in increasing the risk-to-reward (RR).

In our case, the risk-to-reward (RR) ratio of the trade was 1.5, which is above average.

Strategy Roundup

The RSI+Stochastic+SMA strategy is a reliable trend trading system that accurately pinpoints the bottom of a channel in a trend. More importantly, the strategy can provide the best-with-trend entry points that are necessary to increase the probability of winning. Since we are applying this strategy on a higher time frame, it will limit the effects of whipsaws that are encountered more often these days.

Categories
Forex Basic Strategies

Generating Reliable Trading Signals Using ‘The Power of Two’ Forex Strategy

Introduction 

Introduction 

Introduction 

In the previous article, we discussed a strategy that was based on three indicators, namely the RSI, Stochastic, and SMA. It was not only a bit complex in nature but involved many rules that had to be fulfilled before we could make a ‘trade.’ Also, the probability of occurrence of the signal was lower as it involved many indicators.

In today’s article, we will discuss a setup that is observed more often in the market and has a higher probability of success. Again, the strategy may not be suitable for day traders as it used a longer time frame for analysis. In this strategy, we will be examining the 4-hour time frame chart of the currency pairs. This is simpler than the previous strategy.

Time Frame

As mentioned in the previous paragraph, the strategy yields the best results when applied on the 4-hour time frame. However, the ‘daily’ is also a suitable time frame for the strategy.

Indicators

We will be using the Relative Strength Index (RSI), with a 14-bar period. The overbought and oversold levels stand at 70 and 30, respectively. We also apply the Bollinger Band indicator with its default settings.

Currency Pairs

This is the best part of the strategy, where we can apply on all currency pairs listed on the broker’s platform, including few minor and exotic pairs.

Strategy Concept

The strategy is based on a simple concept that the RSI is a very powerful indicator of a trend. It can accurately identify the highs and lows that will give rise to a new trend. This is combined with the Bollinger Band indicator to generate exact entry points for the strategy.

The trend becomes especially reliable when the reading of RSI makes a swift jump from an oversold level to a median level (above 50) and vice-versa. The Bollinger Band indicates the formation of a ‘low,’ after which we can execute a ‘long’ trade. Similarly, when Bollinger Band pin-points a ‘high,’ we execute ‘short’ trades in the market. The exact rules of ‘entry’ will be discussed in the next section of the article.

The risk-to-reward (RR) of the trades done using this strategy is highly appealing. This is because it employs a small stop-loss with a much higher take-profit. If the market is in a strong trending state, traders can ride their profits as long as they see signs of reversal.

Trade Setup 

In order to explain the strategy, we have considered the 4-hour chart of GBP/JPY, where we will be illustrating a ‘long’ trade. Here are the steps to execute the strategy.

Step 1

The first step is to open the 4-hour timeframe of the desired currency pair and plot Bollinger Band and RSI indicator on it. Just from the appearance and basic knowledge of trends, identify the trend of the market. This means if the market is making higher highs and higher lows, the market is in an uptrend. And if we see lower lows and lower highs on the chart, it is a downtrend. We can also take the assistance of a simple moving average (SMA) to get a clear picture of the trend.

In the case of GBP/JPY, it is evident from the below image that the market is in a strong downtrend.

 

Step 2

Next, we need to wait for the price to go above the highest point visible on the chart, where we will be analyzing signs of a reversal to the downside. Similarly, we need to wait for the price to go below the lowest point visible on the chart, where we will be analyzing the signs of a reversal to the upside. For example, suppose the price is near its lowest point visible on the chart. In that case, we say that market may be reversing to the upside if a bearish candle closes below the lower band of the Bollinger Band, and the immediate next candle is a bullish candle that closes above the lower band. This has to be accompanied by the RSI moving into the oversold zone (below 30).

In case of a reversal of an uptrend, a bullish candle should close above the upper band of the Bollinger band with a bearish candle that closes below the upper band. At this price, the RSI should indicate an overbought situation of the market (above 70).

Step 3

This is the easiest step of the strategy where we have to only observe the movement of price following the ‘two-candle’ pattern discussed in the previous step. Essentially, we need to see that the price starts moving in the direction of the reversal, i.e., above or below the median line of Bollinger Band. This should again be accompanied by a rising RSI for ‘long’ entry and falling RSI for a ‘short’ entry.

In the below image, we can see how the rise in price above the median line goes with a sudden rise in RSI.

Step 4

In this step, we determine the stop-loss and take-profit for the trade done using this strategy. The stop-loss is placed just below the ‘low’ or above the ‘high’ from where the market reverses. However, there is no fixed take-profit level here. We exit a ‘long’ trade once RSI goes below 50 and start moving lower. While a ‘short’ trade is exited as soon as RSI goes past the level of 50.

As we can see in the image below, the market reversed fully, and the trade turned to be extremely profitable.

Strategy Roundup

When Bollinger Band and RSI are combined to generate trade signals, we can accurately identify the market top and bottom where we take advantage of the reversal. But this can only be done efficiently after practicing well. The above strategy is suitable for swing and part-time traders.

Categories
Forex Indicators

Currency Strength Meter Indicators: What You Need to Know

When you go ahead and type into the Google Currency Strength Meter, believe it or not, you will see that this tool gets over 14000 searches per month average. This is almost the same as one of the most popular indicators RSI. Can you imagine? So, what is the currency strength meter? This is the […]

When you go ahead and type into the Google Currency Strength Meter, believe it or not, you will see that this tool gets over 14000 searches per month average. This is almost the same as one of the most popular indicators RSI. Can you imagine? So, what is the currency strength meter? This is the […]

When you go ahead and type into the Google Currency Strength Meter, believe it or not, you will see that this tool gets over 14000 searches per month average. This is almost the same as one of the most popular indicators RSI. Can you imagine?

So, what is the currency strength meter?

This is the kind of visual map – guidance that demonstrates which currencies are strong and which ones are weak in a certain moment. It uses the exchange rates of different currency pairs to show comparable strength of each of those currencies. There are different Currency Strength Meters to be found out there. The simpler ones may not use any weighting, while more complex and advanced ones may apply their own weightings. Some may even combine other indicators with the currency strength measurement in order to provide trading signals. For example, to calculate the strength of the EUR – this tool would calculate the strength of all pairs that consist of EUR currency, and then use those calculations to determine the strength of the EUR.  

What this tool actually does is to give you information about 8 major currency pairs, mostly, based on the fact how strongly these currency pairs performed over a certain time frame. It tries to give you an overall picture of which currencies have been strong and which ones have been weak for those periods. For Currency meters, the most common time frame is 24 hours. The one that knows will notice that most similar to this tool are Forex Heat Maps – which essentially do the same thing.

As it may happen with any tool, Currency Strength Meters may have their own issues, particularly when they are poorly coded. If CSM cannot give accurate currency strength indicator values, it is of little use – regardless of their other features. With outdated Currency Strength Meters, traders may experience the following issues: MT4 can freeze, PC or laptop can freeze, stutters, whipsaw signals, memory leakage, your CPU keeps on 100%, and so on. Some of these tools that you can find out there might even produce data that were not part of the original concept of Currency Strength Meter. Some traders apply smoothing filters to this tool, like moving averages, for example, while some traders apply other filters like the RSI or MACD. By adding these filters on top of the CS meter, traders may even experience getting some false trading signals, and they can enter some bad trades which may lead to the money loss.

In years of existence, Forex strength meters developed to currency correlation matrices that could quite possibly deliver more accurate and better information, so this can be one of the ways to measure currency strength that a CS meter gives you. Since currencies are traded in pairs, for example, EUR/USD, you can use correlations to measure the strength of individual currencies like EUR and compare it to Currency Strength Meter.

Some advantages to using Currency Strength Meter including its obvious simplicity, are the usefulness as a short-term indicator, the ability to avoid double exposure and unnecessary hedging, the possibility to signal high-risk trades, and last but not least, it is available for free.

There is an opinion of certain traders that the most usual thing that new traders do when they discover these tools, they get an idea that the hardest thing in trading is to put some money on the account for start, and after that money just comes – drops from the sky in loads, you just need to apply this easy and cool tools. Indeed.  

They conclude that these are the tools that only tell you what just happened, not what is going to happen – suppose that this should help you profit in your trades? Their standpoint is that charts already give you this information. Actually, what they mean is that you have charts for 27-28 different currency pairs and this has been confirmed as better and more reliable than any Currency Strength Meter. Carefully built experience in trading, so far, has shown that brokers that make money by taking the other side of your trade very much love this tool – to put you on to use it frequently in order to make money on your trades.

From their point of view, how these tools work is that the meter is taking readings from every forex pair over the last 24 hours and applies calculations to each. Then it by algorithm finds the current strength in the pair and gives you a visual guide. It displays which currencies are strong and which are weak at any given moment, reflecting that movement in a gradually colored matrix. Only by using an effective currency strength meter, you will have another tool at your disposal that will empower you to become a profitable trader. You must admire the sound of it!

The claim is that another thing that can attract the novice is the simplicity that this tool has. It is quite easy to use it, even though it doesn’t give much of a result in practice, to be honest. Listening to this, the conclusion to be drawn is that Heat Maps and Currency Strength Meters are not very useful. If you wish to stick to it, after all, you can do it on your own and they wish you a load of luck because you will need it by far.

Now, what they say about the Currency Strength Indicator, is that it is a little bit different in the outer look. They explain it as a graph with an overview of the strength of a currency, presented with lines in different colors. It is just a line version of Currency Strength Meter. It measures the strength of a currency based on all of the currencies that are available with your Forex broker in the last 24 hours or the period setting of your choosing. It then applies calculation and assigns individual strength to each currency and presents information in an easily understandable way.

What this indicator actually does is to allow you to overlay several currency pair graphs (lines) on top of each other so you can see and try to predict where the price of a certain pair may go next. This also can be used as a two-lines cross indicator – a position where you would make a move after two chosen lines finish crossing each other, or as a reversal trade, when two different lines both appear at their extremes.

We gave this indicator enough of our time and attention and tested it thoroughly. Unfortunately, it doesn’t give results strong enough to rely on it and to base your future trades on its results. However, you may discover something we don’t know yet, and we are all different people. The systems each trader builds, even if based on the same ideas are also different. If you like the idea of it, our suggestion is to try, to test it and see where it will get you. It could be worth trying. 

Some prop trading firms use individual currency baskets, also called currency index. Traders may be familiar with the dollar index, DXY, but other major currency indexes are not common. By analyzing how each major currency is holding against the others in the form of a simple chart, prop traders have an insight on what currency they should be trading. Custom currency baskets can be easily made using the now-famous Tradingview platform.

What you can do, also, is to go out to search for other places where different versions of Currency Strength Indicators can be found. Choose a couple, or more, that you like, download them, and start to test them. Try to test the indicator, up against a chart and see how it performs on its own first, before testing it out against other indicators or with other indicators.

