How to use the relative strength index to make you a better trader

Every experienced Forex trader should know the four Relative Strength Index (RSI) trends in a currency cycle. The four cycles are: the positive and negative phases of divergence and reversal. These 4 RSI cycles have a direct correlation with determining the trend of a currency.

In the Positive divergence cycle, the price of the currency moves upwards and is considered to be bullish. This upwards movement helps the currency gain momentum. With momentum comes an increase in volume helping the currency price to keep climbing. As you identify this upward trend, you should enter the trade by purchasing the currency and keeping it until it hits its peak. Once the currency hits the peak of uptrend, a negative reversal starts to develop.
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A negative reversal starts when the positive divergence loses momentum. Even if the price continues to increase, you will see a slow-down of momentum and a decrease in volume. When both momentum and volume decrease, that signals that a negative reversal is developing. The negative reversal starts once the price stops moving upwards and starts to fall. At this point the price hits the highest point and you should close your open trades to pocket your profits. Of course, at this point you will also see this cycle turn into a negative divergence.

A negative divergence happens when the sentiment of the market turns from bullish to bearish and the price goes on a downfall or down trend. Many traders like to try to make profit in both movements by selling or shorting the currency here. However, a more advisable strategy is to sit and wait until the price hits rock bottom and a positive reversal starts to develop.

A positive reversal may be the most profitable position in your chart. At this point, the currency price hits rock bottom and it is starting a reversal and moving upwards again. Once you identify a positive reversal, you should buy the currency again. This cycle points the cheapest price of a currency and, in the long run, will yield you the most profits by following these simple steps.

As you can see, divergence and reversal cycles are an integral part of a currency behavior. By mastering the 4 RSI cycles, you could make great profits. Every trader should have a “go to” strategy when everything else seems to fail. This simple strategy may be that “go to” strategy and should be integrated to your trading toolbox.
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How to use the breakout cycle to make you profits

A Forex trader is always aware of which of the 3 trading cycles (consolidation, breakout, or trend) a currency is before entering a trade. One of the most popular strategies to make a profitable trade is a channel breakout.

A channel in Forex trading is created by drawing lines between support and resistance in a chart when the market is in a consolidation mode. A consolidation is easy to identify in your chart with, the most common pattern being two almost horizontal parallel lines making your support and resistance levels. These two lines form a trading range in which the currency is trading over the period of time set in your chart whether it is a day chart or a six month chart or whichever time frame you choose.
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As the name suggests, a channel breakout occurs when the price of a currency breaks either of the support or resistance channel lines. When the price breaks the resistance level, the currency is believed to be at the start of an uptrend. On the other hand, if the price breaks the bottom line, the market is believed to be at the start of a down trend.

Keep in mind that not every not every crossover of the lines should be considered a breakout. By using a combination of technical indicators such as Pivot Points, MACD, RSI, and candlesticks to determine price breaks, you should be able to differentiate a false breakout from a real breakout and trend setter.

By mastering this simple strategy you can make significant profits. If you set your trade properly with a tight stop-loss, you will minimize your losses or even make small profits if you entered a false breakout. The profits you make from a real breakout will more than make up for your small losses from the false ones.

Most professional traders use channel breakouts as part of their trading arsenal. By using technical indicators they can tell with almost absolute certainty when a breakout is occurring and, in those few occasions when the signals were false, their tight stop-loss help minimize their losses. When done properly this strategy can lead to great profits.
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How to use volume and trend indicators to make you money

You should never make a trade based only on a trend indicator. The Volume Oscillator (VO) is another indicator that will help you determine whether a trend is breaking support or resistance. In essence, the old saying is true: without volume there is no price movement and without price movement there is no volume. Use that old saying to your advantage.

Several oscillators like the Percentage Volume Oscillator (PVO) and the Market Volume Oscillator (MVO) and are based on the VO.

The VO calculation is based on two Volume Moving Averages (VMAs). The base of calculation is simple:

VO = [Fast VMA] / [Slow VMA]

The Fast VMA is short term moving average, and the Slow VMA is a long term moving average.
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If we use set a VO (5, 20) as an example, the setting would be the Fast VMA to 5 bars and the Slow VMA ito 20 bars. At 5 bars, the Fast VMA is the shorter period and, at 20 bars, the Slow VMA is the longer period.

In essence, the VO calculates the difference between 2 VMAs. This calculation reveals surges in volume and possible abnormal volume activity. The VO tell us where the current volume is in relationship to the average volume over a longer period of time.

