Forex Trading Strategy Combining RSI, Full Stochastic Oscillator and SMA
Technical analysis is widely used by private traders and is becoming more and more popular. Fundamental analysis involves assessing the broader economy and what may specifically impact the financial product or asset you are going to trade. It is most heavily used by traditional stockbrokers and fund managers. Unfortunately, one of the things underpinning the effectiveness of fundamental analysis is that all market participants act in a rational manner. Therefore, the value of indices, or commodities or currencies will track a reasonable expectation based on fundamental influences.
I say unfortunately as many market participants can be gripped by fear and greed and act in a manner that is anything but rational. I have found that the main approach for most traders is technical analysis.
Stochastic RSI: How Two Indicators Combine to Provide a Powerful Signal in Trading -
Technical analysis is the study of actual movements in the price of a financial product. Despite what people may tell you, there are only two things that move prices. They are supply and demand - nothing more and nothing less. When demand for something is greater than supply, prices rise.
Conversely, if supply is greater than demand, prices fall. The cause of supply and demand of a financial product could be discussed for hours. However, the interesting thing is that no-one can be sure at any point why people may be buying and selling a product. Herein lies the beauty of technical analysis.
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At no time does technical analysis attempt to determine why there might be supply and demand, only that there are certain levels of supply and demand. By studying actual movements in the price, we can determine, to a great extent, the present levels of supply and demand for a financial product, and what market participants may be thinking, and can therefore analyse it as a potential trade. Indicators are the result of mathematical calculations done on price and volume data and are displayed on charts. It should be noted that no indicator is perfect, and no single indicator will be right all the time.
Indeed, several indicators will often produce varying signals. The fewer the number of periods you use, the more erratic the indicator becomes. A period RSI is popular. The RSI can be interpreted several ways.
RSI and stochastic oscillators video guide
A popular approach is to buy and sell when the RSI crosses the reference lines; that is, when the RSI crosses up above 30, this is interpreted as a buy signal, and when the RSI crosses down below 70, it is interpreted as a sell signal. Although the construction of the MACD is quite simple it is nonetheless quite powerful. The MACD is simply the difference between a short-term exponential moving average and a longer-term exponential moving average.
The most common combination is that of a period exponential moving average with a period exponential moving average. Another line is plotted alongside the MACD for interpretation purposes and is called the signal or trigger line. The signal line is often a nine-period exponential moving average of the MACD itself.
Both lines are then plotted either side of zero. If the shorter-term moving average is above the longer-term moving average, the MACD will be above zero, and vice versa. The Stochastic Oscillator is another popular indicator that is widely used by traders. The underlying premise is that when the price is rising, it tends to close near the high of a recent period, and when it is falling, the price closes near its low.
Thus, we will add daily pivot points. Pivots Points are an accurate indicator, as the most market participants are watching and trading these key levels. They are especially useful to short-term traders who are looking to speculate small price movements. We will also add the MACD indicator with When we start analyzing the chart, the first thing we should do is to look at the central pivot point and price. We are looking for signals above or below the pivot point. As you can see, this setup generated during 2 trading days 5 excellent signals. All of the trades were successful.
We then had 2 short signals, below the pivot. Look at the StochRSI at the time we took our short trades. It was clearly indicating oversold conditions. They were taught to trade the StochRSI the wrong way. To me, the StochRSI at those levels suggests a strong bearish pressure. As the MACD confirmed our trades, we were safe to short the market. The key to this system is taking the trades around the main pivot. We also have the advantage of looking differently at the StochRSI.
We are searching for market strength. As you can see, all signals were successful. The power of this system is the fact that we use tight stop losses. Once you bank a couple of winners, use a trailing stop and leave the trades to run to their full potential. By now, I think the charts are clear and easy to follow.
During the first day, we had 2 valid signals. The middle one was not valid because the MACD was above the 0-level when the price closed below the central pivot point. It will benefit you in the long run.
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Even though the trade would have been successful, we ignored it. The market gave us the opportunity to re-enter during a pullback to the pivot. The second day was a no-signal day.
Yes, there will be days when the price never comes to the central pivot point. Keep up to date with Liquid Blog. Related articles. Cryptocurrencies are a promising.. By Liquid In Product. January 21, Easy on the eyes! Introducing FIO addresses on Liquid At Liquid, we feel that your experience with crypto transactions should be smooth and hassle.. Subscribe to Liquid Blog.