With the slow markets yesterday and earlier today, due to Easter holidays in many places (and hence no day trading signal last night/this morning), I thought it would be good to provide a little insight into one of the indicators I use…the RSI.

In the USD/JPY Swing Trade set-up below I mentioned a few things about oscillators – overbought levels etc.  I mentioned those because often they are viewed in the wrong way.  This article will take a closer at the the RSI indicator and what certain levels can actually tell us about what we are trading.  If you are going to use an indicator it is very important to know how that indicator works so you can understand when the information is valuable and when it isn’t.

I am not saying that common ideas about this indicator are wrong, but they need to be used in a context, and not simply used blindly.

RSI is an oscillator and commonly people believe they are only  valuable in ranging markets.  This is false.  An oscillator can give us a lot of information about trends as well.

So here is the first thing we need to know – The RSI moves within ranges during a trend a price.  The levels the RSI ranges between can indicate the strength of the trend.  In an uptrend the RSI should stay between about 30 and 90.   In a down trend it will generally stay between 20 and 70 (often 60).  This can let us know if a trend is reversing, as a drop below the 30 level on an RSI is rare in an uptrend.  If it ducks below 30 or fails to recover above 70, the uptrend has been stifled.  These levels will vary slightly depending on the market traded, so find the levels your market ranges between before using this. (If the market is ranging this information is not particularly useful)

This means if we are in an uptrend we will often have “overbought” type readings on the RSI.  Many traders exit positions because they think a price reversal will materialize simply because the RSI is showing a reading of 90 for example.  This is not necessarily the case.  The RSI looks at average up moves and average down moves, therefore, we can get a drop or reversal in the RSI without a reversal in price.  The RSI can move out of this overbought territory even without a significant fall in price.  This is because a brief sideways movement will bring down the “up average” calculation of the RSI, allowing it to fall to more normal levels, with price never really moving lower, but simply taking a breather.

An RSI that is continually in the in the 60 to 70 range shows – in a rough approximation – that prices are continually closing near highs and former bar highs a high percentage of the time…and this is great for the person riding the trend.  It is true a reversal will eventually occur, but the a trade should not be exited on the single premise that the instrument is “overbought.”  Rather we need to look at other factors… is price actually breaking?  Is the RSI range still showing strength by staying above 30 and hitting the 80+ range occasionally?  Is the RSI making new highs as price makes new highs (this is good)?

Just a few things to consider.  The RSI, and oscillators similar to it, can provide a lot more information than they are not commonly given credit for.  The above are just a few different ways to look at this indicator.  There are many other ways to use this indicator as well.  I will cover more of these in future posts.

~Cory Mitchell
Market Strategist
—————————

Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open a Standard account and receive up to a $1,000 bonus.

Open a SuperMini or Standard account now and receive a 100% cashback worth up to $300.
Open a Standard account and trade commodities, receive 10% cashback worth up to $1,000.

I am here to personally help you out if you open an account, and need help with strategies or figuring out the trading platform.

View last post for this trade here: http://vantagepointtrading.com/archives/1071

Original post can be viewed from that post. Entry was at 1.2719

This trade has already realized a 500 pip profit on part of the position. Profit targets hit so far are 1.2430 (a 289 pip profit). We have also hit the target at 1.2200 (a 519 pip profit).

Currently we are trading at 1.2290 – well onside. Yet the large drop has also caused a short term oversold condition (13 on RSI), while prices have so far held above the former swing low. This does not mean we are about to head higher but it makes it less likely we will head lower in a hurry.

Bring in trailing stop to 1.2377. But we want a close above this level. If you use a different time frame on your charts than I do, at least make sure the US market close is above this level.  If we do continue lower, next profit target is 1.1850.

(square box is our entry, circles are profit targets hit so far.  Black line is current trailing stop – based on a closing price)

~Cory Mitchell
Market Strategist

————————–
Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open a Standard account and receive up to a $1,000 bonus.

Open a SuperMini or Standard account now and receive a 100% cashback worth up to $300.
Open a Standard account and trade commodities, receive 10% cashback worth up to $1,000.
—————————

With some major rate action coming from the FOMC announcement on Wednesday, I am going to update the Longer Term trade setups I have mentioned.

———

First, recently I wrote of a potential trade in the USD/JPY pair.  The trade was a potential upside breakout.  See original post here: http://vantagepointtrading.com/archives/1061.

This set up did not develop, as we have fallen well off the upside resistance area between 99.50-100.00.  The pair is currently trading at 96.30.  The Cup and Handle chart pattern is still present, but currently we have retreated to the lower range of the handle.  Thus this trade was never triggered.  Take this trade out of your “pending” trades inventory.