If we take a look at the VO setting above, that means that when the VO is over 1 then the Fast VMA is over the Slow MVA and we can conclude that the volume activity in the market is higher than usual. In other words, we can conclude that there is an unusual volume surge based on the parameters we set (5,20).
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By knowing how the basis of calculation works in the VO, the indicator becomes a very effective tool in your trading. You should never solely rely on trend based technical indicators. By doing so, you will only see one half of the total picture and it will lead to more losses than wins. When you combine your trend indicators with an oscillator like the VO, you will be able to distinguish whether the changes in the trend are based on abnormal volume activity and make a better decision as to whether to enter a trade.

A final thought is that you should consider a break in support combined with unusual volume activity as panic selling and the opposite is true with a break of resistance with an unusual volume surge which should be considered as greedy buying.
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What is the best trading method for you to use?

Trading is summarized by 2 methods, the subjective method and the rule-based method. Both methods have their merits, however, if you are not a seasoned and successful trader, you should strictly use the rule-based method.

The subjective trading method combines multiple pieces of information to make a trading decision which can’t be precisely defined in rule form. Subjective traders trade based on guidelines and not rules. With an established set of guidelines an expert trader has the flexibility to change a trade when new information is available. In some instances, where a rule-based system may pass on a trade, a subjective based trader may take a trade based on the “feel” for the market. A rule-based system doesn’t have such flexibility.

Unlike the subjective trading method, the rule trading method is simple and, because the rules are specifically predefined, it is mostly stress-free. The predefined rules account for your entry, stop loss, and take profit values among others. All new traders as well as those traders struggling to become profitable should use a rule-based method to refine their trading before ever considering a subjective method.

A rule-based system is designed to “set and forget.” Once your orders are placed, they continue to progress until one of the following happen: you are either stopped out or your target price hits. As a trader, once a trade is placed, you never interfere with it until one of the actions previously mentioned happen. Since all entries are done following a specific predetermined set of rules, these rules must be followed until you exit the trade.

With a system like 1000 Pips Climber, the highly advanced and rigorously tested Forex trading algorithm is already developed and predefined for you. This system will provide you easy-to-follow signals that are very precise and clear. Since the system is ruled based, whenever a signal is produced you enter a trade. This takes away all the guess work and uncertainties of trading. The system does all the analytics for you and gives you clear entry, stop loss, and take profit values. All you need to do is follow the signals that the system produce. You remain fully in control of your trading account and can have the confidence in knowing you are following professional signals generated by a strictly predefined set of rules.

With a rule-based system, there is not guessing of what a trade will look like. Your entry and exit are precisely defined by the predetermined rule and, for that reason, the system can be easily tested for profitability.

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Should I create my own chart/strategy or use a Forex Expert Advisor?

The big majority of Forex software in the market fall in one of 3 categories: charting system, Expert Advisor (EA), and Fully Automated EA.

A charting system is just what the name inferes, a signal provider that will generate charts with any parameters you set. Many of these providers offer pre-set charts for your convenience, but, ultimately it is your responsibility to set the parameters to fit your trading strategy. I would only recommend this method to advanced traders that know how the market works and have tested several strategies to know which ones will perform best under different market conditions. Most professional traders use charts with custom sets of parameters. Professional traders are not the norm, but rather the exception to the rule and are not your average Forex trader.

Before I get to the next 2 categories, a little personal background is important here. When I first started trading almost 30 years ago, I did it in Nasdaq Level 2. I had 3 screens to track my technical indicators (MACD, Stochastics, Volume, and others) for each of the stocks I followed. On another screen, I had all the indexes – the DJI, NDQ, SPY, and the sector indexes of the stocks I was following). In a third screen, I had my orders ready to go. Before entering a trade, base on what the stock chart said, you had to look at the Nasdaq market conditions, then the Dow, then the S&P 500, the your sector index, check momentum, volume, and enter the trade. All of this to make a trade decision in a split second if you are day trading. Had an Expert Advisor being available those days, my chances of succeeding as a day trader would have grown exponentially.

In that aspect, the Forex market is no different than the stock market, because, instead of the stock indexes, it has at least 11 economic indicators that can affect your trade regardless of what the currency chart is saying. You must be aware of at least 11 economic indicators before entering a trade. Economic indicators like the Gross Domestic Products, Non-farm Payroll, Unemployment rates, Consumer Confidence Index, Consumer Price Index, Industrial Production Index, and more, can greatly affect the value of a currency and their releases should be an integral part of your economic calendar. In addition to those economic, your should be aware of news that may affect your trading. In 2016, the “Brexit” vote caused the most volatile world market reaction we have seen in recent history due to a one single country news. Only then, you are ready to look at your technical indicators to determine whether to enter a trade.

