The RSI Trade

Hi Kareem,
Thank you for showing a chart of my default setup.

If I may, there is one setting that I would change - the 21 period RSI is way to sluggish in defining the RSI levels - using a 9 period or possibly a 14 period would be more appropriate.

Overlay a 9 period on the 21 period and see the difference - then refer back to my earlier posts on RSI S/R levels, they work very well (well at least for my stocks)http://cdn.forexfactory.com/images/icons/icon7.gif

My layout may look a bit cluttered to some, but I am a bit lazy, I let my indicators do the work, I have complete faith in them as I know them pretty well.
All I need is a quick glance at a chart to know if there is a possible trade. No need to draw new price S/R or new Fibonacci lines etc etc

For me , trading S/R is the name of the game and the RSI and Bollinger Bands define them excellently - no ifs, buts or maybe
The stochastic is just a timing tool

However - PRICE IS KING, it must confirm any analysis i.e. it must show follow through in the direction of the analysis before taking or exiting a trade.

The RSI must be one of the most versatile and informative trading aids available, and well worth the effort required to understand its nuances

Trade management is what determines whether or not we are profitable, discipline and low risk trades determine whether or not we stay in business

I hope the above will be of use to some readers - its only my opinion.http://cdn.forexfactory.com/images/icons/icon10.gif

Don't worry, be happy
Peter

Peter Thanks for your input a few posts back, made the changes and was lucky to catch EU on the way down..

Hi Rebelheart,
Nice one!http://cdn.forexfactory.com/images/icons/icon14.gif

Trading extremes can be really good and they tend to have a high success rate.

On your trade you had advanced warning of the move with the Stoch being oversold and the price being outside the upper band (which is an unsustainable condition and suggests that price will move back inside the band and typically retrace to the mean - 20sma). Having the advanced warning, maybe you could have trailed a stop below the price bars?.

RSI backed it up also, Mr Dependable.

S/R forever
Peter

Hi again Rebelheart,
Just looking at your chart again - to continue the analysis

(I do not have access to Forex charts - so I do not know the outcome - Stock trader)

As the RSI is in a consolidation phase - this is where patterns tend to form and is a good place to draw trendlines over the price action (or RSI trace)

That being so you could draw a triangle encumposing the last 4 price bars
Price is at the Bol Band 20sma (which is another form of S/R)
and the Stoch is at oversold and turning up

So what was the outcome?
Hopefully an upmove http://cdn.forexfactory.com/images/icons/icon11.gif ?

Peter

Peter price broke the lower line on the triangle by 13 pips, then went on north, when the breach accured the stcocks where heading up and rsi down, so id like to think in real time I would not have taken the trade, how ever when price breaks out at the top stocks are still heading up and rsi has broken R line... would have been nice to have been here to take that one, I will try to incorperate more drawing on my charts channels, wedges and the like... thanks again for you comments as always very helpfull and thought perfoking..

Rebel

Worst Speller in the world..

Hi Rebel,
Well there you go, you win some, you lose some, another business expence, that's trading!

HOWEVER. I would not have gotten into this trade either if it had kept going down. - I would only trade in the direction of the stoch
My entry would have been on a break of the upper trendline forming the triangle. If I had a pre order in the market, it would have been picked up as price reversed, but that would have been a fluke.
Its good practise to trade in the direction of the stoch.
Entry on a breach of the trendline would have been an aggressive entry

A more conservative entry:
As this breakout was from within the RSI range trading zone (40-60)
Wait until the rsi trace breaks above 60 for a long, or below 40 for a short
The odds are:
Above 60 confirms the start of an uptrend or below 40 confirms the start of a downtrend

For info:
We can also have a trend start from a reversal, or trend continuation from a major correction/retracement
Example - Long
When we have a downtrend or a major correction from an upmove, when this ends, price will either - reverse, pause and then reverse, pause and then continue down, or start range trading

The RSI will be in the 20 area
The Stoch will be oversold

The stoch will give a buy signal - but we do not know if this signal will reverse as it hangs around the 20 line and signal a downtrend continuation.