A completely new signal may be close at hand in this pair, which will be posted shortly.

———

The USD/CAD trade (last update is here http://vantagepointtrading.com/archives/938 and you can link to original post from there) was triggered on 03/13 with a closing price of 1.2719.  This was our entry point.  Currently this trade is over 200 pips in the profit.   The first two profit targets have already been hit.  Stop should now be moved to breakeven.

PLEASE NOTE, for my own analysis my daily bars close at 24:00 GMT.

~Cory Mitchell

Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open an account and receive a cashback bonus (up to $300 or $1000 depending on the account).

On Wednesday after the market closed, everyone was talking about a market rally (from the reports I saw/read). Up 130 points was just the move that was the result of restored confidence, but not only that, it was going to trigger further rallying. Well, Thursday showed market participants that the bear is still more likely to eat Goldilocks than give her some porridge (or money for that porridge).

While short term traders should play both sides of the market and make money in any which they can, investors should not be buying. I have said that investors for the most part (unless you need to buy a few million shares) can slip easily into the market, so there is no reason to buy until there is a significant move upwards. A 130 point move up, despite what the many of the news reports seemed to think, is not a significant move.

From an investing standpoint, we are a ways away from an entry point, which I would view as a reversal to this bear market. Thus I won’t even publish an entry point for the long positions. No point losing money when you can just keep it as is for the moment.

There is no need to pick bottoms to make money.

But lets look at the broader picture of the market once again. From Jan 1942 to 1965 the market went from approximately 100 to 900. It multiplied by 9X in 23 years. Then from 1982-2007 it went from 900 to 14000. It multiplied by over 15 times in 25 years. Thus in about the same amount of time, gains were accelerated by more than 50%. That is quite an improvement. What caused this massive acceleration? (I have left out 1965-1981 as the market was range bound during this time and did not reflect any growth, actually negative growth when factoring for inflation, over that 16 years)

In my opinion, perception. Perceptions changed. Just as in the microcosm the 90’s investors believed we had entered a new era of unlimited potential prosperity and perpetual growth, the last 25 years has been filled with this new era type thinking. Market participation has increased in terms of volume which then created a need for government and businesses to focus on short term gains. With a the seeming positivity bias built into the market, participants chased short term gains to higher and higher prices (on the aggregate over the last 25 years). But when major catalysts changed that sentiment and major fundamental flaws were revealed it became apparent this market was in severe trouble. Hence, why I use technical analysis for trading and talk about fundamentals for fun.

Are these numbers I used above somewhat arbitrary? I suppose on could argue so, but looking at a multi-decade chart I picked the major trends since after the great depression. The point is that there has been a major acceleration of growth in the stock market and now we are seeing a major acceleration to the downside to correct for this.

I am currently sticking to my target of 6000. The Dow closes at 6594 on Thursday. I will reconsider this downside profit target if a close above 7000 occurs anytime soon.

The Non-farm Payroll Report comes out on Friday, always a big mover, so watch for that as it could take us a lot close to either of these levels.

~Cory Mitchell

These are the 8 Rules of “Carney” from the book “Ugly Americans” by Ben Mezrich (published by Harper Perennial). They are pretty good so I thought I would reproduce them here. Check out the book, it isn’t too bad. Not as much trading material as I was hoping for but still an entertaining read.

1. Never get into something you can’t get out of by the closing bell. Every trade you make, you’re looking for an exit point. Always keep your eye on the exit point.

2. Don’t ever take anything at face value. Because face value is the biggest lie of the market. Nothing is ever priced at its true worth. The key is to figure out the real, intrinsic value-and get it for much, much less.

3. One minute you have your feet on the ground and you’re moving forward. The next minute, the ground is gone and you’re falling. The key is to never land. keep it in the air as long as you can.

4. You walk into a room with a grenade, and your best-case scenario is walking back out still holding the grenade. Your worst case-scenario is that the grenade explodes, blowing you into little bloody pieces. The moral of the story: don’t make bets with no upside.

5. Don’t overthink. If it looks like a duck and quacks like a duck-it’s a duck.

6. Fear is the greatest motivator. Motivation is what it takes to find profit.

7. The first place to look for a solution is within the problem itself.

8. The ends justify the means, but there’s only one end that really matters. Ending up on a beach with a bottle of champagne.

Posted by Cory Mitchell

The following is an article I found which is a good reminder to keep things simple.  I generally just use price as an indicator, coupled with chart patterns (past prices).  Although occasionally I refer to an RSI or price overlay for confirmation.  Here is the article….

Trading Analysis Pitfalls by Ginny Fairham

The Dow Jones average has slipped into a short term range, but the breakout could be significant – especially to the downside.

