Why RSI May Be One of the Best Short-Term Indicators

The monthly charts can yield some profitable setups. Start display at page:. If the market falls it should drop along the line of the blue arrows. A bullish signal happens when the rsi falls below 30 and then rises above 30 again Then a daily candle touches the upper Bollinger band. Divergence happens on every time frame. Lets see how that worked out for him!

What is so fantastic about the 2-period Relative Strength Index (RSI) that a well-regarded trader like Larry Connors would suggest it as “the one” indicator? Let’s find out. Trading Rules – 2-Period RSI Strategy. Coupling an oscillator .

How To Trade MACD, Stochastic, and RSI Divergence Like A Pro

My feeling is that entering when the RSI is climbing above 30 from below would be a better method than when it's declining below The RSI can remain below the 30 threshold for months and the stock keeps declining.

On the last exit, at 75 or 90 or whatever value you choose, having the RSI dropping down from above tends to help avoid exiting too soon as price climbs. It took me 15 years to discover that I had no talent for writing, but I couldn't give up because by that time I was too famous. Subscribe to RSS feeds.

He may be reached at Support this site! Buy at tomorrow's open when the 14 period RSI goes below Set a stop loss for the entire position if price falls below the entry price by 5 times the day average true range ATR. Sell the entire position if it is held days without any sell activity. See Also DCB setup. When trading divergence, I consider the divergence to be the key signal. I use price action to laser target my entry point. I agree that combining the two is a great strategy. You will obviously miss out on some good trading opportunities by not using histogram divergence, and MACD line divergence happens much less often, but the setups that do happen will be stronger.

Another thing that you could do is wait for an extended trend before taking any divergence trade. In other words, divergence of any kind works better at the end of a trend. I only trade divergence after a trend has formed. How to use multiple timeframes with divergence? Divergence happens on every time frame. Notify me of followup comments via e-mail.

You can also subscribe without commenting. This site uses Akismet to reduce spam. Learn how your comment data is processed. Chris April 3, Jwan August 28, You are the best man. What are you think about divergence with supply and demand zones? Chris August 28, Hello Jwan, Thanks for commenting, and thanks for the kind words.

Thanks a lot mate. Momentum began to move up. Now when would you exit? This depends on the type of trader you are. Short-term traders would have exited here but longer term traders who are willing to wait through the cycles of Momentum 1, 2 and 3 would perhaps want to hold on to this trade for a longer catch of pips.

RSI feel deeply to 20 before establishing the next channel. Channels on RSI are always drawn parallel but they can occur different distances apart as is shown here. The yellow arrow locates the most recent RSI channel and the red arrow and red lines project what might be the next move in price. A break through the yellow channel line would set up another channel, etc.

All of the Negative Reversals would have been ignored in this particular climb of price. However, after the last signal price moved up and stabilized along the upper Main Channel and the Inner Channel.

This in my mind is a perfectly good place to take a trade short. There is risk but often you may catch a Range Shift which is always a bonus. Second, Negative Divergences often lead into the first point of a Negative Reversal.

Because of the location of price here, the risk might be well worth taking. You would be looking to exit at the bottom of the channel unless the lower channel is broken and shifts the Main Channel downward. The blue letters on price indicate where the letters would be and as you see on the diagram to the right. This is important for long term traders or traders willing to stay in a trade for several days. Notice also that the the CD part of the trade has gone through several different changes of the Inner Channels, three to be exact.

There were two trades that signaled at the yellow arrows under 60 RSI. Notice that price was at the top of the channel red dashed lines on price. Price never got above the white dashed line on price. The funny looking objects on this chart are price histograms and are not significant.

These trades are over about 2 a twp week period. The Main Channel is down and all of the trades were short. We are looking for short trades primarily when the Main Channel is down and vice versa when prices are up.

This is a good trading concept. When the Main trend is down then stay with the mainstream with your trades especially if you are wanting to be conservative. When the Main Channel is up then stay with uptrending signals or Positive Reversals. Always check the Main Channel of prices before you trade any time frame. If you are trading the hourly you may need to zoom back to the H4. If you are trading shorter time frames make sure you zoom back far enough to see the Main Channel, then to trade conservatively, find your signals in that direction.

There were two exits at the Positive Divergences. If you are only trading short because you are trading with the Main Channel then you will want to anticipate where the next Negative Reversal will come. Depending on the time of day and the velocity of the market you should be able to predict the next area where the signal will come. Learn to do this and you will become much more predictive in your trading. Trade 1 Conservative Trade is at the bottom of what is the Inner Channel.

Notice that we have a Positive Reversal at the same point. With price moving up as dramatically as it did, price would need to retrace some and we see the shower of Negative Divergences that begin to occur. We get a number of PRs as price retraces which we expect in the range of RSI and because of the Negative Divergences which are Momentum 1 Type retracement momentum signals.

