Power of The Relative Strength Index

Struggling newbies... I think I can help put you on the right track to consistent profitable trading. Criticism often times dominates in forums and rarely provides solutions if this has been your experience let's hook up and discuss my "Power of The Relative Strength Index" strategy.

Why do so many struggle in the beginning? Well, that answer depends on who you ask. I will tell you why I think so.

I believe the struggles are linked to rumors, over-trading, lack of technical analysis base and choppy markets.

Are you allowing news to dictate your decisions over technical analysis, are you trading large contracts, are you experiencing 100+ pip counter moves on regular basis? Timing entries is one of the most important aspect of trading... do you know how to buy a dip during bullish trends and how to sell into rallies?

Does any of this sound familiar?

Could you trade a indicator-free chart if you had to? (volume inclusion ok)

Once you gain a deeper understanding of the relative strength index (RSI) your trading success will improve.

READY NEWBIES! (what's about to be shared can be easily verified by simply studying charts)

"THERE'LL BE NO TREND WITHOUT RSI(9) FIRST GOING OVERBOUGHT OR OVERSOLD. REPEAT... THERE'LL BE NO TREND WITHOUT RSI(9) GOING OVERBOUGHT OR OVERSOLD. PRICE MOVEMENT SHOULD ONLY BE CONSIDERED STRONG WHEN THEY GO OVERBOUGHT/OVERSOLD; IT'S DURING THIS TIME YOU WANT TO LOOK TO PARTICIPATE, NOT BEFORE THEN".

Pullbacks follow overbought/ oversold conditions and it's these pullbacks you should make your focus; not breakouts which often times trap aggressive traders. CREATE YOUR SETUP TO COINCIDE WITH THIS CONCEPT.

For those whom want a suggested setup I'll offer one.
EMA20 / EM200 / RSI(9) / SLOW STOCHASTIC(14,3,3 OR 5,3,3 test to see which suits you best) / ADX(13) / PIVOT POINTS (DAILY PIVOTS for intraday traders and WEEKLY OR MONTHLY PIVOT POINTS for the longer term traders

Suggested Studies:
DOW Theory and Elliott Wave Theory. "Learn to trade only what you see and not what you hear"
Contract positioning (money management)
Patterns (very important)
Trend lines
Study your indicators

Closing comment:
Trading for the most part is waiting for the markets to get going and going alone with them. Calm markets are a traders enemy.
RSI will help you follow the markets (prices) via pullbacks and help you fade (counter-trend trade) trend exhaustions but you must first make sure you understand it. It's all gauging the power driving prices... LEARN IT WELL

GOOD TRADING

Hello i just read your post about using RSI. i am a newbie and would like to learn more about using the RSI and other reliable indicators to trade and make profit

I'd love to help.

The relative strength index tells traders when price patterns are strong and weak. This is critical info. to traders whether they're following or fading. No one wants to be stampeded after entering the market so they'd better gauge the power of driving price pattern. Learning how to read chart patterns and combine this knowledge with your power reads before entering trades. In forex few traders have real-time volume so they must have it together when trading the foreign exchange market. RSI and ADX are my favorites for gauging power AFTER I first get my tradable price patterns. I also pay strict attention to candle stick/bar length which also tells a story about crowd participation.

Whether it's convergence/divergence patterns or pullbacks RSI is you indicator. However, I do love and use slow stochastic BUT in my opinion RSI is the only indicator whom the retail forex trader can trust when they ask the question "Is the market truly overbought/oversold?".


Trends are ignited with ob/os and a study of any instrument with prove my case. When is a trader gambling?

IMHO it's when they allow news to guide their entries, when they don't wait for high/low re-tests, when they trade with contracts far too large and when they hop into calm markets. Forex will punish you so you'd better come with a full understanding of these things.

Study Study Study FIRST! THEN TRADE

Dex, my understanding is that oscillators (RSI, Stochastic, Williams %R) all measure rate of change in price, and their underlying math reflects this (similar to first level differentials in calculus). Hence they all pick up accelerations and decelerations in a price move; decelerations show up as divergences. Occasionally these result in a reversal.

The main difference in RSI's construction is that it uses Wilder's smoothing function, which is similar to the way EMAs are calculated (yesterday's value x period weight + today's value). But in essence it's just another indicator. All indicators are derived from price, and price is the result of sentiment. Over the years I've grown to realize that it's only rarely that indicators highlight a phenomenon that can't be seen from a suitable interpretation of price itself.