You will certainly get better results by adding any momentum indicator that has enough volume behind it. We suggest doing the back-testing standalone and after that, test it together with the volume indicator already attached and measure test results when you are showing enough volume to do so. This thing should give you a million of false signals when there is no real volatility in the market. By our experience so far, it should make a big difference in overall results and this could be the most efficient way. Even though we don’t truly endorse it, there is a possibility that it might work for you.

This indicator is very unique to most of the indicators out there and should be handled accordingly. The conclusion from this would be that Currency Strength Meter is a sort of useless standalone, redundant and it is made only to get the novice in trading excited and in a better position to lose their money very fast.

Currency Strength Indicator could be, possibly, a little better – it may be worth testing if you choose to do it wisely and properly. The currency strength indicator is not an indicator that should be used on its own. Rather, this indicator can complement your existing trading strategies and could help you to pick the right combination of the currency pair to strength.

Categories
Forex Course

146. Measuring The Strength of a Breakout

Introduction

Introduction

Introduction

When you can see the momentum of the market slowing down, you can soon expect a reversal breakout in any underlying currency pair. Knowing this info will boost your confidence to pull the trigger, and to scale your positions without any hesitation.  Conversely, to trade the trend continuation breakout, knowing the strength of the breakout is also crucial.

In this course lesson, we will learn how to measure the breakout’s strength and take appropriate action according to the information which the market represents.

Using The MACD Indicator To Measure The Momentum

MACD is one of the most common momentum indicators in the Forex market. There are many different ways to use the MACD indicator, and in our case, we suggest you look at the histograms of the indicator to gauge the market strength. As the price moves, if the histograms get bigger, it is indicating that the market momentum is increasing. In this case, we can expect a breakout in the direction of the trend. Conversely, if the histogram gets smaller, it means the momentum is getting weaker, and we can soon expect a reversal in the currency pair.

Buy Example

The image below represents a buy trade in the EUR/GBP Forex pair.

Please observe the first arrow in the MACD histogram. The upsurge lines indicate the strong trend in this Forex pair. When the price action goes above the breakout line with the rising histogram bars, it is a sign of a strong breakout. After the breakout, we took a buy-entry, and the pair printed a brand new higher high.

Sell Example

The image below indicates a sell trade in the CHF/JPY Forex pair.

The image below represents the entry, exit, and stop-loss placements. The price action breaks below the significant level with the rising histogram lines. This shows the sellers are real, and they are ready to make a brand new lower low. After our entry, prices went down, making a brand new lower low. Therefore, when the breakout indicates strong strength, we must go for smaller stops and hunt significant returns.

Using The RSI Indicator To Measure Market’s Strenght

RSI stands for Relative Strength Index, and it is a popular indicator which oscillates between the 0 to 100 levels. When the indicator reaches the 70 levels, it means the market is overbought, and a reversal is expected. When it reaches the 30 levels, it means the market is oversold, and an upside reversal is expected.

In this article, we are not going to use the RSI indicator, like how it is typically used. Instead, we will use the RSI divergence to measure the strength of the trend. A divergence is when the price moves in one direction, and the indicator moves in another. Divergence shows that the indicator is not satisfied with the price action, so in this case, a reversal should be expected.

Buy Entry

  1. Find out the divergence in a downtrend.
  2. Wait for the price action to break above the significant resistance level.
  3. Wait for the hold above the breakout level to confirm the breakout.
  4. Hit Buy.
  5. Place the stop-loss below the breakout.
  6. Go for brand new higher high.

The image below indicates the buying trade in the GBP/CAD Forex pair.

The image below represents our entry, stop loss, and take profit in this Forex pair. As you can see, the trend was down, but on the other hand, the RSI indicator failed to make the higher high. This indicates that the buyers are strong, and after any breakout, we can confidently go long.

Sell Entry

  1. Find out the divergence in an uptrend.
  2. Wait for the price action to break below the significant support level.
  3. Wait for the hold below the breakout level to confirm the breakout.
  4. Hit sell.
  5. Place the stop loss above the breakout.
  6. Go for a brand new lower low.

The image below represents the selling trade in this Forex pair.

As you can see, when the price action and indicator gave the divergence, it means the indicator didn’t like the upward spiral anymore. Also, the buyers are exhausted, and we can expect a strong downward reversal. Soon after the breakout, we took short entry and exited our position when printing the brand new lower low.

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Categories
Forex Basic Strategies

Let’s Learn Some Momentum Trading Techniques Using The Awesome Oscillator

Introduction

Introduction

Introduction

Bill Williams was the one to first developed the Awesome Oscillator, and it essentially indicates the market momentum. On the other hand, RSI (Relative Strength Index) is a trading indicator that provides an idea of the overbought and oversold zone. In the Awesome Oscillator based trading strategy, we will use the Awesome Oscillator to determine the market direction and use the RSI to increase the probability by eliminating unwanted market movements.

The Awesome Oscillator

Bill Williams has created the Awesome Oscillators to identify the market momentum of a currency pair. Besides the forex market, this trading strategy works well in all financial markets, including the stock, indices, cryptocurrencies, and commodities. The elements of this trading indicator are pointed out in the image below.

  • The first element of Awesome Oscillator is the 34 period’s simple moving average indicating the median of the last 34 candlesticks.
  • 5-period simple moving averages indicate the median of the last five candlesticks.
  • Histogram and Zero Line.

Let’s have a look at how these elements represent in a market:

  • When the Awesome Oscillator is below the zero lines, we should focus on the short term moving average. If the 5 SMA moves below the 34 SMA, it will indicate a downtrend.
  • If the position of Awesome Oscillator is above the zero lines, we can consider the trend as an uptrend.
  • If the Awesome Oscillator histogram moves to the green zone, we can consider the candlestick that moved higher than the previous candle.
  • We will consider the histogram at the red zone that is smaller than the previous candlestick.
  • The rules mentioned above are not exact buying and selling signals. Instead, it provides a trading opportunity where traders should consider other confirmations.

We can also identify the divergence between the price and the Awesome Oscillator to find a trading opportunity.

If you see the price of a currency pair to make a lower low from the left side to the right side, but the Awesome Oscillator makes the opposite, you can find a potential divergence. In divergence, the Awesome Oscillator should create two peaks above the zero lines considering the market condition.

Awesome Oscillator with RSI Trading Strategy

In this trading strategy, we will combine the Awesome Oscillator to identify the market momentum and the Relative Strength Index to get the overbought or oversold zone. If we can combine these accurately, we can make a trading strategy that can provide a good profit.

This strategy works very well in most of the currency pairs and time frames. Therefore, we can take swing trade, day trade, and even position trade. Besides the technical formation using these two indicators, we will use price action to enter the trade. Moreover, we will use stop loss and take profit as a risk management tool before taking the trading decisions.

Now let’s move to the trading strategy. In the image below, we can see the visual representation of how to trade using the Awesome Oscillator RSI trading strategy. The rules for buying and selling of a currency pair are mentioned below:

Buy Trade Setup

  • At first, the RSI should be below the 30 levels and point to an upward reversal.
  • When the RSI moves above the 30 levels, we will consider buying signals only if the Awesome Oscillator shows a green bar.
  • When the green bar appears, we can place a buy stop about 2- 5 pips above the current candlestick and allow the price to take our trade automatically.
  • Sometimes RSI might signal 1-2 candlestick later than the Awesome Oscillator. In that case, we can consider trading entry by taking a smaller lot.

Sell Trade Setup

  • At first, the RSI should be above the 70 levels and point to a downward reversal.
  • When the RSI moves below the 70 levels, we will consider selling signals only if the Awesome Oscillator shows a red bar.
  • When the red bar appears, we can place a sell stop about 2- 5 pips below the current candlestick and allow the price to take our trade automatically.
  • Sometimes RSI might signal 1-2 candlestick later than the Awesome Oscillator. In that case, we can consider trading entry by taking a smaller lot.

In this strategy, we did not consider the histogram crossing zero lines. However, suppose you want to increase the probability of your trading. You can look at the zero line cross as a further trading condition that will indicate the overbought and oversold zone.

Stop Loss And Take Profit Idea

The stop loss and take profit idea is a vital element of any trading strategy. There are many ways to set take profit and stop-loss depending on the market swing low and Sewing high. In a buy trade setup, the stop loss should be below the recent swing low with 10 to 15 pips buffer. Similarly, in a sell trade, the stop loss should be above the recent swing high with 10 to 15 pips buffer.

Another idea of a stop-loss plan is to set it at 1.5X ATR. It will indicate the actual volatility of the currency pair that you are trading. Besides the stop-loss setting, take profits can be set with a multiple-level approach. You can hold your position until the Awesome Oscillator crossed above or below the zero lines. Later on, you can monitor the momentum of the price to identify the next take profit level.

Summary

Let’s summarise the awesome oscillator and RSI trading strategy:

  • If the RSI is above the 70 levels and points downward movement, we will consider selling setups only, and if the RSI starts to move from the 30 levels, we will consider buying only.
  • To enter the trade, we can take a pending order above or below the previous candle if other conditions meet.
  • The stop loss should be below the swing low or swing high with some buffer or at 1.5 X ATR.
  • For setting take profit, you can hold the trade until the Awesome Oscillator crosses above or below the zero lines. Moreover, if the market conditions allow you to extend the take profit.

In every trading strategy, trade management is an essential tool that a trader should not ignore. In the forex market, we anticipate the price based on our technical and fundamental analysis. As we trade on probabilities, there will be conditions where the market will hit our stop loss. Therefore, strong trade management is the only way to keep your balance steady growth.

Categories
Forex Basic Strategies

Everything About The ‘RSI Rollercoaster’ Forex Trading Strategy

Introduction Sometimes it is best to choose the simplest path of trading. The Relative Strength Index (RSI), invented by Welles Wilder, is one of the oldest and most popular technical analysis tools. If best traders in the world were asked to rank the technical indicators, RSI would certainly be accorded in the top five. It […]

Introduction Sometimes it is best to choose the simplest path of trading. The Relative Strength Index (RSI), invented by Welles Wilder, is one of the oldest and most popular technical analysis tools. If best traders in the world were asked to rank the technical indicators, RSI would certainly be accorded in the top five. It […]

Introduction

Sometimes it is best to choose the simplest path of trading. The Relative Strength Index (RSI), invented by Welles Wilder, is one of the oldest and most popular technical analysis tools. If best traders in the world were asked to rank the technical indicators, RSI would certainly be accorded in the top five. It has the unique ability to measure turns in price by measuring the momentum of the turn, which is impossible by any other technical tool in technical analysis.

The standard RSI setting of 70 and 30 serves as a clear sign of overbought and oversold, respectively. The RSI rollercoaster is a strategy that we have developed to take advantage of these turns in the market. The purpose of RSI rollercoaster is to make money from range-bound currency pairs.

Time Frame

This strategy is suitable for trading on the ‘daily’ time frame. It can also be used on the smaller time frames, but the success rate is not very encouraging.

Indicators

As the name suggests, we will be using the RSI indicator for the strategy. No other indicators will be used. Sime knowledge of price action will be helpful.

