Trading with the RSI

“The Relative Strength Index (RSI) is such an indicator, offering the best of all worlds,” said Cardwell, president of Cardwell Financial Group, Inc., based in Woodstock, Ga. The RSI “is the cornerstone of my trading model,” he said.

Cardwell is a featured speaker at this weekend’s 20th annual Telerate Seminars Technical Analysis Group (TAG 20) conference here.

“In the lectures and workshops I have given, I have shown how the RSI can be used as either a completely independent trading model or an addition to and enhancement of a trader’s current technical approach. I use it as a completely independent model to identify trend, support and resistance, overbought/oversold levels, divergence, trend change, reversal and price targeting.”

Cardwell said most traders who use the RSI focus their attention on trying to identify bullish and bearish divergences. He said basic price and momentum divergence can and does help to identify extreme overbought or oversold conditions in market momentum. 

“However, most traders fall prey to the concept of divergence and see it as the end or reversal of the prevailing trend of the market. All would be right in the world if markets were to reverse from simple divergence. But there are times when sentiment and momentum are so strong that the market continues to make new highs (or lows), which will keep the RSI at overbought (or oversold) levels for extended periods of time.

“Momentum and price corrections, when they do materialize, are usually sharp and swift. After these brief respites the market is then ready to resume its normal upward (downward) trend. With each successive new high (low) and divergence formed, anxious traders are ready to call for a top (bottom) and reversal of trend. However, in strongly trending markets, multiple divergences can and do develop, which only lead to corrections of the overbought (oversold) condition of the market.

“If a trader attempted to take positions based solely on divergences, he or she would need deep pockets and eventually exhaust his or her trading capital,” said Cardwell.

While Cardwell takes note of divergence, he said that only shows the market is overextended and needs to correct the overbought or oversold condition. Even though the RSI is considered a momentum oscillator, he said it has more values as a trend-following indicator.

“One of the guidelines I have established for myself is to identify a range for uptrends as well as downtrends. As the market trends higher or lower I will adjust the normal range of RSI (70-30) to account for the shift in market momentum and bullish or bearish sentiment on the part of the traders. The fact that this adjustment needs to be made in the range of RSI is one of the first indications that the market is undergoing a trend change.”

The ability of a trader to recognize a trend change quickly, reverse a position and trade in the direction of that next trend is the skill that traders must develop to be successful, said Cardwell. “By having a position in tune with the trend, the trader will have the opportunity to participate in the bigger market moves, which generate larger profits.”

Cardwell has what he calls “Three Keys to Success: have a trading program, patience and discipline.”

How to Turn any Forex Trading System into a Money Making Machine

How to Turn any Forex Trading System into a Money Making Machine

Posted by Casey Sheldon on Monday, January 26, 2009 Under: Trading Strategy

Forex traders often have times where they can not find a single Forex system that makes money. As they continue looking for system, they start getting a good idea of what works and which type of trading systems produce results. There is however, a different approach whereby ANY forex trading system can be made more efficient and over 90% of systems profitable.

90% of all trading systems can be optimised to be profitable. This process is however, not easy and requires some trading experience, knowledge, expertise and creativity. This approach is not for the lazy trader who is trying to find a plug and play solution. 90% of trading systems available on the market today are merely under optimized. They require just a little more from the trader to make them profitable.

This process often leads to the conclusion that it is not the trading system that creates successful traders. It is the trader with a thorough approach that creates good trading systems for themselves. They therefore own the system 100%. Failing traders in general do not have a positive approach or the knowledge to stick with or fix a reasonable system. They would rather move on to another sub optimised system. They never fully own the system they are trading because they have not optimised it or have not really understood the strengths and weaknesses of the system. They would rather trade it with the default settings and hope for the best. This sometimes works in the short term.

The sad fact is that almost all trading systems (90%) can be made more profitable very, very easily. There are a number of techniques to do this. Below are a few that may give you food for thought.

Reversing the trading direction on an unsuccessful or disastrous trading technique can produce good results. If you think that a particular trading technique is trading suicide. That it will produce unacceptable losses all the time. Why not be brave and simply reverse the trade direction on all deals. This simplistic approach has turned some real dog systems into winners. This work particularly well when the stops and targets are the same size.

Optimising the settings of the existing trading system will teach you the strengths and weaknesses of a system. Most system have variables and the system results can be optimised by find the best settings, time span, currency, stops, targets etc for a system. With the ability to turn most systems into trading robots this is very easy to do. In general changing the size of stops and targets alone can produce amazing results.

Introducing a filter to the existing trading system can improve results dramatically. A trading filter either improves the systems chances of success or eliminates the negative deals. It can be an additional indicator or additional information that must be taken into account before trading. A filter can therefore be an indicator, only trading at a certain time of day, only trading under certain volume conditions, only trading in trending or sideways markets, not trading near major announcements, using the relative strength of currencies when compared to each other, etc. Using multiple timespan confirmations eliminate many doubtful trades.

