ven novice forex traders know how the unexpected twists and turns of the market can be thrilling, surprising and often frightening. Getting into the market without a solid trading plan and a sound foundation in technical and fundamental analysis is a little like getting on a roller coaster without a safety harness. The first abrupt change in direction is likely tothrow you right out of the car.
However, one of the forex market’s advantages is its tendency to trend. Like any market, it’s certainly subject to periods of increased volatility and unpredictable activity, but there are a number of tools and techniques that traders can use to both forecast potential outcomes and help manage risk in almost any market condition. Because of its trendingnature, being able to spot potential forex market tops and bottoms (points at which the market may reverse a trend) can be a great help in determining when and where to enter and exit the market. At FX360.com, we use a number of techniques to help forecast price movements and trend reversals.
Riding the Price Roller Coaster: Three Techniques for Spotting Market Twists & Turns | FX360.com
2Relative Strength Indicator (RSI) Roller Coaster Strategy
n interesting way that we determine a potential change in a trend on shorter-term time frame is through our RSI Roller Coaster Strategy.
The strategy hinges on using the RSI to alert you to overbought or oversold market conditions and tends to be more efficient in rangebound environments where oversold and overbought situationssignify a change in the trend. Typically, when the RSI rises above 70 the market is overbought, while a reading below 30 represents an oversold market.
There are just a few basic components of this strategy:
To take a long (buy) position:*
1. RSI reading should be less than 30. 2. An up-candle should form and close sending an RSI reading to greater than 30. 3. Consider going long at the marketprice on the open of the next candle. 4. Set profit targets and risk management levels based on your individual trading strategy and tolerance for risk.
To take a short (sell) position:*
1. RSI reading should be greater than 70. 2. A down-candle should form and close pushing an RSI reading to less than 70. 3. Consider going short at the market price on the open of thenext candle. 4. Set profit targets and risk-management levels based on your individual trading strategy and tolerance for risk.
Overbought – A market that has risen to the point where it may be considered to be overvalued and may present an opportunity to sell. Oversold – A market that has fallen to the point where it may be considered to be undervalued and may present an opportunityto buy.
*Note: This guide does not constitute a recommendation to follow a particular trading strategy. Each trade should be considered carefully as to how it fits with your individual trading strategy, including risk tolerance.
Let us show you how to add the RSI indicator in DealBook®360.
Contact GFT at 1 800 465 4373 or click here to start a live text chat.
Riding the Price RollerCoaster: Three Techniques for Spotting Market Twists & Turns | FX360.com
Relative Strength Indicator (RSI) Roller Coaster Strategy
EUR/USD 4-HR USD/CHF 1-HR
Source: FX360 Source: FX360
The EUR/USD four-hour chart above shows the RSI Roller Coaster in action from early to mid February 2009. The pair ranges with no clear trend over thecourse of a couple of days. The RSI reading finally breaks below the 30 level after a temporary decline. The RSI Roller coaster strategy then sets up as the candle sends the RSI back above 30 and triggers a potential buy signal.
Shorter-term timeframes tend to produce an abundance of potential RSI Roller Coaster formations. On the one-hour chart above, the USD/CHF developed two setups within 24...