Currency Pairs

This strategy applies to all the currency pairs listed on the broker’s platform. If trading on the lower time frame, we need to look for highly liquid currency pairs.

Strategy Concept

The key to the RSI rollercoaster strategy versus the traditional RSI strategy is the way of trading the overbought and oversold levels. Here we look for a reversal candle, which provides a sign of exhaustion before taking the trade. This way, we prevent ourselves from picking the top or bottom of a ‘range’ by waiting for an indicator confirmation.

This strategy works best in a ‘ranging’ market where overbought and oversold signals are far more true indications of change in direction. Furthermore, from experience, we have observed that the setup is much more accurate on the ‘daily’ charts than on the smaller time frames such as the 4 hours or 1 hour.

The primary reason for this difference is that ‘daily’ charts include far more data points into their subset and, therefore, change in momentum tends to be more meaningful on longer time frames. Nevertheless, the disproportionate risk to reward ratio in this setup makes even the shorter time frame trades worth considering. We keep in mind that although the setup will fail more frequently on the shorter time frames, the losses will generally be smaller, keeping the overall risk manageable.

Trade Setup

In order to explain the strategy, we have considered an example of such a trade that was carried out on the USD/CAD pair. As the strategy produces a better result on the ‘daily’ time frame, we will be applying it to the ‘daily’ time frame chart. Let us see the steps to execute the strategy.

Step 1

The first step of the strategy is to open the ‘daily’ (preferable) time frame chart of the desired currency pair. Identify key levels of ‘support’ and ‘resistance.’ A ‘support’ or ‘resistance’ is only valid if the price has reacted off from this area at least twice. If the price has reacted only once, that means a ‘range’ has not yet been established.

The below image shows the clear formation of a ‘range’ where the price has reacted multiple times from the ‘ends.’

Step 2

In this step, we wait for the RSI indicator to cross above the 70 ‘mark ‘when the price is near ‘resistance’ or cross below the 30 marks when the price is near ‘support.’ During this time, the price action of the chart is not of much importance. Once the RSI shows a reading below 70 after crossing it, we will look for ‘sell’ opportunities depending on the price action. Similarly, when the RSI shows a reading above 30 after crossing below it, we will look for ‘buy’ opportunities depending on the price action.

In this case, we can see that the price breaks down below ‘support,’ which is an indication of ‘sell’ as per the theory of support and resistance. But as per our strategy, we will not be looking at the price action in this step, and we will focus only on the RSI indicator.

A few days later, we see that the RSI goes below the 30 ‘mark’ for a moment and starts moving higher. This is our first indication of going ‘long’ in the market.

Step 3

We ‘enter’ for a ‘sell’ when the price moves back into the ‘range’ after the indication from RSI. Similarly, we enter for a ‘buy’ when the price moves back into the ‘range’ after the indication from RSI. This price action indicates a false breakout or breakdown, which is identified rightly with the help of an indicator.

In our case, we are entering ‘long’ in the currency pair after we get a confirmation in the form of a bullish candle, as we can see in the below image.

Step 4

In this step, we determine the ‘stop-loss’ and ‘take-profit‘ levels for the strategy. When executing a ‘long’ trade, the stop-loss will be placed just above the ‘high’ where the price created a false breakout. And when executing a ‘sell’ trade, the ‘stop-loss’ will be placed just below the ‘low’ from where the price created a false breakdown. The ‘take-profit’ depends on the major trend of the market. If we are trading against the trend, it should be kept at 1:1 risk to reward or even a little lesser than that. If the ‘trade’ is taking place with the trend, it can be kept at 1:2 risk to reward.

Strategy Roundup

The RSI rollercoaster strategy is designed to squeeze as much profit as possible out of the turns at ‘support’ and ‘resistance.’ Instead of immediately entering into a position when the market moves into an overbought or oversold zone, the RSI, along with a little bit of price action, keeps us away from the market until we get a confirmation sign of the exhaustion. The RSI rollercoaster is almost always in the market, as long as we see wild moves on either side of the ‘range’ to stop-out traders.

Categories
Forex Signals

EURNZD Moves in a Short-Term Ascending Channel

Description

Description

Description

The EURNZD cross in its hourly chart exposes a short-term ascending channel that looks following the price action since the June 09th low at 1.71896, from where the cross started to develop a higher high and lower high sequence.

The June 11th high at 1.76530, which surpassed the previous swing high at 1.75890 from June 04th, the short-term picture changed the bias from bearish to bullish.

The RSI oscillator, which supports the change in our market sentiment, found support in the zone of level 40, which lead us to weight the bullish bias for the potential next move.

A bullish position will activate if the price soars above the last intraday swing at 1.7520, from where we expect an upside until the round level at 1.7605. However, we don’t foresee a rally over the upper long-term descending trendline in brown.

Our bullish scenario will be invalid if the price drops below 1.7475

Chart

Trading Plan Summary

Categories
Forex Forex Indicators Forex Market Analysis Forex Price Action Forex Signals

EURAUD Reveals Strength Signals (UPDATE)

In our previous market analysis corresponding to EURAUD cross (read here,) we commented that the price action revealed potential raises, supported by the price action and confirmed by the RSI oscillator.

In our previous market analysis corresponding to EURAUD cross (read here,) we commented that the price action revealed potential raises, supported by the price action and confirmed by the RSI oscillator.

In our previous market analysis corresponding to EURAUD cross (read here,) we commented that the price action revealed potential raises, supported by the price action and confirmed by the RSI oscillator.

Trade Update

In the current update, we distinguish that the EURAUD cross soared until 1.64 level, from where the price found resistance in the dynamic resistance corresponding to the upper line of the ascending channel. Likewise, the RSI oscillator moves over level 70, which warns us about the intraday overbought.

With the advance over 120 pips in our previous setup, this situation carries us to consider the risk reduction or partially close the long position placed previously.

What’s Next?

For the next path, EURAUD could retrace until the blue box in the area of 1.6357, which could act as a pivot zone from where the price could find fresh buyers expecting to incorporate additional positions in the long side. If the price action does not experience the retracement forecasted, this is signal strong bullish sentiment in the EURAUD cross.

Categories
Forex Signals

EURAUD Reveals Strength Signals

Description

Description

Description

The EURAUD cross exposes in its 2-hour chart a short-term ascending move, developing a sequence of lower highs from the June 03rd low at 1.6033. 

During this trading week, we observe the last upward movement that EURAUD realized from the trading session corresponding to recent Monday 08th low at 1.6065 until Tuesday 09th high at 1.63495, which was elapsed in a small portion of time that the descending sequence from the previous week high at 1.63659. This context convinces us that institutional market participants could be interested in moving the price to the bull-side.

On the other hand, the bounce over level 40 observed in the SI oscillator leads us to conclude that the EURAUD cross is turning its bias from bearish to bullish.

Our outlook foresees a buy-side positioning from the current zone (1.6261) with a potential bullish target at 1.6532. This zone corresponds to the last pivot zone from where the EURAUD found support and then penetrated, creating a new lower low that carried down the price until the June 03rd low at 1.60332.

The invalidation level of our bullish scenario locates at 1.6139.

Chart

Trading Plan Summary

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Forex Course

105. Summary of Leading and Lagging Indicators

Introduction

Introduction

Introduction

In the previous lessons, we have understood what leading, and lagging indicators are. We also saw how these indicators could be further divided into other types. Here’s a summary of everything we’ve learned so far in this space.

Leading Indicators

Leading indicators are those who forecast prices in the market using historical prices. It indicates a signal for the continuation or reversal of a trend the event occurs. However, these indicators do not work with complete certainty. As they are making a prediction, it is more probability driven.

Lagging Indicators

Lagging indicators, as the name suggests, are lagging in nature. These indicators confirm the market trend using past prices. They are called the trend-following indicators as they give an indication once the trend has been established in the price charts. However, these confirmatory indicators are more reliable than the leading indicators as they give more accurate signals though they are late in doing so.

Please refer to this article to know the differences between these two types of indicators.

In the industry, there are three types of indicators that are widely used. They are

  • Oscillators
  • Trend-following indicators
  • Momentum indicators

If we were to put them into the bag of leading or lagging indicators, Oscillators are leading, trend-following indicators and momentum indicators are lagging. Note that an indicator may not be under one of the types; they can be a combination of two or all three.

Oscillators

An oscillator is a leading indicator that moves within a predefined range. These are to our interest when it crosses above or below the specified bound. These areas determine the oversold and overbought conditions in the market. These indicators are very helpful in determining market reversal. Some of the most popular oscillators include MACD, ROC, RSI, CCI, etc. The usage and interpretation of oscillators have been discussed in detail in this article.

Trend-Following Indicators

Trend-following indicators are lagging indicators that are usually constructed with a variety of moving averages. Crossovers are the typical strategy used with these indicators. These indicators give a signal to buy or sell when the market has already begun its move. Hence, these indicators give us late entries but are more convincing than leading indicators. For example, Moving Averages and MACD are the most used trend-following indicators.

Momentum Indicators

As the name clearly indicates, these indicators show the speed or the rate of price change in the market. Since the momentum can be calculated after the price moves, it is considered a lagging indicator. These indicators indicate when there is a slowdown in the buyers or sellers. And with this, we can assume for a possible reversal. More about this can be found here.

Conclusion

This sums up the concept of leading and lagging indicators. Having an understanding of these indicators is necessary because it is risky if a lagging indicator is analyzed as a leading indicator and vice versa. Also, it is recommended to use these indicators in conjunction with each other for better results. In the upcoming course lessons, we will be discussing interesting topics related to Elliot Wave Theory.

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Forex Course

103. Analyzing The Power Of Oscillators

Introduction

Introduction

Introduction

In the previous lesson, we had an introduction to oscillator indicators and understood how they work. In this lesson, we shall put that into action by analyzing some of the most used oscillators.

Quick Revision

In general, Oscillator is any object that moves back and forth between two points. In simple terms, anything that moves between two points, 1&2, is said to be an oscillator.

The concept remains the same for trading as well. An oscillator is an indicator which moves within two bounds in a range. When trading using oscillators, our eye catches interest when it is around the peaks and troughs. These areas generate buy and sell signals. Precisely, it indicates the end of a trend or the beginning of a new trend.

Trading Oscillators

Stochastic, Relative Strength Index, and Parabolic SAR are the extensively used oscillators by traders.

All these indicators work under the premise that the rate of price change begins to slow; that is, the number of buyers or sellers have reduced at the current trading price. And this change in the momentum indicates a possible trend reversal because the other party is losing its gas. Such indications are given when the oscillators are at the overbought or oversold regions.

Stochastic Indicator

The stochastic indicator is an oscillator whose upper and lower bounds are 80 and 20, respectively. So, if the line moves 80, it enters into the overbought region, and if it drops below 20, it is said to be in the oversold region.