Introducing the appropriate money management and position sizing approach can make an unsuccessful technique profitable. You always want to increase your risk in winning streaks and decrease your risk in loosing streaks. You can make money with a poor technique that has clear winning and losing streaks.

This process of optimising systems is fun and educational. It adds a lot of enjoyment to Forex trading. So many traders spend a disproportionate amount of time trying to find the absolutely perfect Forex trading entry technique. They waste so much time chasing the evasive Holy Grail. Some never stop this search for perfection in this less than perfect Forex market. Some never stop to consider being creative and fixing what they have got.

In all of this the most reliable systems is often the simplest ones. After all you only need a tiny edge over the market to make money. Trading basic horizontal and non horizontal support and resistance principles, taking market phases into account, using momentum appropriately, sizing your targets and stops well, and managing your risk through good position sizing plan is all it really takes. Forex trading can be so much fun when this happens.

http://www.winnersedgetrading.com

How to Trade the Bollinger Bands Well

The Bollinger Bands (B-Bands) technical study was created by John Bollinger, the president of Bollinger Capital Management Inc., based in Manhattan Beach, California. Bollinger is well respected in the futures and equities industries.

Traders generally use B-Bands to determine overbought and oversold zones, to confirm divergences between prices and other technical indicators, and to project price targets. The wider the B-bands on a chart, the greater the market volatility; the narrower the bands, the less market volatility.

B-Bands are lines plotted on a chart at an interval around a moving average. They consist of a moving average and two standard deviations charted as one line above and one line below the moving average. The line above is two standard deviations added to the moving average. The line below is two standard deviations subtracted from the moving average. 

Some traders use B-Bands in conjunction with another indicator, such as the Relative Strength Index (RSI). If the market price touches the upper B-band and the RSI does not confirm the upward move (i.e. there is divergence between the indicators), a sell signal is generated. If the indicator confirms the upward move, no sell signal is generated, and in fact, a buy signal may be indicated.

If the price touches the lower B-band and the RSI does not confirm the downward move, a buy signal is generated. If the indicator confirms the downward move, no buy signal is generated, and in fact, a sell signal may be indicated.

Another strategy uses the Bollinger Bands without another indicator. In this approach, a chart top occurring above the upper band followed by a top below the upper band generates a sell signal. Likewise, a chart bottom occurring below the lower band followed by a bottom above the lower band generates a buy signal.

B-Bands also help determine overbought and oversold markets. When prices move closer to the upper band, the market is becoming overbought, and as the prices move closer to the lower band, the market is becoming oversold. 

Importantly, the market’s price momentum should also be taken into account. When a market enters an overbought or oversold area, it may become even more so before it reverses. You should always look for evidence of price weakening or strengthening before anticipating a market reversal.

Bollinger Bands can be applied to any type of chart, although this indicator works best with daily and weekly charts. When applied to a weekly chart, the Bands carry more significance for long-term market changes. John Bollinger says periods of less than 10 days do not work well for B-Bands. He says that the optimal period is 20 or 21 days.

Like most computer-generated technical indicators, I use B-Bands as mostly an indicator of overbought and oversold conditions, or for divergence--but not as a specific generator of buy and sell signals for my trading opportunities. It's just one more "secondary" trading tool, as opposed to my "primary" trading tools that include chart patterns and trend lines and fundamental analysis.

Which Timeframe Should I Trade?

Which Timeframe Should I Trade?

One of the main reasons traders don’t do well as they should is because they’re usually trading the wrong timeframe for their personality. New traders will want to learn how to get rich quick so they’ll start trading small timeframes like the 1-minute or 5-minute charts. Then they end up getting frustrated when they trade because it’s the wrong timeframe for their personality. 

Let me begin here by telling you a story: 

Finally after a long period of timeframe unfaithfulness, we felt we were most comfortable trading the 1-hour charts. This timeframe is longer, but not too long, and trade signals were fewer, but not too few. We now have more time to analyze the market and didn’t feel rushed anymore. On the other hand, we have a friend who could never, ever, trade in a 1-hour timeframe. It would be way too slow for him and he’d probably think he was going to rot and die before he could get in a trade. He prefers trading a 15-minute chart. It still gives him enough time (but not too much) to make decisions based on his trading plan. Another buddy of ours can’t figure out how we can trade a 1-hour chart because he thinks it’s too fast! He trades only daily, weekly, and monthly charts. 

Okay, so you’re probably asking what the right timeframe is for you. Well, buddy, if you had been paying attention, it depends on your personality. You have to feel comfortable with the timeframe you’re trading in. 

You’ll always feel some kind of pressure or sense of frustration when you’re in a trade because real money is involved. But you shouldn’t feel that the reason for the pressure is because things are happening so fast that you find it difficult to make decisions or so slowly that you get frustrated. When we first started trading, we couldn’t stick to a timeframe. We started with the 15-minute chart. Then the 5-minute chart. Then we tried the 1-hour chart, the daily chart, and 4-hour chart. 