We should wait until the RSI passes up thro 40 before entering long - as we now have the makings of a new uptrend - if it continues up and passes thro 60 -great!

The above works for me, before using any of this ALWAYS check it out for yourself

Thanks for the chart Rebel (one of these days I might start trading Forex)

Have a great day - hope you are not snowed in over there, weathers great here in Australia and the pool looks crystal clear-30 degrees (like jumping in the bath)
Peter http://cdn.forexfactory.com/images/icons/icon7.gif

Hello everyone. I finally decided to jump into the conversation. I have been trading RSI for about 2 mos now. I started with Woodies CCI, but found I like the RSI better. I figured out about the trends line and using the 50 line kind of on my own from just sitting there and watching the indicator for 2 weeks w/o placing a trade. Having read through the rest of the post, you all have shown me even more pearls to use (20/60 & 40/80 relationships for instance). Out of pure curiosity I did a search on RSI in the forums and found this thread. I should tell you, it is a treasure trove to be sure. Anyway enough sunshine. I use the RSI w/ a setting of 21, along with what i call a stochastic array. Basically coded the following as a complete study for the thinkorswim platform: RSI; 21, Stoch: 5/3, 8/5. 17,3, 44,3. i use the 5/3 as a timing for the current timeframe I am using (5min) and the longer stochs give me a clue as to what is happening on the progressively longer TF's (15m,30m,2hr). I posted a pic of a recent trade i had. I didn't get max pips as closed out the remaining contracts price hit my second target. Lesson: Be patient, let the indicator do what it is supposed to do. Oh well, live and learn. Thanks for all of the great info, keep up the good work. The heavy yellow line is the RSI.

The rsi and stoch are both momentum indicators, but obviously constructed differently.

They both operate between 0 and 100 limits

However:
The RSI(9): uses three zones to move between 0 and 100
1.e. uptrend - 40-80, above 80 is an extreme
downtrend - 20-60, below 20 is an extreme
overlapping zone - 40-60 where price will be range trading, or passing thro from a downtrend to an uptrend and vice versa.

The Stochastic:
The stoch can travel its whole range 0-100 (20-80) in measuring a single move
i.e. it is much more responsive than the RSI

When we combine the two - its like looking at the big picture via the RSI while the Stoch buy and sell signals determine the individual moves that form the building blocks in the construction of the RSI chart

Here's something to try out to see if the combination can work for you.(This is only one of the uses of this combination)

Trading the RSI S/R levels
RSI(9) S/R Levels: 20,40, 60,80 and (50?)
Price must confirm your analysis i.e.

If price is moving up to or at the 60 level and stoch (5,3,3,) is at oversold and giving a buy signal - then the odds are that the 60 level will break
In this case put a buy order in just above the high of the signal bar (the bar at/near the resistance level[60])
Stop location?- depends on your risk tolerance. I set mine just below the signal bar.

PS When the stoch gives a buy/sell signal at any of the RSI S/R levels - it is always worth checking out

The market is driven by fear and greed i.e. the pyschology of the crowd (participants). If we become part of the crowd, we tend to act in a similar manner to the crowd - who are losers!
Stand back and do your own analysis - what works for you!!

Hi Ronin,
Nice to see you posting, I'm sure Kareem will welcome you to his thread

I colour code my RSI levels to coincide with what I call the uptrend and downtrend as defined by Andrew Cardwell (think that's his name - he is the MAN)
green: 40 and 80
red: 20 and 60
Wish I knew how to hatch in the 40-60 area - too complicated for me
But I'm good at switching my computer on and off. http://cdn.forexfactory.com/images/icons/icon6.gif

The RSI has other applications, including helping to filter out false Stoch signals. Nothing is perfect.

Have a nice weekend
Peter.