Learn to let the first few Reversals in this sequence go as they form as a result of retracement, however as price gets to the lower level of your range then a Reversal signal to the upside as in Trade 2 Aggressive Trade could be taken with reward. Prices shot up previous to the signal with little retracement and then the last peak was straight up red arrow.

This is a good place to look for a short trade. We may have tried at the previous NR and we would have been stopped out. That would not have been a bad trade. That should not keep us from taking the second NR in particular after the straight up move. As it turned out this trade made pips with almost no retracement which would have easily exceeded the loss we might have taken with the earlier NR. Also, there was no drawdown. The MA above is a MA. The first arrow shows a NR that appears right at the MA.

When price began to climb the NRs begin to appear again. The last NR would have needed a little room for risk but it could have been taken as a good trade in particular when it fell below the second PR below the yellow arrow.

This brings forth another point, it is not imperative that trades always be entered right at the signal to make a profit in particular if this signal comes at a time of no momentum. The reason this often works is that many larger trading systems operate on moving averages.

Had you entered at that point and held, the bottom would have been pips away, something to think about. A possible way to take this kind of long-term position and still trade short term is to take a partial position size on the long term trade and let it run.

This can act as a hedge against short term losses, not to mention you can use other entry points on the Daily chart to add to your position. How long should you stay in this trade? If the market falls it should drop along the line of the blue arrows.

Key to the move is what will be the bounce in particular if the bounce does not rise about 50 or 60 RSI. This would mean that prices would continue to fall. Take a pen or pencil and see if you can mark the Range Shifts from left to right. Also, draw a box around where the ranges stayed within a particular area after a Range Shift. There are at least 4 Range Shifts and 2 ranges. The answers are on the following pages. This typically happens when prices are in consolidation. Notice however after the 3 rd shift RSI did not drop to the same levels it had before.

This would be your first clue that prices might be stabilizing into an uptrend. The green shaded area shows that this is what occurred. The 4 th range shift is down and then RSI stays in a lower range. Notice the difference on of the range tops and bottoms. Notice how in A there is an equal mix of all 4 signals. When prices move up the predominate signals are NDs and PRs. When prices begin to move down, PDs and NRs. Draw a horizontal ceiling line where RSI would need to remain below if prices were going to continue to drop.

If prices resist falling, where would RSI mostly likely stop in this next move? These are relative as there might be drops slightly below or above these numbers but on the hourly charts these areas would be representative of where price would range. This is a good habit to get into as you trade to create the possible scenarios where RSI needs to go. With the 4 RSI Signals you have good clues to help you.

The uptrend ended when the last higher high could not be taken out leading to a short period of consolidation. When the last higher low in the uptrend was taken out the downtrend began. This is the H4 time frame. If you are trading the H1 time frame dropping back a time frame and getting a feel for the direction of the trend will help in making decisions about which reversal signals to take. What is missing from this trading chart that would help in the execution of this trade? Adding the Inner Channel on price will help track where price is going.

It will also be of benefit when there is a shift in the channel 2. Simply outline where price is going. When the Main Channel is down the channels on RSI will be ascending as above and as price breaks through the bottom, new channels will be formed. Vice versa for uptrending Main Channels.

Locate the range that RSI is trading in. Here the range in about 65 to What this means is for price to continue downward, RSI must drop to a lower range and then not recover to the previous range but stay below it. What is the Main Channel direction for this currency pair? This is an hourly chart with the widest view possible. Prices are going up but the time period up is about 15 trading days, but what about the preceding days? The downtrend on the left side of the chart is just about equal to the current.

We want to find the overall direction. To get the proper perspective we need to drop back to the H4 time frame and zoom out. We see a 4 month consolidation of prices with a wide range from top to bottom.

In this case pips. This can be traded using Page Where would you place your stop loss if you wanted to maximize you chances to successfully trade this Positive Reversal? There is perfect answer but statistically trades with Momentum Type 3 could be placed at any of the locations.

Obviously, answer A offers the largest position size but also the greatest risk. Answer B offers a Page This would be more aggressive. Answer C is probably the best answer as strong momentum trades rarely take out the low of the valley bar in a Positive Reversal. Welcome to one of the easiest methods of trading the Forex market which you can use to trade most currencies, most time frames and which can.

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All analysis and resulting conclusions. Enter a trade in the direction of the trend when a pull-back is complete. The Stock Breakout Profits is a complete trading strategy for trading not only the.

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Mechanical RSI Trading System

The RSI-2 Strategy is designed to use on Daily Bars, however it is a short term trading strategy. The average length of time in a trade is just over 2 days. But the results CRUSH the general market averages. The Accumulated RSI(2) strategy will work well on the mini Dow as well as the two ETFs, DIA and SPY. The EasyLanguage code is available below as a free download. There is also a TradeStation workspace. Please note, the trading concept and the code as provided is not a complete trading system. RSI, Bollinger band strategy = In total, this system made 0 trades and 0 points gained, It is plain to see that the best system in this back test is the RSI candlestick strategy. It did not give many trading signals but, when it did, They were fantastic signals.