I'm always happy to be enlightened, though.
I'd be interested to know why RSI is superior to other oscillators, and or how it can be used to measure trader sentiment ('following' or 'fading') especially if it can be explained in mathematical terms.

Thanks,
David

How do you determine if RSI is OB/OS? Above or below the 50 level? I've just dusted my old Wilders book and he does'nt mention OB/OS. Thanks.

Orientos... prices are overbought above 70 and oversold under 30. In forex YOU'RE HANDICAPPED more than the average trader; therefore you had better have your act together before trading it. PATTERN RECOGNITION AND PATTERN STRENGTH READS ARE VITAL TO US.

Hanover...
IMO, Wilder is a bad dude and I say that in a good sense. He's provided the awesome ADX (which I also use) and RSI which are great contributions to the technical analysis community.

I happen to favor RSI but that's not my sole premise. My premise is that traders should wait until prices are overbought / oversold regardless of what indicator they use to tell them this information and then look to trade the pullbacks... not the break-outs as temptation would have them do. Pattern recognition is also vital but you need to know when these prices are overbought and oversold so you can avoid being chopped. Or course one could always lay blind orders at support and resistance levels with stop-loss protection orders at the determined fibonacci retracement and pivot points areas but I'm addressing hands-on trading.

So, let me put it this way for those whom like other indicators for overbought/oversold information. Wait until overbought/oversold conditions are met then look to trade the pullbacks and always be aware of the pattern.

Price is the ultimate king or course. Many people think fade when prices become overbought and oversold; THINK TRENDING TIME INSTEAD.

Oscillators look fancy but they have mostly been negative in my own trading, I have tried them all and made some of my own. When I finally dumped them my trading got a lot better.

Indicators lure many newbies from the most important aspect of trading; "PRICE ACTION analysis". In the final analysis all one really needs is a price chart and volume. They could use trend lines in place of moving averages and they can even calculate their own fib ratios and pivot points.

After learning Dow theory and Elliott Wave theory one should learn to trade naked charts and then they can experiment with indicators. If they find that indicators skew their analysis then they should trade naked charts and leave indicators alone.

There're many ways to be successful and they included naked charts trading and trading charts with indicators. What price say's rules over indicators.

The beautiful thing about trading is there're several ways to construct a set-up. We all meet thru our objectives... therefore at the end of the day you're either following or fading.

My premise! "After overbought / oversold conditions there'll be a pullback". Go ye and build your trend following system from this premise and you want regret it and by all means TRADE ONLY OVERBOUGHT / OVERSOLD MARKETS.

CALM MARKETS CHOP TRADERS!

i would like to know ,about how over laying ema on rsi
in meta trader 4

I sometimes like overlaying price with EMA's but as for combining it with RSI. I'm not sure but if it works why not. Just keep in mind that gauging the POWER accompanying price pattern should be the focus. Indicators are to help you accomplish this objective. This is very important for traders.

Price consolidates (range), power picks up causing price to break-out of consolidation and trend and during these trends there'll be pullbacks along the way and then the trend will exhaust by failing to make higher highs if it's an uptrend or failing to make lower lows. DOW theory and Elliott Wave principle explain these movements in much greater detail and I suggest first study them.

In forex real-time volume isn't available so it's very important that traders working with this handicap learn to read patterns first and secondly learn how to use indicators for enhancement. However, it is possible to trade without any indicators and for decades traders did so.

Read patterns and experiment with some of the indicators out there which report momentum strength like RSI, ADX, Mommentum, Stochastic, Bollinger Band and etc. I happen to favor RSI but the others have validity also.

The indicators merely help us and shouldn't put us at conflict with price action. One can tell if prices are range bound, trending, exhausted and reversing without indicators. Indicators just help us trade these phases after they've been determine. You can't trade a pullback if you haven't first confirmed there's a breakout or trend and you can't fade (counter-trend) without waiting for the price trending legs (patterns) to stop making higher highs or lower lows.

So, I suggest trading naked charts and for a while and slowly and carefully add indicators to help not change your reads. Indicators often times lure new traders from price reads and add confusion. They should help your reads! Starting out on naked charts allows you to understand to importance of reading (price pattern analysis) which is where a traders focus should always remain. I hope this information has been helpful.