Calculating stochastic variables

There are two line on the stochastic oscillator, namely, %K and %D. Both the values are calculated as follows:

%K = 100 x (Price – L) / (H – L)

%D = (K1 + K2 + K3) / 3

Where, in %K, H and L represent the Low and High for the specified period. And %D represents the average of the most three recent values of the %K.

Note: In the given example, the period is chosen as 14 (last 14 days/candles).

RSI Indicator

The Relative Strength Index (RSI) is a momentum oscillator that measures the rate of change of price and the magnitude of directional price movements. The RSI calculates the momentum as the ratio of higher close values and lower close values for a specified period. As it is an oscillator, it oscillates between the bounds 30 and 70. The interpretation for it is the same as that of other oscillators.

Interpretation Example

To illustrate the use of the oscillators, consider the given chart of USD/CAD on the 1D timeframe. To the price chart, the stochastic and the RSI oscillator has been applied.

At the vertical red lines, it can be seen that the market was overbought according to both the oscillators. This is an indication that the market which was in an uptrend priorly is not losing strength. Hence, in hindsight, the market falls as the oscillators start to make their way back into the range.

Bottom Line

Oscillators are great leading indicators that help in determining oversold and overbought conditions. It also gives traders an indication of the possibility of a market reversal. From the above example, it is seen that these indicators work like a charm. However, one must note that oscillators work in your favor, but not always. Sometimes, one oscillator indicates a buy while the other does not. These are the times when traders must avoid trading such instruments. As shown, oscillators must be used with other oscillators or technical tools to achieve the best out of it.

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Categories
Crypto Videos

Master Trading Cryptocurrencies Using The RSI Indicator

https://youtu.be/Y9uwdySPm50

https://youtu.be/Y9uwdySPm50

Trading cryptocurrencies using RSI indicator

RSI, which is an acronym for the Relative Strength Index, is one of the most popular technical indicators used in the analysis of any financial markets. It is often used for cryptocurrency trading as well.

It was created in 1978 in John Welles Wilder’s book that carries the name “New concepts in technical trading systems.” Wilder was a former mechanical engineer who abandoned his job in order to focus on the financial markets.
He wanted to create indicators based on mathematical analysis by finding a simple yet effective tool to visually represent market movements. The RSI indicator is what came from his research, and this indicator is one of the most widely used indicators to date.

RSI indicator – explained

This indicator is based on quite a simple concept. The stronger the relative price, the greater the market’s upward closures compared to the market’s downward closures. The opposite is also true.

RSI is considered an oscillator that is used for measuring the speed as well as the direction of price movements. That’s why it is also a “momentum” indicator. Contrary to some other indicators, RSI manages to overcome the momentum-related problems that can occur when abrupt movements of the market cause a sudden reversal of the trend.
RSI uses a band of oscillation that ranges from 0 to 100. It also allows for visual comparison with predetermined constant levels. It is based on a simple mathematical formula that requires only one input parameter, which is the number of periods that we are taking into consideration.
In his book, Wilder recommended that 14 should be used to get the best results.
As with all the other oscillators, if a short time-period is used, the sensitivity of the oscillator might be too great, and traders may get false signals.

Using RSI in crypto trading

Trading cryptocurrencies using RSI is not much different than trading any other asset. When the price moves up quickly, the RSI indicator will enter the “overbought” area. The opposite is also true.
It is important to say that the longer the time frame used, the more accurate the data is. Bitcoin has almost never had a false signal on the higher time frames.
Wilder designed this indicator with the aim to spot reversals. RSI will show alert zones set at 70 for overbought and by the value 30 for oversold. However, it is not uncommon to see zones moved to values 80 and 20.
A cryptocurrency trader, this indicator should NOT be used by itself, but rather alongside using the knowledge of candlestick and pattern analysis as well as some other indicators.

Categories
Forex Course

84. RVI (Relative Vigor Index) & Related Trading Strategies

Introduction

Introduction

Introduction

The Relative Vigor Index is one of the most popular indicators in the technical trading community. ‘John Ehlers’ developed this indicator, and it belongs to the oscillator family. The RVI is typically used to determine the strength of a trend in any given instrument. In a rising market, we generally expect the closing price to be higher than the opening price. Likewise, in a downtrend, we expect the closing price of any instrument to be lower than the opening price.

By comparing the opening price to its closing price, the RVI tries to gauge whether the trend is bullish or bearish. This predictive ability of the indicator makes it a leading indicator in the market. RVI consists of two lines, which are Green and Red in color. The Greenline is the standard moving average line, and the Redline is a 4-period volume weighted moving average. The Red is a trigger line as it provides the trading signal when it crosses above or below the Greenline.

Below how the price chart looks when the Relative Vigor Index is plotted on it.

Trading Strategies Using The RVI Indicator

A low value of the RVI indicates an oversold market, and when the RVI crosses above the signal line, it indicates a buying opportunity. Conversely, a high value indicates an overbought market, and the RVI crossing below the signal line indicates a selling opportunity.

Overbought and Oversold Crossovers

This is one of the basic and quite popular strategies using the RVI indicator. The trading opportunities that are generated in this strategy works well in all types of market conditions. The idea is to go long when the crossover happens at the oversold area and go short when the crossover happens at the overbought area. We must exit our positions when the indicator triggers an opposite signal.

As you can see in the below chart, we have generated a couple of trading opportunities in the USD/CAD Forex pair using the RVI indicator. We must follow all the rules of the strategy to generate an accurate trading signal. Place the stop-loss just below the closing of the recent candle and book the profit when the market gives an opposite signal.

Pairing RVI with RSI Indicator

In this strategy, we have paired the RVI indicator with the RSI indicator to identify accurate trading signals. Both of these indicators belong to the oscillator family, and when combined, they add great value. RSI indicator has only one line, which oscillates between the 70 to 30 levels. When it goes below the 30-level, it means that the market is oversold and above the 70 level means that the market is overbought.

Buy Example

The idea is to go long when both the indicators give a crossover at the oversold area.

The below charts represent a buy signal generated by both of these indicators in the CAD/JPY Forex pair. When both of these indicators line up in one direction, that trade has a very high probability of performing in the anticipated direction, and we must look for deeper targets. In this kind of situation, we can even risk a bigger amount.

Sell Example

The idea is to go short when both the indicators give a crossover at the overbought area.

In the below chart, NZD/USD was in a downtrend. During the pullback, both the indicators aligned in one direction giving us a selling signal. Expect deeper targets and make sure to exit the position when any of the indicators gives an opposite signal at the oversold area.

That’s about the RVI and the trading strategies using this indicator. Try these strategies in a demo account to master them and only then use them in the live market. Cheers.

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Categories
Forex Course

81. Learn To Trade Using The ‘RSI’ Indicator

Introduction

Introduction

Introduction

In our previous article, we have learned how to trade the markets using the Bollinger Bands. We hope you have used that indicator in a demo account and got a hang of it. Now, in this course lesson, let’s learn the identification of trading opportunities using a reliable indicator know as RSI.

RSI is one of the most famous indicators used in the Forex and the Stock market. It stands for the ‘Relative Strength Index’ and is developed by an American technical analyst – J. Welles Wilder. This momentum indicator measures the magnitude of the price change to identify the oversold and overbought market conditions.

The RSI indicator consists of a line graph that oscillates between zero and 100 levels. Traditionally, the market is considered overbought when the indicator goes above the 70-level. Likewise, the market is considered oversold when RSI goes below the 30-level. These traditional levels can be adjusted according to different market situations. But if you are a novice trader, it is advisable to go with the default setting of the RSI.

When the market is in an overbought condition, it indicates a sell signal in the currency pair. Likewise, if the market is in an oversold condition, we can expect a reversal to the buy-side. To confirm the buy and sell signals generated by the oversold and overbought market conditions, it is advisable to also look for centerline crossovers.

When the RSI line goes above the 50-level, it means that the strength of the uptrend is increasing, and it is safe to hold our positions up to the 70-level. When the centerline goes below the 50-level, it indicates the weakening in strength and any open sell position until the 30-level is good to hold.

RSI is one of those indicators which is not overlapped with the price action. It stays below the price charts. Below we can see the snippet of how the RSI would look on the charts. The highlighted light purple region marks the 70 and 30 levels, and the moving line in the middle is the RSI line.

How To Trade Using The RSI Indicator

There are various ways to use the RSI indicator to generate consistent signals from the market. You can use this indicator stand-alone, or you can pair it with other indicators and with candlestick patterns for additional confirmation. In this article, let’s learn the traditional way of using the RSI indicator along with RSI divergence and RSI trendline breakout strategies.

Traditional Overbought/Oversold Strategy

In the traditional way, we just hit the Buy when the RSI indicator gives sharp reversal at the oversold area. Contrarily, we go short when the RSI indicator reverses at the overbought area. The image below represents the Buy and Sell trade in the AUD/CAD Forex pair. We must close our positions when the market triggers the opposite signal. Stop-loss can be placed just below the close of the recent candle.

RSI Divergence Strategy

Divergence is when the price action moves into one direction, and the indicator moves in another direction. It essentially means that the indicator does not agree with the price move, and soon a reversal is expected. In other words, RSI divergence is known as a trend reversal indication.

In the below image, price action prints the RSI divergence twice, and both times the market reversed to the opposite side. When the market gives us a reversal, find any candlestick pattern or any reliable indicator to confirm the trading signal generated.

In the below image, we have identified the market divergence twice, and both the times the market reversed. If traded correctly, this strategy will result in high profitable trades.

Trendline Breakout Strategy

RSI trend line breaks out is a quite popular strategy as it is used by most of the professional traders. In the image below, when price action and the RSI indicator breaks the trend line, we can see the market blasting to the north.

Always remember to strictly go long in an uptrend, and go short in a downtrend while using this strategy. Buying must be done when the market is in an overbought condition, and the selling must be done when the market is in an oversold condition.

If you want to confirm the entry, wait for the price action to hold above the breakout line to know that the breakout is valid. Exit your positions when the RSI reaches the opposite market condition.

That’s about RSI and trading strategies using this indicator. Try using this indicator on a demo account today and experiment with the above-given strategies. Let us know if you have any questions in the comments below. Cheers!

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Categories
Forex Course

79. Is Indicator Based Trading For You or Not? (Pros & Cons)

Introduction

Introduction

Introduction

In the previous course article, we have briefly discussed the basics of indicator-based trading. We have also understood the different types of indicators. Before considering how to trade using these indicators, let’s see if indicator based trading is for you or not. For that, we will be listing down some of the significant pros and cons involved in indicator-based trading. After going through this article, we will know why we should be using indicators to trade the markets and what we should be cautious about while using these indicators.

Pros of using Technical Indicators

Simplification

As discussed in the previous course article, Indicators mainly present the existing price and volume data on the price charts. For novice traders who have less knowledge of reading this data, can take the help of indicators to understand the price charts in a more precise way. Also, indicators act as a great tool to identify market strength.

For instance, using the Moving Average indicator, the direction of the trend can be found. By using the stochastic indicator, overbought and oversold areas can be found. These cannot be easily identified by the novice traders if not for these indicators.

