Oscillators: When to act on them?

Beginner Questions
1

I have just started using RSi and Stochiastics and of course, I am not quite getting it. My problem is that this indicator shows me oscillations, but that I can see without the indicator. What I need are buying/selling indicators. :stuck_out_tongue: Unfortunately, even when the line bottoms out, or tops out, there is no way of knowing if the trend will continue much further. This graph below shows that when the line bottomed out indicated a buying opportunity, the price actually continued to decline much more for much longer time.

So the exist question is, what good are these indicators to a trader? When do we give them credence?

Thanks

pippy

2

IMHO rsi sucks:D

see in the chart the diference between the PA, the rsi in red line and the CCI in blue line.

http://i842.photobucket.com/albums/zz349/ruilima22/rsicci.gif

3

Okay I see now I am supposed to wait until the line comes back above the 20% line before buying to not buy into a continuing downtrend.

This indicator seems to be too good to be true. Is it not right a majority of the time? Why won’t this make me a millionaire?

BTW, I have tried to find the defintion of %K and %D, but no where can I find what K and D refer to.

4

Well, so far not very much success with RSI. I follow the indicators, and most times, the price moves against what the indicator would predict. Just now, the price rose above the 80% level, then fell back below it, so I sold. Unfortunately, the price changed direction again and I lost a lot of virtual dough.

lol

How useful are these things?

I also noticed something just now. The RSI line changes in the past!! That way, it always looks like it was right, even when it was wrong. With new data, the position of the line will readjust to take into account the present situation, making it look like it was a perfect predictor, even though where the line was when it told me to make a move is no longer where the line is now!

5

Hmmm…

I’ve been reading your posts (and I’ve tried to answer as many of them as I can to the best of my knowledge, expericence, and ability). One thing that stands out to me (correct me if I’m wrong) is the fact that you have a major issue taking losses of any kind, your losses are always HUGE, and I can therefore only assume that you’re not using any type of MOENY MANAGEMENT / RISK MANAGEMENT. If I’m wrong: then please forgive me i.e. that’s just the impression that I’m getting from your posts.

I know it’s REAL boring to hear to ‘same old same old’ thing over and over again BUT: NO INDICATOR or TRADING SYSTEM is ALWAYS RIGHT no matter HOW much we wish this to NOT be so. There is nothing wrong with RSI. As a matter of fact it’s one of the MOST widely used and reliable indicators around and used by analysts the world over (well: for what THAT statement is worth anyway)!!! LOL!!! The fact of the matter is that if you traded using ONLY RSI (which is NOT a good idea but there is a reason I’m saying this) i.e. go long when RSI crosses from BELOW 30 to above 30 and short when RSI crosses from ABOVE 70 to below 70 you would make some money WITH THE PROVISO THAT YOU WERE USING STOPS AND THE MOST YOU WOULD LOSE IF THOSE STOPS WERE EXECUTED WAS 1% - 5% OF YOUR ACCOUNT (2% being the ‘de facto standard’)!!! MONEY MANAGEMENT / RISK MANAGEMENT!!! (In case you’re wondering: the stops could be placed, for example, ‘a couple of ticks (pips)’ above the previous swing high or swing low. That’s just ONE method and given as an example).

Now I’m NOT saying that RSI is the MOST fantastic indicator of all time. It’s not and there are many other (better) indidcators and trading systems and trading methdologies around. That said: RSI generates other far more reliable signals than the simple crossing of the 30 / 70 limits i.e. it has MANY ‘nuances’ (that are freely available for you to find and read about on the Internet).

The same applies to StochRSI by the way (which is simply a Stochastic of RSI and there ARE MANY sites that will explain this to you very clearly). Her is BUT ONE of them: StockCharts.com - ChartSchool - StochRSI. YOU WILL NOTE that StochRSI is NOT being used on its own (note the trendline)!!!