Interesting comment that you made about the RSI--

"The RSI must be one of the most versatile and informative trading aids available, and well worth the effort required to understand its nuances"

I have know it for years. When I started working with it in 1978 I knew I had found something. And from what I have seen in some of the posts here, others also realize it is a powerful tool and indicator. The ways in which I use it and have built models based on my RSI work that are very different. However, I do want to let traders know that there are some people who are claiming to know my work, (some have even claimed some of my work as their own by just changing the names of my Positive / Negative Reversals). Just a warning to be aware of what is out there and by whom. I still offer my courses and original work if you wish to learn it directly from me. You can reach me at cardwellrsiatgmaildotcom

Andrew Cardwell




[qote=lizpet;3360306]Hi Kareem,
Thank you for showing a chart of my default setup.

If I may, there is one setting that I would change - the 21 period RSI is way to sluggish in defining the RSI levels - using a 9 period or possibly a 14 period would be more appropriate.

Overlay a 9 period on the 21 period and see the difference - then refer back to my earlier posts on RSI S/R levels, they work very well (well at least for my stocks)http://cdn.forexfactory.com/images/icons/icon7.gif

My layout may look a bit cluttered to some, but I am a bit lazy, I let my indicators do the work, I have complete faith in them as I know them pretty well.
All I need is a quick glance at a chart to know if there is a possible trade. No need to draw new price S/R or new Fibonacci lines etc etc

For me , trading S/R is the name of the game and the RSI and Bollinger Bands define them excellently - no ifs, buts or maybe
The stochastic is just a timing tool

However - PRICE IS KING, it must confirm any analysis i.e. it must show follow through in the direction of the analysis before taking or exiting a trade.


Trade management is what determines whether or not we are profitable, discipline and low risk trades determine whether or not we stay in business

I hope the above will be of use to some readers - its only my opinion.http://cdn.forexfactory.com/images/icons/icon10.gif

Don't worry, be happy
Peter[/quote]

The patterns you are speaking of "MDRP's are what John Hayden renamed my original work I called Positive and Negative Reversals. There are a lot of people who have written articles and books claiming some of my work as their own. John was one of my course students who probably without my courses could have not written a book. You can reach me at cardwellrsiatgmaildotcom.

Hi Ronin,
Thank you for your post. I hope to see more post/charts about your set up. I have tried TOS before and it is a nice platform.
Kareem

Hi Peter,
I am currently using your levels on all of my charts, stocks and FX.
Thanks
Kareem

Looks like Mr Cardwell has put me in my place, and it is true that I first read about the 20,40 etc levels in John Hadens book.

That was when I realised the potential of the RSI and started "playing around with it a bit more"

I have no intention of stepping on his toes or taking any credit.

I was just telling the RSI story as I see and use it

So I'll leave it to him. I'm too old for any confrontational stuff - only thing is he'll probably charge you for his expertise.

Trade what you see
Peter

Hi Kareem and friends
Just a parting shot.......

If you believe in the RSI S/R levels - they may be a good location from which to start drawing your trendlines thro the RSI peaks or troughs (makes sense to me)

I tried it on a few stocks this afternoon and it proved to be quite reliable - I'm sure it can be refined

Helpful condition:
If the Bollinger Bands are wide apart and more or less running horizontal - this suggests range trading conditions, and the distance between the bands will give you an idea if or not the risk / reward is worth trading.
The bands will also be wide at turning points (end of trends and possible reversals)