Swift Decision Making

Since you aren’t entirely aware of most of the indicators, we would like to give you an example of the indicators we have learned till now. If you remember trading Fibonacci levels, we have taken our entries right after the price bounces after touching the respective Fib levels. It is impossible to make such swift decisions in the absence of these indicators. Hence we can say that indicator based trading allows us to make quick decisions comparatively.

Confirmation Tool

Indicators act like an excellent confirmation tool for experienced traders as well. For example, a technical trader identifies a candlestick pattern and wants to take trades based on that pattern. To confirm if the signal provided by the pattern is accurate or not, he can take the help of any technical indicator like RSI or Stochastic. If the indicator supports the signal provided by the pattern, the trader can confidently make trades.

Combination Capability  

Indicators can be combined to understand the market more clearly. For instance, Moving Averages can be combined with Fibonacci levels, and Stochastic can be combined with many other reliable indicators to generate accurate signals. If we wish to, we can even add an end number of indicators, but these additions should able to simplify the price chart rather than making it more complex.

Cons of using Technical Indicators

Unawareness of the complete picture

Novice traders who get used to trading with these indicators can never get an entire background on what’s happening behind the charts. If they get used to this, they can never become a professional technical trader. Also, they won’t be able to identify if the signal generated by the indicator is accurate or not. Hence, it is always crucial to understand why the indicator is moving the way it is so that we can make better trading decisions.

Not for pure price action traders

Price action trading is also a part of technical trading. It is purely based on the price movements of the asset alone. So price action traders might find indicator based trading a bit redundant because they know why the price is moving the way it is moving. Hence we can say that indicators don’t add more value to pure price action traders.

Lag Issue

By now, we know that there are lagging indicators that portray what has already happened in the market. These indicators do add significant value to indicator based trading, but they can’t be completely used to take the trades.

Final Word

These are some of the pros and cons involved in using indicators for trading the markets. So the answer to the question ‘If the Indicator based trading is for you or not?’ is yes. It is for you. But we have to be cautious and understand the entire picture instead of blindly following the indicators. In the upcoming articles, we will start learning how to take trades using various reliable indicators in the market. Cheers!

Categories
Forex Course

78. Brief Introduction To Technical Indicators & Indicator Trading

Introduction

Introduction

Introduction

In the past two sections of this course, we have discussed two of the most important tools in Technical Analysis – Fibonacci & Moving Averages. These two are discussed in an elaborated way because you might be using them in conjunction with many of the other reliable indicators in the market. They can be used standalone not just to take trades but also for different other purposes. For instance, Moving Averages can be used to identify the direction of the trend. Likewise, Fibonacci Levels can be used to test the reliability of any support and resistance level.

Since we have completed learning these crucial tools, it’s time for us to extend our learning to understand specific technical tools known as indicators and oscillators. There are many indicators and oscillators in the market. Some are reliable, and some are not. So in the next few course lessons, we will be discussing some of the most credible and reliable indicators. In this lesson, let’s first understand what an Indicator basically is and why it is important to use them in technical analysis.

What is an Indicator?

An indicator is a tool that is used by technical traders and investors to understand the price charts and market conditions. The important purpose of any indicator is to interpret the existing data and accurately forecast the market direction. These indicators are built on various mathematical calculations by market experts.

These days, with the advent of technology, hundreds of indicators can easily be accessed. They are available on most of the charting platforms that we currently use, like MT4 & TradingView. Many of the reliable indicators we have today are a result of extensive research and back-testing. Any technical indicator considers a lot of important data like historical price and volume to predict the future price of an asset.

Indicators are an integral part of technical analysis, and the number of traders who just rely on indicators to take trades is pretty high. Typically, most of the indicators overlay on the price charts to predict the market trend. However, there are indicators that position themselves below the price chart to make users understand the overbought and oversold market conditions.

Oscillators are nothing but range-bound indicators. Which means, an oscillator can range from 0 to100 levels (0 being the floor and 100 being the roof). Essentially, if the price of an asset is at 0, it represents oversold conditions. Likewise, if the asset’s price is at 100, it represents overbought conditions.

Two Types of Indicators

Indicators are classified into two different types – Leading Indicators & Lagging Indicators. As the names pretty much suggest, leading indicators are those that predict the future price direction of any given currency pair. Essentially, these indicators precede the price action and predict the price.

Leading Indicator Examples: RSI (Relative Strength Index), Stochastic Indicator, & Williams %R.

Contrarily, lagging indicators act more like a confirmation tool. They follow the price action and help traders to understand the complex price charts better. One of the best use cases of a lagging indicator could be while testing the trend. We can confirm the trend along with its strength using a lagging indicator.

Lagging Indicator Examples: MACD (Moving Average Convergence & Divergence) & Bollinger Bands.

That’s about a brief introduction to Indicators and Indicator trading. In the next lesson, let’s understand the pros and cons involved in Indicator trading. Once that is done, we can start learning some of the most reliable indicators and how to trade the markets using them. Cheers.

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Categories
Forex Basic Strategies

Trading The ‘Three White Soldiers’ Candlestick Pattern (With RSI & EMA)

Introduction

Introduction

Introduction

The Three White Soldiers is a bullish candlestick pattern. This pattern is highly reliable and quite potent when it is found at a significant support area in a downtrend, which indicates sharp price reversals from a bear market to a bull market.

  1. Three White Soldiers pattern consists of three consecutive bullish candles; typically, this pattern should be traded when found at the end of a downtrend.
  2. Each candle should open and close higher than the previous candle.
  3. The candles must have small or no wicks. Because that indicates, the buyers managed to close the price of the currency pair at the high of a candle. If the third candle is smaller than the preceding two candles, it indicates that the buyers do not have much strength, and the market can easily print a new lower low.

Candles get printed on every trading chart in all the timeframe. But only the candlestick patterns in the right context of the market will be rewarded. The Three White Soldiers pattern that we are going to discuss is one of the most credible and reliable patterns we have come across. Trading legend Gregory L. Morris, in his book ‘Candlestick Charting Explained,’ said that the Three White Soldiers is extremely rewarding if traded correctly and it should never be ignored.

Trading Strategies

Three White Soldiers + RSI indicator

In this strategy, we have paired the Three White Soldiers pattern with the RSI indicator to identify good trading signals. RSI is a well-known oscillator, and it stands for the Relative Strength Index. The RSI indicator has a reading from 0 to 100. When the indicator line goes above the 70, it indicates the overbought conditions. When the indicator lines go below the 30 levels, it means the market is in an oversold condition.

Step 1 – First of all, find the Three White Soldiers pattern in a downtrend.

Step 2 – When market prints the Three White Soldiers, our next step is to check the RSI indicator. If the RSI indicator is at the oversold area and gives a sharp reversal, it means that both of the trading tools support the buying entry in any underlying currency pair.

In the example below, GBPNZD was in an overall downtrend. At first, market prints the Three White Soldiers pattern, and the RSI was at the oversold area. This condition indicates a potential trend reversal. We can see that the pattern candles are quite strong, and the RSI indicator also supported our strategy. This aspect creates an illusion for novice traders to take the trade immediately. However, it is not a good way to enter the trade. We suggest you always wait for 2-3 candles to confirm the stability of the pattern.

Step 3 – Step Loss & Take Profit

In this example, we have put the stop loss just below the low of the first candle of three green candles. When two leading trading tools indicate the same signal, always use smaller stops so that you can maximize your profits.

For this strategy, there are several ways to book the profit. We can close our position at a significant resistance area or when the RSI indicator reaches the overbought area. If your plan is to ride the longer moves, we suggest you closing your position when the market prints the Three Black Crows patterns. This pattern is the complete opposite of the Three White Soldiers pattern.

The example below belongs to the daily chart. Keep in mind that stronger the support/resistance area on the higher timeframe, more chances the market has to respect that area. In our example, the last time price respects the resistance line, so we decided to close our full position at a resistance area. Overall it was 1500+ pip move on the daily chart. These kinds of higher timeframe trades are suitable only for big investors.

Three White Soldiers + EMA

In this strategy, we have paired the Three White Soldiers pattern with the EMA to filter out the bad trading signals. EMA stands for Exponential Moving Average. The EMA is used to highlight the current trend and to spot the trend reversals. Trading signals can also be generated when the EMAs are read correctly. Generally, when the EMA goes above the price action, it indicates a sell signal, and when it goes below the price action, it indicates a buying signal.

Step 1 – Of course, the first step here is to identify the Three White Soldiers pattern on the charts.

Step 2 – When market prints, the Three White Soldiers, and EMA go below the price action, it indicates the buying signal.

In the below EURAUD weekly Forex chart, when the market prints the Three White Soldiers pattern, EMA was also below the price action. This indicates a potential price reversal of this currency pair. Even when both the pattern and EMA indicates the signal, we decided to wait for 3 to 4 candles to confirm the strength of the pattern. We can see that the market holds there for a couple of candles, which is a clear cut sign to go long on this pair.

Initially, the market goes higher for some candles, but it didn’t reach our major target. Our position goes into the loss a couple of times. Do not panic and lose trust in your strategy because the price didn’t hit the stop loss yet. Trading is a game of patience and only close your position when the market hit the stop loss or take profit. In this case, waiting patiently led to fruitful results as our trade hits the take profit.

Step 3 – Stop Loss & Take Profit

In the above chart, we have placed the stop loss above the exponential moving average because it works as a dynamic support/resistance to price action. We closed our full position when EMA goes above the price action.

Conclusion

Most of the times, Three White Soldiers pattern appears at the end of a downtrend. Sometimes it also prints after a lengthy consolidation phase. Although it is not a strong bullish sign if you want to trade the consolidation phase, always pair this pattern with other technical tools to filter out the negative signals. The volume is the most critical thing to enhance the reliability of the pattern when the market is in a consolidation phase.

Categories
Forex Basic Strategies

Learning The Art Of Fading In Trading

What is Fading?
Fading involves placing trades against the trend to profit from a reversal. Using the concept of fading, a trader will short sell, expecting the momentum to fade

What is Fading?
Fading involves placing trades against the trend to profit from a reversal. Using the concept of fading, a trader will short sell, expecting the momentum to fade

What is Fading?

Fading involves placing trades against the trend to profit from a reversal. Using the concept of fading, a trader will short sell, expecting the momentum to fade when the market is in an uptrend. Likewise, he/she will buy a currency pair with the expectation that the move will fade away and reverse when the market is in a downtrend.

The fading strategy involves three assumptions:

  • The price is either at the overbought or oversold condition.
  • Early buyers or sellers are getting ready to take profits.
  • Current position holders might be at risk.

Overbought and oversold conditions can be identified using technical indicators such as the Relative Strength Index (RSI). Momentum shows the signs of shifting of forces from bulls to bears or vice-versa. And as these signs develop, current holders of the asset start to rethink their positions.

These conditions get exaggerated after an earnings announcement or news release. This may lead to a knee-jerk reaction on the part of other traders to sell the currency pair. As a result, this reaction gets overextended, and a mean-reversion takes place.