Taking (small) losses in this business is simply an integral part of the business. Think of the actual WORD ‘trading’ and what it means??? ‘You win some and you lose some’. The ‘key’ is to NOT ‘lose’ MORE than you ‘win’. UNLIKE ‘retailing’ (where the prices are fixed) you are ‘trading’ (where the prices are NOT fixed). (Well: this interpretation has helped ME anyway regardless of how ridiculous or irrelevant to the business of trading as it may sound). Think of the word ‘speculating’ and what IT means!!! MONEY MANAGEMENT / RISK MANAGEMENT!!!

You’ve posted about being margin called and now about a ‘huge’ loss. This should not be so if you have MONEY MANAGEMENT / RISK MANAGEMENT!!!

(I think I’ve made my point)!!! LOL!!!

Regards,

Dale.

6

HI Dale,

No, I have no problem with loss, especially considering I am trading virtual money. What I am wondering is why the RSI indicator seems to be in fact, working less for me than even flipping a coin. LOL.

7

LOL!!!

OK well now that we’ve got THAT out of the way!!! LOL!!!

I’m not going to REALLY disagree with you (about RSI anyway). As much as I’ve always been a ‘Wilder fan’ (I love ‘the old man’): I’m the first person to admit NOW that maybe, JUST MAYBE, his ‘tried and tested methods’ have less relevance TODAY than they did a good few years ago. One MUST also bear in mind (although it took ME a GOOD long while to come to terms with this) that Wilder was a COMMODITIES trader and I’ve have now finally accepted that COMMODITIES DO MOVE DIFFERENTLY than forex pairs (as do stocks, metals, bonds, interest rates, etc.). One OTHER thing to note is this: these are all INDICATORS i.e. they are only a (possible) INDICATION of something that MAY (or MAY NOT) happen.

Look: I’m quite happy to be YOUR ‘trading buddy’ AS WELL (see one of the other posts of today on this forum) if that will help. I’m not a KAJILLIONAIRE YET (at the moment I’m POORER than a ‘Church Mouse’) but I’m more than happy to share my GOOD AND BAD experiences with you if you like (AT NO CHARGE)!!! It would appear to me that you are ‘floundering’ in the ‘multiplicity of choice’ here so maybe I can give you a bit of a ‘steer’. I’ve come across (and tried) MANY different trading systems and methodologies (some INCLUDING RSI) and some of them do work (would you believe). I’m happy to trade them with you if you like.

As a matter of act (and as a sign of good faith AND to PROVE my ‘RSI point’) here is BUT ONE of them that uses RSI:

(Unfortuantely you will need to be able to make some changes to indicator code. If you had an account at Delta I could send the system to you but I KNOW that you don’t so I’m sure that some ‘kind Metatrader coding capable soul’ will code this for you IF you ask NICELY that is)!!! LOL!!!

1 hour chart (a suggestion: start with EUR/USD).

Bollinger Bands. Now LISTEN UP (here is where the ‘coding’ comes in). Use a 20-period Bollinger Band (20-periods is the default). BUT: you need to add a THIRD standard deviation (‘standard’ Bollinger Bands only display a first and a second deviation from the middle moving average).

RSI(14).

200-period SIMPLE moving average.

Go long at market WHEN RSI(14) indicates an OVERSOLD condition (RSI(14) is BELOW 30) AND price has been ‘touching’ the THIRD band (as detailed above) AND a price bar has now OPENED AND CLOSED BETWEEN the FIRST and the SECOND band AND price is CLOSING ABOVE the 200-period SIMPLE moving average (on both the daily chart and the 1 hour chart). Your stop loss is set ‘a couple of ticks’ below the SWING LOW (which you WILL have). Your first TP level for HALF of your position is equal to your INITIAL RISK (INITIAL RISK calculated as the difference in pips between your entry price and your stop loss and this value MULTIPLIED by your $ value per pip MUST NOT EXCEED 2% OF YOUR ACCOUNT BALANCE). Once your first TP level is hit you move your stop loss to breakeven on the second half of your position. Your second TP level is the SECOND (upper in this case because you’re long) band. This TP level is adjusted every hour until either IT is hit or your stop loss is hit(Reverse everything here for short trades).