Trade for profit, not to be right.
Peter

OK you asked for more, so here goes. Please bear with me as I try to describe what I look for in one type of set up. First let me say that I don’t solely rely on the RSI for trade signals. I feel that PA has to be reinforced by whatever indicator(s) you should choose to apply. Also, I believe support and resistance is vital in understanding not only where price may be headed, but where it came from (more on this another time). Below I posted one example of what I look for when trading anything intraday utilizing a top down approach. So there is no misunderstanding, this is NOT a trade I took, (it was New Years Eve day here in the states. Paint dries faster than the market moves then) but it serves as a fine example none the less.
In the first chart (USDJPY 2hr) I’ll have you note the red vertical line. This is to give a point of reference as we progress down the TF’s. You see that the price has stalled and the RSI (heavy yellow line) is showing weakness, having breached into the overbought area (>70 in this case). But just as important is how the stochs (other colored lines) are converging together almost to a point. This is significant in that it shows the short (5/3-purple & 8/5-green), medium (17/3-red) and long term (44/3-pinkish) momentum have all converging to the same point (overbought in this case) and starting to roll over. The nice thing about this set up, is it takes some time for this event to occur, giving you plenty of time to coordinate the other time frames, and work out your entry and exit.
On the next chart (USDJPY 30m) you’ll see the same event occuring.The PA, RSI, and stochs are demonstrating the same characteristics as the 2hr. Makes sense as the 30m builds into the 2 hr.
Next chart (USDJPY 15m) on this chart we see the same characteristics, but now we can see the divergence of the RSI and Price. The price is making a higher high, while the RSI makes a dbl top. Make special note of the stochs in this chart. They have already gone through their convergence (blue vertical line) and have begun to breakdown.
Finally The last chart (USDJPY 5m)! You can see that the stochs had converged several hours prior to the red vertical line and that the RSI has been weakening during this time as well. However, it’s not until the red & Pink stochs fall <80, ( at the red vertical line) that price finally starts to breakdown as well. My entry would be on the close the green candle next to the vertical line (approx 93.10), as this is where the near term resistance is to be found, thereby giving you a low risk, high probability trade. Believe it or not I typically only use a 10 pip stop with this setup as my statistics show an avg MAE (Maximum Adverse Excursion, or amount of heat taken during trade life) of 6 pips.
As you can see, this set up is one that can be seen well in advance and requires some amount of patience as you wait for its completion. In retrospect I wish I HAD taken the trade, but, as I said earlier, it was New Years Eve day in the states, and this is a pretty thinly traded time (plus the fact it was the last trading day of the week…don’t care much for ‘over-the-weekend’ carries). Oh well….next trade J.
Thanks for letting me ramble on, I hope I didn’t bore any of you too much. Happy Trades!

i'm very,very sorry and i apollogise with you because i don't now how to put a chart on forum(i use Oa...),but i'll explain to you.look AUD/USD dailly chart with RSI 14 and draw a trend line on rsi.you'll see how after the broke,the R becomes S-the pull back off price action-(you have to notice that the SL could be hit and is risky).now change RSI 21 and you'll see how the same trend line can take inside even the pull back and brokes in a safer way.however RSI brokes earlier than the price. P.S. it is only my humble opinion.

in 14/21 it is all about how your trade way is-conservative or agressive-.in an agressive way you could take the first candle after the reject from S (trend line)point,meanwhile in conservative way you wait the broke and maybe a confirmation off price.