Now let us see how does the strategy work and what are the necessary steps you need to take to profit from the strategy:

The Fading strategy

Step 1 – Identify market extremes from the daily time frame 

The first step is identifying overbought and oversold zones using technical indicators or chart patterns.

The popular indicators used for identifying the zones include:

The overbought and oversold conditions are indicated by reading above or below a certain level. For example, the market is said to be in an overbought condition if the RSI is above 70, and it is said to be in oversold condition if the RSI is below 30. This can help traders in identifying fading opportunities.

In the above chart, we can see how the RSI indicator was crossing the normal range when the market gets into the overbought zone. One can find trading opportunities just using the RSI indicator stand-alone. But to trade like how professionals trade, we need to use a lot more tools.

Traders may also use familiar chart patterns or analysis based on price action and watching the price continuously.

Step 2 – Look for signs of capitulation

The second step in the strategy is to look for early signs of capitulation or change in the short-term trend using momentum. This can be mostly done by using candlestick patterns or price action with a volume indicator. We suggest looking for price action signals.

Some other signs to watch for include:

  • When technical indicators start to fade or move away from their extreme overbought or oversold levels.
  • The volume of the significant trend starts decreasing, or the volume of the opposite trend starts increasing.
  • Bearish candlestick patterns appear (in case of an uptrend), or critical support and resistance are broken.

It’s essential to identify these signs early to maximize profit and avoid mistakes.

The signs mentioned above can be explained better with the help of some figures.

Image 1

In the above image, we clearly see that the market is in an uptrend and has been trending from a few days (as it is a daily chart). The volume of the significant trend is also high with the decreasing volume of the sellers, which is a good sign for bulls. But in the end, the volume starts to decrease. The RSI declines sharply after entering the overbought zone for a while.

Image 2

Immediately we see an increase in the volume of sellers with a drastic drop in the RSI indicator (Image 2). The signs are getting stronger for a reversal, and this trend can continue. All the traders who are holding the currency pair start exiting the market. This could be one of the most reliable signs for us to take appropriate action. 

Image 3

Finally, we see a break in the ‘support’ by the bears with high volume. Now we have combined all the tools, and each of them is indicating a reversal. Hence, we should take a position in the opposite direction. This is precisely the kind of setup that you need to be looking for every time.

Image 4

In order to find the exact entry, we need to magnify the chart. For this, you need to go on a lower time frame to analyze and set your stop-loss or target based on that time frame. This is mandatory for getting precise entries. The above figure is the lower time frame chart of the explained example.

Note: Images 1, 2 & 3 belong to the daily timeframe, whereas Image 4 belongs to the 4H timeframe.

Step 3 – Enter the trade with a stop-loss and take-profit

The last step is to enter the market with a compulsory stop-loss and take profit to ensure risk management is in place. In this strategy, a stop-loss order can be placed above the price where the RSI enters the overbought/oversold zone. Avoid putting small stop-loss as you can prematurely get stopped out from the trade.

Profit can be booked when the volume of your trend starts to decrease. Now, the stop-loss and target would be placed, as shown in the above chart. This trade would result in a risk-to-reward ratio of a minimum of 1:5. Traders can also use a moving average or any other indicator to set a profit-taking price level. Limit orders are almost used by all traders to avoid any slippage or other issues, particularly in less liquid assets.

Bottom line

Fading strategies can be considered as risky as you are going against the trend. It is always a good idea to take a trade if the risk to reward ratio is favorable. These strategies are commonly used by short to medium term traders to capitalize on short term reversals. Even though it seems risky, it can be extremely profitable if appropriately used. This is because the market has reached a saturation state, and there has to be some balancing force. This is why fading strategies are also known as contrarian strategies. Because they work on the assumption that prices deviating far from the trend, tend to reverse and revert back. That’s about Art Of Fading. If you have any queries, let us know in the comments below. Cheers.

Categories
Forex Elliott Wave

Elliott Wave Principle – Advanced Concepts – Part 3

The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this

The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this

The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this educational article, we will review how to apply the RSI with the Elliott Wave Analysis.

The basics

Possibly, the RSI indicator is the most widespread indicator from professionals to retail traders. The RSI is an oscillator that moves in a range between 0 to 100. Alexander Elder describes it as a “leading or coincident indicator – never laggard.”
 
Some applications of RSI are tops and bottoms identification, divergences, failure swings, support and resistance, and chart formations.
 
In the Elliott wave theory, the RSI application can to aid in the wave identification process. In particular, the identification of divergences is the most used application in the wave analysis.
 
J. W. Wilder describes the divergence between the price action and RSI path as a “powerful indication that the market could reverse soon.
 
A divergence takes place when the price is still increasing, while the RSI began decreasing (bearish divergence). Or when the price falls, and the RSI climbs (bullish divergence.) In the wave analysis terms, divergences appear between the end of waves three and five. Let’s see a couple of examples.

RSI and the Elliott Wave Principle

Johnson & Johnson (NYSE:JNJ), on its weekly chart, illustrates the RSI and the Awesome Oscillator. Both indicators show the divergence created between the end of waves three and five.

On the JNJ chart, we also can observe the RSI levels when price action runs in a wave three. When this occurs, the RSI tends to move between the levels 70 and 80.

In a bull market scenario, usually, the price action tends to find support near to level 40. When the price moves in a bear market, the ascending correction tends to find resistance near to level 60. This concept, with the swings identification, can support the wave analysis.

The following chart corresponds to the Dollar Index (DXY) in its 8-hour timeframe. From the figure, we observe the bullish sequence developed in five internal legs, in which we observe that each leg has three waves.

As a conclusion from the study using the RSI indicator and wave analysis, the price action unveils an ending diagonal pattern. The Elliott wave structure shows us that the Greenback should see new lower lows.

Categories
Forex Indicators

Let’s Trade Divergences!

Trading with Divergences
Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading

Trading with Divergences
Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading

Trading with Divergences

Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading analysis. That is because we don’t know what will happen. All we can do is interpret what kind of future behavior may occur based on past events – this is the basis of all psychology and significant portions of medicine: we can only predict future behavior by analyzing past behavior. Now, just because most of the tools and theories used in technical analysis are lagging in nature – it doesn’t mean that there is no method of leading analysis.

Divergences are one method of turning lagging analysis into leading analysis – it’s not 100% accurate, but divergences can detect anomalies and differences in normal price behavior. Divergences are useful in identifying when a significant trend may be ending or when a pullback may continue in the prior trend direction. Let’s review some of those now.

Divergences are easily one of the most complex components to learn in technical analysis. First, they are challenging to identify when you are starting. Second, it can be confusing trying to remember which divergence is which and if you compare highs or lows. It is essential to know those divergences themselves are not sufficient to decide whether or not to take a trade – they help confirm trades.

When we look for divergences, we are looking for discrepancies between the directions of highs and lows in price against another indicator/oscillator. The RSI is the oscillator used for this lesson. We are going to review the four main types of divergences:

  1. Bullish Divergence
  2. Bearish Divergence
  3. Hidden Bullish Divergence
  4. Hidden Bearish Divergence

Bullish divergence

Bullish Divergence

A bullish divergence occurs, generally, at the end of a downtrend. In all forms of bullish divergences, we compare swing lows in price and the oscillator. For a bullish divergence to happen, we should observe price making new lower lows and the oscillator making new higher lows. When bullish divergence occurs, prices will usually rally or consolidate.

Bearish divergence

Bearish Divergence

A bearish divergence is the inverse of a bullish divergence. A bearish divergence occurs near the end of an uptrend and gives a warning that the trend may change. In all forms of bearish divergence, we compare swing highs in price and the oscillator. For a bearish divergence to happen, we should observe price making new higher highs and the oscillator making new lower highs.

Hidden divergences

The last two divergences are known as hidden divergences. Hidden does not mean that it is difficult to see or hard to find – rather, it shows where a short term change in direction is actually a continuation move. Think of it as a pullback or a throwback in a larger uptrend or downtrend. Hidden divergences tell you of a probable continuation of a trend, not a broad trend change. If you combine these with common pullback and throwback patterns such as flags and pennants, then the identification and strength of a hidden divergence can yield extremely positive results.

Hidden Bullish Divergence

Hidden Bullish Divergence

A hidden bullish divergence can appear in uptrends and downtrends but is only valid if there is an existing uptrend. It’s easier to think of hidden bullish divergences as pullbacks or continuation patterns. For hidden bullish divergences, we should observe price making new higher lows and the oscillator making new lower lows. The expected price behavior is a continuation of higher prices.

Hidden Bearish Divergence

Hidden Bearish Divergence

Our final divergence is hidden bearish divergence. Just like hidden bullish divergence, hidden bearish divergence can appear in both uptrends and downtrends but is only valid in an existing downtrend. Hidden bearish divergence is identified when price makes lower highs, and the oscillator makes new higher highs. We should observe a resumption in the prior downtrend when hidden bearish divergence is identified.

Key Points

Regular Bullish Divergence
  • End of a downtrend.
  • Often the second swing low.
  • Price makes new Lower Lows, but the oscillator makes Higher Lows.
  • Trend changes to the upside.
Regular Bearish Divergence
  • End of an uptrend.
  • Often the second swing high.
  • Price makes Higher Highs, but the oscillator makes Lower Highs.
  • Trend changes to the downside.
Hidden Bullish Divergence
  • Valid only during an uptrend.
  • Price makes Higher Lows, but the oscillator makes a Lower Low.
  • The trend should continue to the upside.
Hidden Bearish Divergence
  • Valid only during a downtrend.
  • Price makes Lower Highs, but the oscillator makes Higher Highs.
  • The trend should continue to the downside.

Final words

It may be confusing trying to remember which divergence is which and you’ll find yourself asking questions such as, “do I use highs on this divergence or lows?” It’s easier to think about measuring divergences like this:

All Bullish divergences are going to compare lows to lows – lows in price and lows in an oscillator.

All Bearish divergences are going to compare highs to highs – highs in price and highs in an oscillator.

Categories
Forex Market Analysis

Forex and Indices – Daily Update

Hot Topics: 

Major currencies show bullish signals against

Hot Topics: 

Major currencies show bullish signals against

Hot Topics: 

  • Major currencies show bullish signals against the greenback.
  • Indices recovers but more falls are expected.
  • Pound crosses could turn bullish.

 

Major currencies show bullish signals against the greenback.

Forex Daily Market Update

The EURUSD broke up the flag pattern testing the 1.17 level resistance. Now the price is making a throwback to the congestion area. RSI also is showing bullish signals with the breakout and test to the flag structure.


GBPUSD looks like as its turning bullish. On the one hand, the price is making higher highs and higher lows. On the other, the RSI found support above the 40 level; this signal makes us foresee that a turning movement is near for the pound.


 

USDCHF is in a congestion zone between 0.9845 and 0.989. We expect a new bearish move to the region between 0.9784 and 0.9815. The shape of the price sequence that started on May 9th looks like a consolidation structure and is likely that the price could see new highs.


