Tag Archives: futuresmarket

How to Trade the Relative Strength Index (RSI)

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In today’s lesson we’re going to look at indicators which are known as oscillators, starting with the one of the most popular oscillators, the RSI. So let’s get started!

An oscillator is a technical indicator which fluctuates above and below a central line and normally has an upper and lower band which indicate overbought and oversold conditions in the market. An exception to this upper and lower band component would be the MACD, which we learned about yesterday, which is an oscillator as well but is not encompassed by an upper and lower band. One of the most popular what’s known as banded oscillators is what’s known as the RSI, which is what we’re going to start our discussion on oscillators with today. The RSI’s best described as an indicator which represents the momentum in a particular financial instrument as well as when it’s reaching extreme levels to the upside which is referred to as overbought conditions or extreme levels to the downside which is referred to as oversold conditions.

The indicator accomplishes this through a formula which compares the size of recent gains for a financial instrument to the size of it’s recent losses. The results are then plotted as a line which fluctuates between 0 and 100. And bands are then placed at 70, which is considered an extreme level to the upside and 30, which is considered an extreme level to the downside.

This is what an oscillator looks like. You can see the price chart there. And you can see the RSI plotted to the bottom. And you can see the central line there at level 50, and the upper band at 70 and the lower band at 30. That’s what an RSI looks like when it’s plotted on a chart. And you can see how it fluctuates above and below those lines. We’re going to look at what that means next.

There’s several different ways that traders use the RSI in their trading. The first is to identify overbought and oversold conditions in the market. As we just talked about when the RSI is below the 30 line, this is considered an oversold level and therefore traders are going to look to trade a reversal of the trend there because the boat is tipped too far to one side so to speak.

The RSI goes below 30, the market bottoms there then turns upward. And then the market continues upward, goes into overbought territory on the RSI, and then you can see it turns downward after that.

The second way that traders use the RSI in their trading is what’s known as RSI divergence, and this is similar to what we learned about with the MACD divergence. If the indicator (the RSI) is trading in the opposite direction or trending in the opposite direction as the price action of the financial instrument that you’re analyzing, this tells you that momentum is waning and therefore that particular financial instrument may be due for reversal.

So, you can see here the market is making a new high, but the RSI is not. And that is a divergence there showing that the market may be running out of steam. In that case it was, and it sold off pretty dramatically right after that.

The third way that traders use this in their trading is known as the centerline crossover. And this you know a less reliable signal than the first two so you definitely going to want to use this one in conjunction with some of the other things that we’ve learned about or some of the things that we’re going to learn about in future lessons.

But basically what this is, is when the RSI crosses above the 50 line that’s considered a bullish sign, and because the market is making more highs and more making more gains than it is losses. When it crosses below that center 50 line that’s considered a bearish sign because the market is making more losses than gains.

You could use that and how it would have actually worked very well recently trading the euro-dollar. You could see there’s a head and shoulders pattern there, that we learned about in one of our previous lessons. And then you can see the RSI makes a bearish crossover confirming, so to speak, that that break below the neckline of the head and shoulders pattern is legitimate. In that case you would caught a nice big candle down, and might catch a few more in the days that come as a result of that confirmation.

So that’s our lesson for today. You should now have a good understanding of the RSI and how traders use this in their trading. And then tomorrow’s lesson we’re going to look at another oscillator which is known as the stochastic oscillators.

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A lesson on how to trade the RSI. In our last lesson we looked at 3 different ways that the MACD indicator can be traded. In today’s lesson we are going to look at a class of indicators which are known as Oscillators with a look at how to trade one of the more popular Oscillators the Relative Strength Index (RSI).

An oscillator is a leading technical indicator which fluctuates above and below a center line and normally has upper and lower bands which indicate overbought and oversold conditions in the market (an exception to this would be the MACD which is an Oscillator as well).

One of the most popular Oscillators outside of the MACD which we have already gone over is the Relative Strength Index (RSI) which is where we will start our discussion. The RSI is best described as an indicator which represents the momentum in a particular financial instrument as well as when it is reaching extreme levels to the upside (referred to as overbought) or downside (referred to as oversold) and is therefore due for a reversal. The indicator accomplishes this through a formula which compares the size of recent gains for a particular financial instrument to the size of recent losses, the results of which are plotted as a line which fluctuates between 0 and 100.

How to Trade Triangle Chart Patterns

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In our last lesson we learned about the flag and pennant chart patterns as well as strategies for trading each when we find them in an uptrend or down trend. In today’s lesson, we’re going to look at a similar chart pattern which is known as the triangle chart pattern, so that we can then learn some strategies for trading this chart pattern.

The triangle pattern can be broken down into three categories. And these are the ascending triangle, the descending triangle, and the symmetrical triangle. While the shape of the triangle is significant, of more importance is the direction that the market moves when it breaks out of the triangle. Lastly, while triangles can sometimes be reversal patterns, they are normally seen as continuation patterns. So let’s take a look here. Start with the ascending triangle here, and the ascending triangle is formed when the market makes higher lows and the same level highs. OK. These patterns are normally seen in an uptrend and viewed as a continuation pattern as the bulls gain more and more control running up to the top resistance line of the pattern. While you normally see this pattern in an uptrend, if you do see it in a down trend, it should be paid special attention to as it can be seen as a powerful reversal signal if it does show up in a down trend.

Chart of Walgreen Company here. And you see the higher lows there. All right. And then you see the same level highs. And what that indicates there is that as the market and the buyers continue to bump up against that top resistance line, you can see they’re gaining more and more control.