Hey everyone, It’s me again. This time I wanted to share my method for buying an OTM Option having a good chance of success. I’ve always felt buying an OTM option was a bit like buying a lottery ticket, low risk, low probability. But there is a way to buy an OTM option that does have a ‘better than not’ chance of giving you a return. Maybe even a big one. The chart I posted has a lot going on so I’ll try to explain as clear as I can (I don’t think any of you are dense, I am just not always good at getting the stuff outta my head and thru my mouth ).
Again using top down analysis, I placed an alert about 2 weeks prior to this trade on the SPY (S&P 500 ETF) to tell me when price hit $115. Well the morn of Monday January 11, 2010 it triggered pretty much right after the US market open. So I bought some SPY FEB10 $109 puts, here’s why:
SPY 30m chart:
You’ll have to trust me on this; during the week prior to this all of my stochs had already converged and have begun to breakdown on the 30m charts and the RSI has been ever so painfully slowly losing elevation. I use this for my entry and exits when doing this type of trade, but look at weekly & daily for the set up signals. On the chart at the very top you’ll see a pink horizontal line (115.27) this is a resistance level from the monthly chart, the reason I set alert. My expectation is that price will approach/hit this and then retrace. Anyone who has been watching the US markets and is a contrarian has noticed the weakness and has been waiting for the pull back. Unfortunately this has been the case for many weeks! But I am no different, but I digress.
To continue; as I said I bought some FEB 109 puts, and by mid day the market gave me my target (I know, I shoulda had one before I started). You can see that to the right of the blue vertical line, at mid day, SPY hit support, and the RSI & stochs (particularly the pinkish one-long term momentum) have all begun to fall away from overbought. At this point, I expected a dbl top would be forming, and using the fib tool pick the highest peak (first 30m bar of the day) and dragged down until the 50% line was at the low of the (assumed) valley, using the price at the 0% line as my target. You notice how this lines up very nicely with a prior support line (lucky me ). Now according to Candlestick theory, the midpoint of the big candle (again the first) is near term S&R. This area proved to be correct at the end of the day as price was rejected, thereby giving me my potential second peak. At the same time make note that the RSI has been rejected by the 70 line and has turned downward. So far all systems are ‘go’.
The next morning, I was given a gift when price gapped down at the open below the LOD of the day before (green S/R line), was rejected and steadfastly marched down to my target, the next S/R line. Once there, I sold my puts for nice, quick 40% gain.
Now was there some luck involved, probably. But trading is finding the situations where the odds are on our side for success, right? Remember, a good set up always works…..until it doesn’t. This time it did for me. In case you may have noticed, on Thursday 2 days later, price hit the $115 area again. Yes, I did the same thing, FEB 109 puts. This time however, my target is $111 as the price action for this week produced another intraday dbl top, and the RSI on the daily has finally broken my trendline. I’ll have to let you know how it all turns out. Thanks again for putting up with me and Happy Trades!

i was talking about this difference

Unlike my earlier posts, this trade utilized PA, S&R, and RSI (no stochs this time)
Despite a misread of things this morning this trade did work out a little for me, but I had to work for it. As depicted by the red vertical line, I entered the trade @ 1.4393 (short) as the RSI had broken my trend line, or so I thought. I waited patiently for the price decline, but as you can see in the chart, it didn’t come (at least not when I expected). As I said in an earlier post I use a 10pip SL per my stats, and as the chart shows, I needed it. I had decided to let this one breathe rather than close out, so you don’t think I suffer from a need to be right (I have a wife and 5 kids, so usually the only thing I am right about is being wrong! ), here’s why.
First off, as you can see on the chart, there was quite a bit of resistance above at 1.4398, & the often used ’00.00’. This is apparent from the long wicks on the candle tops. Taking this and the wedge pattern into account, I determined that one of four things would most likely happen and here they are in order of likely hood: 1) the market loves to test, so I would have the opportunity to close out at a smaller loss, 2) as I said the market loves to test, so it would fall back to 1.4383 allowing me a few pips to put into my pocket, 3) The market would test 1.4383 and it will fail, and I can play on, 4) price would test the 1.4400 are yet again and break thru (meaning this post would be demonstrating a loss). Do not mistake this as hope, it’s just how markets move (a hard lesson for me to learn, and maybe a topic for another day).
Anyway, as depicted by the blue vert line, price did fall back to test 1.4383. At this point I reevaluated my charts, and as you can see: the 2hr RSI had turned away from its trend line, the 30m had broken through its trend line as had the 15m. Seeing this, I decided I was now in the trade I should’ve been and to allow the trade to continue on its course (albeit with a lousy entry price). It may seem I merely found what I wanted, to justify staying in a losing trade, but I assure you, I would’ve closed out in a heartbeat if and/or when things changed.
And changed it did, lol. As depicted by the second red vert line, I closed out at 1.4381 when the RSI broke the minor trend line, giving my 10 pips for this one. Bad entry, poor R/R, all because I anticipated a move in price. Someday I’ll learn.
BTW, I see these posts can get pretty lengthy, if this or anything else is a problem, please let me know. My goal is to join in the discussion, not step on toes or be viewed as a loud mouth. Happy Trades!