 

Indices recovers but more falls are expected.

FTSE 100 is recovering from the last selloff but is moving in the Potential Reversal Zone. RSI moves in an ascending channel but it still didn’t break the key level 60 to show bullish signals. Invalidation level is above 7,803.5.


In the same way as the FTSE, the DAX is moving in a consolidation structure as an ascending wedge. RSI is moving in the 51.53 level, but it doesn’t mean that in the short-term the trend is bullish, it suggests that the bias remains bearish and the price is making a retracement. Invalidation level is above 13,040.6.


Pound crosses could turn bullish.

GBPCAD is moving sideways and tested the monthly pivot level at 1.73191 becoming a relevant resistance. We think the cross could make a new low near the first weekly support at 1.71310, where the price could start a bullish cycle with a profit target at the weekly second resistance confluence area on 1.7510. Invalidation level is placed below 1.7065.


GBPAUD  has been moving mostly bearish during this session, but we expect that the price could make a bullish reversal move in the area between 1.7360 and 1.73195, where it could bounce from, with the eyes placed on the weekly pivot at 1.76242. Invalidation level is below 1.725.


 

Categories
Forex Market Analysis

Negotiations Between US-China Support Indices Advances

FINANCIAL MARKET UPDATE TODAY
Hot Topics:

Indices continue soaring boosted by US-China negotiation progress.
UK Government seeks to pay its national debt.
The price action between EURUSD and USDCHF show

FINANCIAL MARKET UPDATE TODAY
Hot Topics:

Indices continue soaring boosted by US-China negotiation progress.
UK Government seeks to pay its national debt.
The price action between EURUSD and USDCHF show

FINANCIAL MARKET UPDATE TODAY

Hot Topics:

  • Indices continue soaring boosted by US-China negotiation progress.
  • UK Government seeks to pay its national debt.
  • The price action between EURUSD and USDCHF show divergences.
  • EURCAD and EURAUD are moving on critical zones.

Indices continue soaring boosted by U.S.-China negotiation progress

The advance in negotiations between the U.S. and China maintain the optimism in markets for the second consecutive session. The FTSE 100 consolidated in the record highs. Despite the fact that RSI shows a little bearish divergence, this does not mean a reversal sign of the trend. We keep our bullish vision for the FTSE in 8,000 pts as the next target.



DAX 30 adds to the market optimism by the progress between the U.S. and China negotiations. The index climbs near to the first target level proposed in previous updates (Daily Update – May 15th). The RSI oscillator does not show movement exhaustion signals.
– First target level 13,250.5.
– Second target level: 13,497.7.
– Invalidation level: 12,918.3


UK Government seeks to pay its national debt

The UK Government will appeal to the High Court for access to a National Fund untouched since 1928 to pay its National Debt. The “National Fund” was opened in 1928 by an anonymous donation of £500,000 with the condition that it must keep untouched until the U.K. have enough money to pay its national debt entirely. Currently, the fund ascends to £475 million, but the U.K. debt rises to £1.7 trillion.

The pound is moving sideways, in this session has tested the 1.348 resistance. RSI shows bullish divergences signals; we expect that the RSI moves above the 60 level for it to start to change the current bearish bias to bullish. Consider that the price action must confirm the new bias. For the moment we maintain neutral our position in GBPUSD.



 

The price action between EURUSD and USDCHF show divergences

USDCHF is moving bearish and has paid its bearish divergence falling to the 0.99203 level. It is likely that the price continues moving bearish to 0.9875 and start to bounce for it to make a new connector for a major degree bearish cycle. Invalidation level remains on 1.00561.




On the other hand, EURUSD keeps moving sideways. In the current session, the common currency has tested the resistance level at 1.18257 without success. However, RSI is showing reversal signals but it is necessary that the oscillator breaks above the 59.06 level and the price soar above the key resistance level 1.18257. Invalidation level is below 1.1717.



 

EURCAD and EURAUD are moving on critical zones

EURCAD has touched the first long-term bearish target level at 1.50373. The RSI oscillator shows bullish divergences as a bearish trend exhaustion signal. Now is the time to expect what the price action does, if the cross moves to the second long-term bearish target at 1.4866 or makes a reversal pattern. In this zone, our position turns from bearish to neutral.



Similarly to EURCAD, EURAUD moves below our second bearish long-term target placed in 1.5552 level. RSI shows bullish divergence as weakness in the bearish cycle. Now we are watching the control level in 1.54673, and waiting to see what will the price action will do. We have two scenarios:

– First scenario: The price breaks below the control level. In this case, it is likely that the cross continues its bearish momentum. For this scenario, the new bearish targets are placed at 1.5307 and 1.5195 levels. Invalidation level is 1.57279.

– Second scenario: The price makes a bullish reversal pattern, in this case, we have 1.5727 as the target.



 

Categories
Forex Educational Library

How to Trade Using the RSI

Introduction
In 1978, J. Welles Wilder Jr published the Relative Strength Index (RSI) in the book “New Concepts in Technical Trading Systems.” Wilder describes the RSI as “a tool which

Introduction
In 1978, J. Welles Wilder Jr published the Relative Strength Index (RSI) in the book “New Concepts in Technical Trading Systems.” Wilder describes the RSI as “a tool which

Introduction

In 1978, J. Welles Wilder Jr published the Relative Strength Index (RSI) in the book “New Concepts in Technical Trading Systems.” Wilder describes the RSI as “a tool which can add a new dimension to chart interpretation.” Some of these interpretations are tops and bottoms identification, divergences, failure swings, support and resistance, and chart formations.

The Relative Strength Index is probably the most popular indicator used by professional and retail traders. It’s an oscillator which moves in a range between 0 to 100. A. Elder describes the RSI as a “leading or coincident indicator – never laggard.” In this article, we will show these different ways to use the RSI.

Tops and Bottoms Identification

The theory about this indicator states: “when the RSI goes above 70 or below 30, the Index will usually top or bottom out,  before the real market top or bottom, providing evidence that a reversal or at least an important reaction is imminent”. Some traders have modified these levels to 80 – 20.

The basic trading idea is:

  • Buy zone: when the RSI is below the 30 (or 20) level.
  • Sell zone: when the RSI is above the 70 (or 80) level.

A trading system based on this interpretation is an easy way to lose money. The following example shows what I mean:

Relative Strength Index (RSI)

Figure 1: Tops and Bottoms signals

Source: Personal Collection

 

In figure 1, an example of a trading system based on Top and Bottoms is shown, with RSI levels of 30 and 70 (or 20 and 80) as entry signals.  To make it short, most of the time the entry signals were false and didn’t allow catching significant trends.

Divergences are the most popular use; Wilder describes the divergence between price movement and RSI as a “very strong indication that the market turning point is imminent.” Divergence takes place when the price is increasing, and the RSI is flat or decreasing (this is known as bearish divergence); the opposite case happens when the price is decreasing, and the RSI is flat or increasing (bullish divergence).

How to trade using the Relative Strength Index (RSI)

Figure 2: Divergences

 

As shown in Figure 2, the divergences are a price weakening formation. That does not mean that it’s a turning point or that you should position yourself in the opposite direction.

Failure Swing

LeBeau and Lucas describe Failure Swing as a formation “which is easier to observe in the RSI study itself than in the underlying chart.” A strong indication of market reversal occurs when the RSI climbs above the 30 level or plunges below the 70 level.

Failure Swing

Figure 3: Failure Swing

 

As we can see in figure 3, the failure swing is part of the divergence concept, and it only confirms that the divergence is real. But you must pay attention and be careful with the failure swing as an entry signal because it is not a rule. The potential trade requires price-action confirmation.

Support and Resistance

The theory says that “support and resistance often show up clearly on the RSI before becoming apparent on the bar chart.” Some authors use the 50 level as a support level in a bullish trend or as resistance in a bearish trend. Hayden proposes the following rules for each trend direction:

  • In a bullish trend, the RSI will find support at 40 and resistance at 80.
  • In a bearish trend, the RSI will find support at 20 and resistance at 60.

RSI Support and Resistance

Figure 4: Support and Resistance.

 

In figure 4, the RSI shows how the RSI works as support and resistance on a bearish and a bullish trend. In the bearish trend, the 60-70’s zone is acting as resistance levels and 30-20’s zone as support. In a contrarian case, during the bullish trend, 70-80’s are the resistance zone, and 40-30’s the support zone.

Chart Formations

The RSI could display a pattern similar to those present in chart formations which may not be clear on the price chart, for example, triangles, pennants, breakouts, buy or sell points. A formation breakout indicates a move in the breakout direction.

RSI Chart Formations

Figure 5: Chart Formations

 

The most common formation is the triangle as a consolidation pattern before an explosive move. However, also is common to see false breakouts before the real move (see figure 5).

RSI chart formations breakout as a trading signal:

Buy Signal: When RSI breaks above its downtrend line place an order to buy above the latest price peak to catch the upside move.

Sell Signal: When RSI breaks below its uptrend line place an order to sell short below the latest price to catch a downside breakout.

We must consider that, usually, the RSI breaks its trendline one or two periods before price does.  In this sense, it’s important to get a confirmation using price-action.

COMMENTARY

To summarize, the RSI is a popular indicator between professional and retail traders alike.  It’s characterized by being a leading indicator. While every one of those styles (divergences, failure swing, support and resistance, and chart formations) can be used independently, that’s not a powerful tool.

A more reliable way to apply the RSI is using a mix of those methods, but the main issue here is how to trade using the RSI.

Some tips to use the RSI:

  1. Determine what is the primary trend? The “big picture” of the traded market.
  2. Identify key levels (swings), divergences, failure swings, chart formations between Price and RSI. In bear markets, wait for a resistance level (60-70’s zone). In bull markets, wait for support levels (40-30’s zone).
  3. Observe price and RSI breakouts.
  4. The order could be placed at the open of the candle, or when the price reaches a specific level (limit or stop orders).
  5. The stop-loss level could be set beyond the last swing high or low, or specific number of pips away.
  6. Profit-taking, ideally, should be set, at least, at two times the distance from the entry point to the stop-loss. Another possibility is to find a key level and set it close to it if the reward is worth its risk
  7. As trade management, the use of a trailing stop should be considered.
  8. If the market moves without us, let it go. The market will provide more opportunities.

 

Trading with the RSI

Figure 6: Trading with the RSI (*)

Source: Personal Collection

 

Trading with the Relative Strength Index (RSI)

Figure 7: Trading with the RSI (*)

Source: Personal Collection

As you can see figures 6 and 7, the RSI is an indicator that does much more than an identification of overbought and oversold price levels. It helps us detecting trade opportunities, areas of movement exhaustion, confirmation of price patterns (price level failures), and chart patterns. However, RSI signals and patterns should only be used as a guide.  A relationship of those signals with the price action should always be present.

(*) This is a simulated analysis and trade application.

