Range Trading With The RSI Indicator

For most of the time, currency pairs in the Forex market are trending by moving sideways, or trending up or down, within a certain price channel. For trading in such a market, use the scalping technique with the RSI indicator. These short trades, often only a few hours in duration, keep the pips coming while you wait for a bigger move.

The Relative Strength Index (RSI) is a popular oscillator. It’s a lagging indicator, measuring the past momentum of a currency pair’s price by comparing upward price pressure (green candles.

If you use candlestick charts against the downward price pressure (red candles) over a defined period of time. This is usually 14 days, the default setting in most software packages, but experiment to see what works best for you.

Like most oscillators, RSI is displayed as a squiggly line within a window beneath the chart itself. It varies up and down on a scale of 1 to 100, like a percentage, so it’s easy to understand.

The Technique

The RSI is excellent for range-bound markets. When the RSI climbs above the 70 line, that indicates the currency pair is overbought and that the people who purchased should be ready to sell it, thereby lowering the price; when it drops below 30, it’s been oversold. When the RSI crosses back over that point a second time, that’s the signal to enter the market.

For example, let’s say the GBP/USD is range-bound and dropping toward its support level. Below the chart, the RSI indicator follows it down and drops below 30. That warns you the currency pair has been oversold, and that people should be ready to purchase it, which means the increased buying pressure will cause the price to rise.

If you purchased the GBP/USD at that point, because other traders watching the RSI might not yet have caught on, the price might still be falling. You could be stopped out, losing pips.

But when the RSI changes direction and rises back above the 30, that’s the time to enter the market long. Place your stop below the price support level so that market jitters won’t trigger it accidentally, then sit back and count the pips as the price climbs back to its resistance point.

When the price reaches that point, close your trade. Then watch the RSI to see if it climbs above 70, when you can reverse the procedure.

This sort of range trading is a form of scalping. It doesn’t earn many pips at a time. But they add up, and if the signals are strong enough to justify the risk, you could always purchase more than one lot, compounding your pips as if they were interest.

Another way of reading the RSI is called divergence. That’s when the price on the chart reaches a new high or low, but the RSI doesn’t follow suit. It can be a powerful tool, too, because usually the price will change direction to follow the RSI rather than the other way around, and you can scalp more pips when the price moves to catch up.

Candlestick Reversal Patterns

Anyone who studies the stock market has undoubtedly heard of candlestick charting. Their history goes back almost four centuries as a method of technical analysis used by Japanese rice traders. It wasn't until the early 1990's that candlestick charting made its way to the western world. As popular as the technique has become in the west, it's hard to imagine a time when there was little information able to be found on the subject.

All a person needs to do is type the term "candlestick charting" into their favorite search engine and they are presented with all types of information on the topic. There are numerous websites, articles, books, software, courses, and videos. There are even candlestick games and flashcards!

The subject has been highly commercialized due to the desire of new traders wanting as much information about the subject as possible.One of the drawbacks of the excess information available on the topic of candlestick charting is that there is as much bad or incomplete information as there is good. Unfortunately, the trader new to candlesticks takes this partial or downright bad information into the trading arena and experiences financial loss at the hands of the stock market. Why? Well, just like any other type of stock analysis, "it's never quite as simple as it sounds".

Candlestick charting is often touted as a "holy grail" in the world of trading stocks, but nothing could be further from the truth. While it's true that using candlesticks can give the trader a method determining whether or not a trend may be getting ready to reverse, it's also important to remember that stocks rarely just turn on a dime and reverse course. If you look at a healthy trend on a stock chart, you'll notice the price movement from one end of the trend to the other takes kind of a zigzag course while the overall price movement moves toward the direction of the trend. If you are looking at a candlestick chart, you'll also notice there will be a multitude of reversal signals that mean nothing more than a slight pullback in price as investors take profits, NOT a trend reversal.

So are candlestick reversal signals a viable method of technical analysis? You bet they are! In order to use candlestick reversal signals successfully you need to understand technical analysis in general.

There are points of price resistance and support that will show up on the chart and most technical analysts learn them early in their studies. Just like any other method of "predicting" a change in trend, candlestick reversal patterns need to be applied to these areas of support and resistance as well. Once the trader understands the proper application of candlestick reversal patterns they can also see the results in their portfolio.

How to Trade Forex with the Stochastic Indicator

The Stochastic is an Oscillator that is typically used to identify overbought and oversold conditions in your day trading.. The indicator consists of two lines: % K and %D. These two lines fluctuate in a vertical range between 0 and 100. Readings above 80 are considered overbought and readings below 20 are considered oversold.

Many traders use Stochastics to generate buy and sell signals. When the faster %K line crosses above the slower %D line and the lines previously crossed below 20, a buy signal is generated. When the %K lines crosses below the %D line and the lines previously crossed above 80 a sell signal is generated.

After identifying a trend it possible to identify buy and sell opportunities. If the trend is up as on the eur/usd daily chart below then we take only buy signals as long as the trend remains in place. We ignore the sell signals and weaken the stochastic by changing the settings to 5,3,3 which will generate more signals and show the hand of the weaker players in the market.

On its own the stochastic generates too many false signals and plenty of whipsaw which can lead to losses.

As we can see from the above daily chart the eur/usd continued its uptrend from 21 August 2007 until 11 November 2007 a rally of 1400 pips before consolidating in a 500 pip range. The next breakout occurred as a continuation on 26 Feb 2008 rallying another 1400 pips before consolidating again.

As with all lagging indicators they are best used in conjunction with other indicators. The large highlighted trade shows a buy signal on the stochastic with the market dropping 300 pips. Stop losses should be placed below the last low or high. All the other signals produced good trades.

By using a 4 hr chart we can probably get better entries with tighter stops once we have a confirmed signal on the daily time frame.

leave space here