As the market does sell off but it sells off less and less as the pattern matures, indicating that the buyers are getting more and more control. And therefore, a lot of traders are going to look for a break out there of the top line to be imminent in that situation.

The descending triangle is basically the opposite or the ascending triangle flipped upside down. So you can see that this is formed when lower highs and the same level lows are made. These patterns are normally seen in a down trend and viewed as continuation patterns as the bears gain more and more control running down to the bottom support line, in this case, not the resistance line.

And while you normally see this pattern in a down trend, like the ascending triangle, if you do see this in the opposite trend, which is the uptrend in this case, you should pay special attention because this can be seen as a powerful reversal signal.

We have a chart of the dollar/yen here. And we see the lower highs there and then the same level lows. So you can see, basically, flipped upside down there. And again here, what the market is showing from a supply/demand perspective and why this pattern is paid attention to is because as the lower highs are made, it indicates that the buyers are having less and less control running down into the support line. And the sellers are getting more and more control and therefore, a lot of traders will look at that as the break at that bottom support line is imminent there.

The symmetrical triangle is unique in the sense that a lot of times you’re going to see this, not in the uptrend or a down trend, but in a directionless market as neither the bulls or the bears or the buyers or the sellers are in control of the market. So we see a contracting range and a directionless contracting range. So unlike the rising or falling wedge, the triangle which is similar to those, points off to the side indicating that neither the buyers nor the sellers are having any control over the market.

And this is formed when the market makes lower highs and higher lows and basically, is going to be seen, if it is in an uptrend or a down trend, is going to be seen as a continuation or reversal pattern depending on which way it breaks out of the pattern. So we can see here the lower highs and then the higher lows forming the pattern, the contraction there. And eventually the market does break out of the bottom of that pattern. And when it does, it breaks out pretty forcefully as you can see there.

The pattern matures the range gets narrower and narrower indicating that neither the buyers nor the sellers have control. So once the pattern does break, that’s an indication that the sellers have taken control in this instance, and therefore the markets have broken pretty significantly there. OK.

You should now have a good understanding of the different types of triangle patterns and what each signifies. In our next lesson, we’re going to go over strategies for trading each of these patterns complete with entry and exit points.

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The first lesson in a two part series on how to identify and trade the ascending, descending, and symmetrical triangle chart patterns using technical analysis in the futures market, forex market and stock market for day traders and investors.

See How to Trade Triangle Chart Patterns Like a Pro Part 2 >>

How to Trade Triangle Chart Patterns Like a Pro Part 2

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In our last lesson, we learned about the different chart types of triangle chart patterns: the ascending triangle, descending triangle and symmetrical triangle. In today’s lesson, we’re going to learn specific strategies for trading each of these patterns, complete with entry and exit points. So let’s get started.

The direction in which the market breaks out of the triangle, and whether the market is in an uptrend or downtrend, determines whether the pattern is a continuation or a reversal pattern, and therefore whether traders are going to look to get long or go short as a result of the breakout. As with other patterns that we’ve recently learned about, when traders spot an ascending triangle, which we’re going to start with, they will look to trade the break of the upper resistance line. The target is then derived by measuring the distance between the starting high point of the ascending triangle, and the starting low point of the triangle, which is then projected upward from the break point.

The stop is then placed just below the most recent trough of the patterns. So let’s look at an example here. We’ve got our ascending triangle that we learned about in last lesson. We have the break. We then measure the distance between the high and the low of the start of the pattern, and we get five points. So that is our target for the buy entry of the trade, and then we place our stop just below the most recent trough of the pattern. OK?

The descending triangle is basically just the opposite. It’s a mirror image. We’re normally going to see these in down trends, and we’re going to look to trade, or traders are going to commonly look to trade the break of the lower support line. The target is then calculated in the same way as the ascending triangle, by measuring the distance between the high and the low points, and then projecting that distance downward from the break.

The stop is then placed just above the nearest peak. Here’s our descending triangle. You can see there, the same one from last lesson. We see the break here. We see the distance between, or measure the distance between the high and low at the start of the pattern. We get 800 points there, so that’s our target for the trade. And then we place our stop just above the most recent peak. All right.

The symmetrical triangle can be seen in either up trends, down trends, or most of the time it is commonly seen in directionless markets. As it’s an indication that neither bulls or bears are winning out. That’s why the market range contracts as they continue to fight each other.

That’s why traders are going to look to trade in the direction of the breakout. It doesn’t matter which side it breaks out on, because the break out is an indication of the side that’s won. So if it breaks to the upside, the bulls have won, if it breaks to the downside, the bears have won.

We’ve got our symmetrical triangle here that we’ve looked at from last lesson, and in this instance, it’s broken to the downside, so traders are going to look to get short there, commonly. And the target is measured in the same way as it is with the other two triangles, by getting the distance at the start. So this case, it’s 1050. Project that downward, and that’s our target for the trade.

And then the stop, because it’s broken to the upside, is placed just above the most recent peak. If that trade had broken to the upside, or if the market had broken to the upside of the symmetrical triangle there, then everything would be done in reverse. All right.

As with our other lessons, and the other patterns that we’ve looked at recently, in those volume is often looked to as a confirmation of all three of these patterns. Traders are going to like to see a decrease in volume as the pattern matures, and then an increase in volume on the break, of the break out from the triangle. So keep that in mind just as with our other strategies that we’ve looked at most recently.

All right. That’s our lesson for today, and that’s going to complete our lessons on charting patterns. In our next lesson, we’re going to start to look at a trading indicators, or technical indicators, which are going to be good for complementing a lot of the stuff that we’ve learned so far.

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The second lesson on how to identify and trade triangle chart patterns in the stock market, forex market, and futures market using technical analysis.