Trading Timeframes Are Usually Categorized Into Three Types:

1.   Long-term 

2.   Medium-term or swing 

3.   Short-term or Intraday or Day-trading 

Which one is better? It depends on You....

You have to decide what the correct timeframe is for YOU. You also have to consider the amount of capital you have to trade. Shorter timeframes allows you to make better use of margin and have tighter stop losses. Larger timeframes require a bigger account so you can handle the market swings without facing a margin call.

When you finally decide on your preferred timeframe is when the fun begins. This is when you start looking at multiple timeframes to help you analyze the market.

Long or Short?   

If you ever look at a currency pair on different timeframes, you probably noticed that markets can move in different directions at the same time. A moving average may rise on a weekly chart, giving a buy signal, but fall on a daily chart, giving a sell signal. It may rally on an hourly chart, telling us to go long, but sink on a 15 minute chart, telling us to go short. What the hell is going on? All of the charts were showing the same date and time. They were just different timeframes. 

We used to just trade off 15-minute charts and that was it. We could never understand why when everything looked good the market would suddenly stall or reverse. It never crossed our minds to take a look at a larger time frame to see what was happening. When the market did stall or reverse on my 15-minute chart, it was often because it had hit support or resistance on a larger time frame. 

It took me a couple of hundred bucks to learn that the larger the timeframe, the more important support and resistance levels were. Do you see now the importance of looking at multiple timeframes? Trading using multiple time frames has probably made us more money than any other one thing alone. It will allow you to stay in a trade longer because you’re able to identify where you are relative to the big picture. 

Most beginners look at only one timeframe. They grab a single timeframe, apply their indicators and ignore other timeframes. The problem is that a new trend, coming from another timeframe, often hurts traders who don’t look at the big picture. 

The procedure is for you to select your preferred timeframe and then go up to the next higher timeframe. There you make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred timeframe to make tactical decisions about where to enter and exit (place stop and profit target). Adding the dimension of time to your analysis gives you an edge over the other tunnel vision traders who trade off on only one timeframe. 

There is obviously a limit to how many timeframes you can study. You don’t want a screen full of charts telling you different things. Use at least two, but not more than three timeframes because adding more will just confuse the geewillikers out of you and you’ll suffer from paralysis analysis and go crazy. 

We like to use three time frames. The largest time frame we consider our main trend, the next time frame down as my medium trend and the smallest time frame as the short-term trend and our trading chart. 

You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement. You might use: 

•   1 minute, 5 minute, and 30 minute 

•   5 minute, 30 minute, and 4 hour 

•   15 minute, 1 hour, and 4 hour 

•   1 hour, 4 hour, and daily 

•   4 hour, daily, and weekly and so on. 

When you’re trying to decide how much time in between charts, just make sure there is enough difference for the smaller time frame to move back and forth without every move reflecting in the larger time frame. If the timeframes are too close, you won’t be able to tell the difference, which would be pretty useless.

Secret Behind why the Candlestick Moves

Focus Point: Behind The Candles

The candlestick chart is what we watch to see where the price is moving in the forex market. Did you ever stop to think about what is happening behind the candlesticks to think of why a price is moving the way that it is? Many forex traders do not understand the reason that currency pairs move the way that they do and that is one of the biggest keys in becoming a profitable forex trader.

Some traders just rely on indicators instead of knowing what is going on to make the market move. If you just trade indicators without having a greater understanding of the market over a period of time the market will beat those traders because if you understand what is happening you can make more educated trades.

To move the price of a currency takes a large amount of money, for example it takes 35 million dollars just to move the price half a pip in peak trading times. So where does all this money come from? The answer to that is the big time movers in the forex market. These movers are the central banks corporate investors, brokers and investment fund companies. The other smaller players in the market are the retail traders or the “dumb money” as the big boys call us. The retail traders are the individual investors and do not have enough money to move the price at all. There are also scalpers, those are the ones that are putting up large amounts of money for very small price movements in off market hours.

So now that we know who is behind the candles, now we need to know what are they doing and how can I profit from this information. The big boys trade at the beginning of the trading session in the U.S the session starts at 8 am Est. They are attempting to get there trades in early in the trading session an make a minimum of 55 pips, but probably more. That is because they are putting large amounts of money at risk and they do not want to make small gains for such a large amount of risk. Now they put up large amounts of money an the market begins to move because they put up enough money to make it start to move. The best way for retail traders will be profitable is to follow the big boys.

So how do you know when the big boys are entering a trade? First thing is they only trade at the market open that is why there is so much movement in the beginning. So that means since the forex players will be in at the open that is when we the retail players should be in the market following there moves. Don't trade after hours with the scalpers stay in for the larger price movements. Next, you will know when you see the candle moving in one direction very quickly when you see a five minute candlestick moving 15 pips you know that billions of dollars are getting into the market. So that automatically tells you who it is, getting in a trade it is the “big boys”. There is another key that can help you and that is find charting software that gives indicators when large amounts of money comes into the market at one time. There are software services out there that provide these type of indicators which proves invaluable to retail traders.

http://www.winnersedgetrading.com