SUGGESTED READINGS

  • Wilder, J.W. (1978). New Concepts in Technical Trading Systems. North Carolina: Trend Research.
  • Hayden, J. (2004). RSI: The Complete Guide. South Carolina: Traders Press Inc.
  • LeBeau, Ch., Lucas, D. (1991). Computer Analysis of the Futures Market. New York: McGraw-Hill.
  • Elder, A. (2014). The New Trading for a Living. New Jersey: John Wiley & Sons, Inc.

 

Keywords:

Technical Indicators, RSI, Education.

 

©Forex.Academy

Categories
Forex Educational Library

Profitable Trading VIII – Computerized Studies V: Oscillators

Introduction

Markets behave as a fair-price searching machine. When there is no consensus about value, caused by an economic event or some other news that might affect the current fair price, market forces launch a new trend, which starts moving the price toward another “fair” level.

And the rest of the time, when the price is already at a consensus “fair price”, what happens? Does it stay at a single price point until a new event shakes it?

Nature hates stillness and rest. It seeks movement -Any kind of movement- and the markets do, as well. Therefore, as we all acknowledge, price does not stay still just because everybody on earth thinks this is the fair price. The fact that there are zillions of market participants, every one of them with its own opinions, makes it impossible that a fair price exists at all. As Jesse Livermore stated, the two most significant market forces are greed and fear, and, consequently, they exert their pressure on prices, too.

Therefore, when a market lacks impulse to continue a trend, it tends to make oscillatory price changes, although the fact that traders are using different time frames, price targets, and stops, makes this oscillation quite complex, with multiple cycles blended on an intricate and, potentially, noisy pattern.

Science has been dealing with waves and cycles for long. Almost everything in science deals with cycles and oscillations, therefore, cycles are a part of markets that may be handled with precise scientific accuracy, limited only by the noisy nature of prices.

To conclude, Markets mainly behave in two interlinked modes: trend mode and cyclic mode. Those two states may blend with each other on a higher timeframe, though.

We’ve already dealt with computerized studies to help traders find and trade a trend. In this article, we’re going to analyze several computerized studies which might assist us during the cyclic phase of the market, when the markets are not trending.

Slow Stochastics

The Stochastics oscillator was developed by George Lane, who teach it during his investment seminars since 1950. According to Lucas and LeBeau on his book “Computer Analysis of the Futures Markets”, Mr. Lane has been perfecting the use of stochastics for trading over many years, and he is able to make it work well in almost any market situation.

The Stochastics Oscillator, came from the observation that closing prices tend to appear near the high of the range during uptrends and near the low of the range in downtrends.

This oscillator measures where the close is, relative to the range of prices over the latest period. The %K line comes from a simple formula, which makes sure the signal is always between zero and 100:

There is a %D line, which is called slow stochastic and is computed by applying a three-day moving average to the %K line.

By convention, an overbought market is one that led its stochastics lines – %K and %D – above the +80 level; while a market is in oversold condition when they are below the 20 level.

The basic way to use Stochastics is by acting at %D and %K crossovers when this happens at those extremes, and when the %D line crosses – over or under- these price triggers. For example, when %D crosses under the 80 level it indicates a sell signal, and when it crosses over the 20 level, it’s a buy signal.

Periods

The standard period for the Stochastic oscillator is 14, but, according to Lucas and LeBeau, George Lane used an adjusted value of about 50% of the perceived market main cycle. Those authors said in their book that they had tested several periods, and a range between 9 and 12 were the best performing ones, as these were the best compromise between speed and validity, producing the minimum quantity of false signals.

What this tells us is that we need to experiment with the period of the signal and back-test it, to get an optimal figure for the current market we are treading.

According to Alexander Elder, if you intend to use Stochastics as your sole signal it’s better to choose a longer-term period, while in combination with other signals a shorter period is preferable.

Signals against the trend

As said at the beginning, the use of this kind of oscillator is best suited to a cyclic phase of the market. When we detect a trend, the Stochastic oscillator does not perform so well, especially when the signal is against the main trend.

Fig. 2 shows a stochastics used in a downtrending market (NZD/YSD). We may observe that, mostly, good signals come from the overbought side of the market that trigger signals with the trend, even when those appear before %K and %D approaches the saturated region. This is common with strong trends. The market doesn’t reach the overbought ( or oversold) level before returning to the primary trend. The only potentially profitable buy signal comes at the end of this long downtrend when the oversold condition permeates several time frames.

LeBeau and Lucas said in his book: “Remember: The trader who coined the phrase ‘the trend is your friend’ was not using stochastics”.

Divergences

Several authors agree about the fact that divergence between prices and stochastics is one of the most powerful signals.

A bullish divergence occurs when a price makes a new low and the stochastic fails to do so, drawing a higher low.

A bearish divergence arises then prices are making new highs but stochastics lines draw a lower low.

A word of caution about divergences: It may work or not. I don’t know for sure. What’s sure is its performance is very challenging to test. I’d rather like those signals that I’m able to back-test, such crossovers, departures from an overbought or oversold level,  etc.

Knees and Shoulders

When %K has crossed over %D and, then, pulls back, but, without another %D crossing to the downside, and, next, it resumes its up movement, Mr. Lane calls it a knee. If the movement is from overbought to the downside, he calls it a shoulder. According to Mr. Lane, it shows a continuation with strength.

Anticipating a crossover

There are people that remark when %D flattens, call it a hinge. Also, there’s a warning hook, when both %K and %D turns at an extreme but still don’t cross.

According to LeBeau and Lucas, those observations focus, mainly, on anticipation rather than reliance on the signals, and they don’t recommend them. It’s better to wait for a crossover.

Bear and bull setups

Another unique tool by George Lane.

A bear setup happens when prices make a series of higher highs and higher bottoms, but the Stochastics oscillator produces a pattern of lower lows when prices are rising. This pattern indicates there will be a top soon.

Bull setups are the specular pattern to bear setups, indicating that a bottom will happen soon.

Williams %R

Williams Percent R is a momentum indicator developed by Larry Williams, very similar to the Stochastic indicator, but in this case, it computes the level of the closing price in relation to the highest high of the period, instead of the lowest low, and it doesn’t depict a smoothed %D line.

 

Therefore, this oscillator moves from -100 to 0. Values below -80 are oversold levels while from -20 to 0 are overbought levels.

Some charting packages shift these values to positive 0 to 100 by adding 100 to the formula. In this case, oversold levels are between 0 and 20, and overbought condition happens from 80 to 100.

%R is noisier than Stochastic %D, but with less lag, so together with a confirming pattern,  it usually allows for a better reward to risk ratio and tends to show more trade opportunities than Stochastic does.

 

This indicator is very good at detecting oversold conditions at an uptrend, or overbought levels at a downtrend, therefore, it’s well suited as a signal, to add to a position or enter a new one on pullbacks.

Advanced topics:

Adaptive Stochastics Indicator

John Ehlers introduced the idea of an adaptive indicator in his book “Cycle Analytics for traders.” Ehlers proposes to, first, find the dominant cycle first, and then use half of that cycle as the period for the stochastic calculation.

So, the adaptive Stochastics starts by computing the dominant cycle using an autocorrelation periodogram, which Ehlers describes in chapter 8 of his book (I will refer the interested readers to check it).

In his book, Ehlers showed the complete algorithm, as well (although written in easy-language, it may be transposed to any language). The main steps are:

  • A low pass roofing filter to eliminate unwanted noise from the price data
  • The periodogram calculation
  • The instantaneous period is used to compute the current value of %D.
  • No %K is computed.

As we observe from fig. 8, the adaptive stochastic is much less noisy and it adapts to the dominant cycle.

Center Of Gravity

John Ehlers describes this oscillator in chapter 5 of his book “Cybernetic analysis for stocks and futures, cutting edge DSP technology to improve your trading”. He states that this study is unique because his smoothing has virtually zero lag, therefore, enabling a definite identification of turning points at the same time.

The center of gravity of an object is, basically, a weighted center of its mass, a balance point. In a trading environment, we can define a kind of rule of weights on an observation window. A fast and upward moving price shifts the center of prices to the right, while a downward move, shift it to the left.

The following formula computes CG:

CG = ∑i=0 to N (xi +1) * Pricei / ∑ i = 0 to N   Pricei

Fig 9 shows the EUR/USD 10-minute chart with Center of Gravity. As we clearly see, the CG is almost free of noise, so a signal can be picked directly from its crossovers if they happen relatively far from its zero line.

Cyan and pink boxes on Fig.9 show the result of scalping on a 10-min EUR/USD chart using CG crossovers. Nothing is perfect in trading, but we clearly observe that CG crossover signals catch the turning points with accuracy, allowing a highly probabilistic approach to scalping.

Stochastizing indicators

Stochastizing indicators is another development by John Ehlers, which he introduced in his book Cybernetic analysis for stocks and futures.

We may “stochastize” any indicator by computing its value in comparison with its lowest value of a period. Below, is an example of Stochastics RSI, much easier to use than in its original form.

The example in Fig. 9 shows entries and exits following the trend, discarding those against it, depicting high accuracy and early signals that allow for good reward-to-risk ratios. If we take the complete bull and bear signals, the stochastic RSI signal is still quite reliable. Just the trades against the trend do not present such good profits, but do not show significant losses either.

 Inverse Fisher Transform Percent R

The idea of a transform is to map some domain into another domain. The Inverse Fisher transform maps an indicator, %R in this case, into another kind of domain that allows us to alter its probability density function (PDF).

Market prices don’t fit on a Gaussian PDF, the familiar bell-shaped normal distribution, instead, prices have fat tails, meaning that large bull and bear events are more probable than a normal distribution allows. The Fisher transform can be applied to prices, such that it makes the resulting distribution nearly Gaussian.

The following equation defines the Fisher transform:

y = 0.5 x ln [ (1+x)/(1-x)]

This function compresses prices, to cut the fat tails, making the resulting price distribution Gaussian.

The inverse Fisher transform, instead of being compressive, is expansive.  Its equation is:

x = (e2y – 1) / (e2y +1)

The shape of the transfer function of an inverse Fisher transform is a kind of sigmoid function. The resulting output has a higher probability of it being +1 or -1. This -almost saturated- function makes the inverse fisher transform behave like the output function of an artificial neuron. The resulting shape shows trend changes very early.

To conclude, we have seen that the use of advanced signal processing is a way to improve classic indicators, for them to show less lag or behave in ways not achieved by conventional means.

To do so, we are required to do a bit of programming, to translate the algorithm into our trading platform. It may be useful to do an internet search because there are lots of free translations of popular indicators to major trading platforms.

This article section was just, the starting point for those with interest in advanced indicators.

A very good article, including MT5 code, is https://www.mql5.com/en/articles/288, where you may get actual code to implement the ideas sketched here.

 

References:

Computer Analysis of the Futures Markets, LeBeau and Lucas

Cycle Analytics for Traders and Cybernetic analysis for stocks and futures, cutting edge DSP technology to improve your trading,  by John Ehlers.

Charts created using MT4 and Multicharts trading platforms.

 

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