Currently the Down Jones average is ranging between 7900 and 8300.   While volume was edging higher to form a possible bottom in the market, volume has normalized and has fallen off the recent peak volume of a January 14.  The indecision seen on January 14 by the long legged doji candle (a way to view charts) set the stage for the next week and the current indecision.

The fact that this indecision has not brought buyers aggressively into the market for a sustained period after testing 9000 in early January may leave investors weary.  “We’ve fallen and we can’t get up!”  A breakdown from the current range would mean a target price of 7500.  This level is significant as it also the low close we saw in November ‘08.

The low of 2002 is also close to this level providing a target of 7300.   Support could be expected at 7000 as well; a level not seen since 1997.

According to technical methods a significant break downwards implies a long term target of 6000.

A break higher would indicate a retest of the 9000 level which has already seen multiple failures and could not be surpassed.

This current relatively tight range may determine whether we head lower to levels not seen in a number of years, of if we can rally back to retest 9000 once again.

~Cory Mitchell

Due to the nature of traders visiting the site and feedback I have gotten, I will be altering the Day Trading Blog to reflect currency trading markets.  I will continue to do a stock market commentary when significant resistance and support levels are being approached or when fundamental shifts in the economy are occurring.  These commentaries will likely occur every one to two weeks.

The new Day Trading Blog will focus on significant levels in the EUR/USD one of the most heavily traded currency pairs.  I will be providing entry and exit points.  Since I generally want to catch large trends I start watching the pair in the evening.  Thus signals will be for the late night sessions (ie. End of Japan and early Europe sessions.  Thus signals will be for breakouts that occur at around 11:00 PM Pacific or 2:00 AM Eastern time.  Even if you do not trade during this time, exit points may still be valid.  Also, if this session is uneventful and not resistance or support levels are broken, both entry and exit points will still be valid when the breakout occurs.

This is generally the time I trade, as this is where the majority of trends start and carry through the US session.   If during the day things are happening I may post signals for trades I am making.

I also trade GBP/JPY so from time to time posts may be made related to this pair.

I start with these concepts because they need to be understood in order to use the day trading levels that I post each day.

Support Levels are price points at which prices have had a hard time pushing down through in the past.  In other words, a support level is a level where price stopped falling.  Often a support can be found at slightly different levels, for example yesterday prices moved down to $90 in the morning, later in the day they went down to 89.90 before moving higher, then near the end of the day price touches 89.95 and then moves back up to close at 91.

In this example 3 support levels were created, but together they can be used to describe a support area.  Support areas have more significance than a single level because it shows the market has tried several times to breakthrough a certain level, but could not sustain it.    In this case the support area would be 89.90-90.00.

Resistance Levels on the other hand are price point in which prices have had a hard time pusing up through in the past.  In other words, a resistance level is where prices stopped rising.  Just as the example under the support levels section, resistance can also form resistance areas.

Resistance and support levels are dynamic, meaning prices may just edge past the old support resistance level only to revert course.  This new price is a new resistance or support level, but should be coupled with old support and resistance levels in the same are to create a support or resistance area.

Breakouts are price movements in which a support or resistance level is moved through.  For instance, if the SPY has moved up to $100, but can not break above that price, $100 is a resistance level.  When the price finally does move above $100 it would be considered a breakout.  When price move up to resistance or support levels, but do not breakthrough, it is called a test (or a level was tested).

If prices quickly move back the other way through the support and resistance zone it just broke out of, then it is called a false breakout.  In the example from above, if the SPY moved above $100, this would be a breakout, but if it fell back below $100 and could not get back up to $100, then this would be a false breakout.

By using support and resistance areas (when available), instead of just a single level, we have a better chance of picking levels to watch that have more significance.  The more times a price has been tested, but not moved through significantly, the more important that price area is.  If a breakout occurs above the top of a resistance area, or the bottom of a support area, it is more likely a significant breakout could occur.  But as mentioned, these areas are dynamic and may expand.

Support and resistance occur on all time frames.  These levels can be seen on a one minute chart which may only show one day of activity or a weekly chart which could show many years worth of data.  If multiple time frames show resistance at a certain level, that level is likely very significant, for all traders.  Even a day trader can benefit if a breakout occurs on a weekly chart.  They may not be aware of that level because generally they are only watching the last few days or a week of price action.  A longer term trader may not be aware of why a major move occurred intra-day, but it could be because of technical factors in a shorter time frame when they were only watching their long term charts.

Not all time frames need to be analyzed, but it is a good idea for all traders to look at time frames longer than the one they currently trade on to be aware of larger forces that may be at work.   If longer term traders are looking to enter or exit and they want a good price it may be worth looking at shorter time frame charts.