A Forex Expert Advisor (EA) is a ruled-based trading software that has a pre-set time-tested set of rules and indicators to help you with your trading. Every Forex novice trader should start trading using a rule-based strategy and, I must say, most Forex traders should too. Trading based on indicators and “instinct” should be left to the most skilled traders. The difference between using an EA and setting your own charts is that all the testing for whichever strategy the EA is using is already done. An EA will then give you trade entry and exit points. A good EA should also tell you where your stop-losses should be. When used properly, an EA should minimize your losses and reduce your learning curve.

As the name may infer, the main difference between a Forex EA and a fully automated Forex EA is that the fully automated EA will execute your trades as well. By using this “hands-free” approach you take all emotion out of your trading. If the indicator and EA is good you can make great profits with this type of system. The only drawback is that these EAs don’t take into consideration economic news releases and you should still keep an eye for your economic calendar to minimize your losses.

As you can see, there is no real answer as to which system is better than the other. As an experienced trader with many hours, days, or even years using indicators, most probably the best option is to use a good chart provider and to use your own time-tested strategies. For a beginner to intermediate trader, the answer is not as clear. While, in the long run, developing your own trading strategies is best. The fact of the matter remain that most traders at these levels fail to make profits consistently and may be much better served using an establish Forex Expert Advisor while they test their own strategies.

What is the right indicator to achieve success?

Forex technical strategies are based on mathematical theories to create technical indicators, but do these indicators work?

Technical indicators assume that market movement can be predicted if you know the right equation. The one constant the indicators can’t account for is how we react to sudden market moves or news, thus disrupting any theory we are applying to our trading.

Many Forex systems are based on a technical indicator to predict prices in advance. Indicators such as Fibonacci, Gann, and Elliott Wave are commonly used, but you should use them with caution. You should adjust your indicator or automated system to reflect current market conditions because most of those indicators work under the assumption that a set equation works all the time and not just some of the time.

We all know that no theory will ever work all the time. If they did, there would be no market. The reality is that, regardless of the mathematical theory we use, statistically, 90% to 95% of us will fail.
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What do we do next?

Since we already established that Forex markets moves are not solely based on theories and certainties, the logical deduction is that the market moves are based on odds and probabilities. When you trade based on probabilities, you shift the odds to your favor. This shift will lead you to profits.

Although I truly dislike the comparison of a professional trader to a gambler, there is a similarity that can’t be avoided. Gamblers keep things simple by taking small losses while waiting for a high odds setup that translates to a big win. In that aspect, Forex trading is not much different, by keeping things simple and minimizing your losses, your successful trades translate to big profits.

To be a successful trader, you should be aware of the market sentiment and use technical indicators to help you corroborate the price direction thus increasing your odds of a successful trade. Case in point, for many years, we have seen unbelievable advances in mathematics, forecasting, computers, and new investment theories. Still, the ratio of successful traders to those that fail remains the same. To succeed, you must account for market sentiment as it relates to the news and human nature reaction to sharp movements in price.

By following this simple, yet often overlooked principle, you will greatly increase the odds of becoming a successful trader to your favor.
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How to "buy low, sell high" consistently

Buying at support and selling at resistance is the oldest trading strategy in existence. How come the majority of traders lose with this time tested “buy low, sell high” strategy?

The explanation for this paradox is simple, although most traders may correctly identify the support and resistance levels, they fail to use indicators to corroborate that these levels are sustainable.

You need to get the odds in your favor. When prices rush towards the support or resistance levels, they break as often they hold. You must be aware of changes in price momentum by using indicators to assist you. Identifying the right support and resistance levels and corroborating them with some of the indicators that follow will greatly increase your chances for a successful trade.
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Stochastic is the best timing indicator. This momentum indicator shows the high-low range over a number of periods as it relates to the location of the close. Because Stochastic is range bound, you can use it to determine overbought and oversold price levels.

The Relative Strength Index (RSI) is another great timing indicator. The RSI measures the speed and change of price movements. The RSI ranges between zero and 100. When the RSI is above 70 the currency is considered overbought and, when the RSI is below 30, then, it is considered oversold.

Combine these two momentum oscillators and wait for confirmation on both. This combination will greatly increase your odds of success by giving you advance warning of a shift in price momentum at support and resistance levels.

By following this strategy, you are not trying to predict the market, you are acting on confirmation, thus increasing your overall profitability.
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