This is but one example of a very simple and basic system BUT HIGH PROBAILITY system that WILL NOT make you a KAJILLIONAIRE BUT will at least instil a bit of confidence in you and make a little bit of ‘chi-ching’ on the side. And one thing (and the reason this MAY fail for you): DO NOT GIVE UP WHEN THE FIRST TRADE GOES ‘SOUR’ on you (and then start looking for ANOTHER system and repeat the same process)!!! REMEMBER: LOSING (1% - 5%) is ‘part of the game’!!!

There are others. I came across this one just last night (while looking for a certain parameter for something else) based on the CCI or ‘Commodity Channel Index’: How to see market context using CCI 1 of 5

It sure looks good to me (I have NO idea who the chap is).

I believe the ‘key’ to ALL of these systems (ANY REASONABLY good system) is to NOT simply ‘bail’ when you have one or two trades that go against you and therefore result in losses. CONSISTENCY (and ‘gonads’) are important!!!

DO WELL!!!

Regards,

Dale.

Edit:

And BY the way: RSI is NOT an ‘oscillator’!!! LOL!!! The MACD HISTOGRAM is an ‘oscillator’. Bill Williams’ AO or ‘Awesome Oscillator’ (go figure) is an ‘oscillator’!!!

8

You can’t use RSI/Soc as a stand alone…Use sup/res, fib, and price action.Apply RSI/SOC to the 4 hour chart. What is overbought/oversold on a 10,15,30 or even 1 hour chart may not be overbought/sold at all on the 4 hour.

Ask your self a few questions: Up/Down trend?, Overbought/Sold?, What type of candel stick is forming? Fibonacci level where is price in relation? Are any economic reports due out today or the next that could have a big impact?

These are just a few important questions to ask yourself before taking that trade.

Always, trade around news when possible…

9

Some good ideas but one BAD one in my opinion. Telling a new trader to ‘always, trade around news when possible …’ is probably the WORST advice they could be given. The potential pitfalls FAR outweigh the possible profitability IN MY OPINION of course and I note this at my OWN possible expense i.e. unless you’re a broker (or and IB for a broker), in which case trades initiated by new and inexperienced traders around news times make the ‘KA-CHING’ sound, it’s not a good idea.

Regards,

Dale.

10

I was meaning stay away from the news! Alway’s know what economic data is due out and trade around it, that is, do not try to trade the news…And wait a good half hour to one hour before placing a trade.

11

Where did you get the bizarre idea from that indicators predicted ?

Indicators DO NOT predict, and the sooner you realise that the better. If you dont believe me then do some testing and prove it to yourself.

12

What makes you believe that you need buying/selling indicators?

13

Actually, some indicators predict. And some of the time they predict correctly. But no indicator predicts accurately 100% of the time.

14

You need to understand oscillators better…
This means you need to understand your currency pair and environment better.

You see, oscillators are meant and built for “RANGING” conditions…
And then you still need to understand that oscillators along is no good…
There are convergences and divergences factors that must be accounted by other indicators…

However, you need to do your own homework…
I cannot give you all the answers… I don’t get pay for being a smart ass.
At least, I am helping out a little…

15

Indicators lag price and shouldn’t be used as a method of entry in the first place. IMO, they should just be used as a confirmation filter of what you see price doing.

The assumption with new traders and indicators is that, “price will always react a certain way when this indicator does X.” But, the price isn’t reacting to the indicator, the price is doing what it does and the indicator is showing the past.

Also, on your chart you have written, “stochastics bottomed out, buying opportunity.”

Just because stochastic or any indicator shows overbought or oversold, it doesn’t mean that the next thing that is going to happen is a reversal. In overbought or oversold it could very well keep going in that direction very strongly.

The best thing you can use as entry an exit indicators is price it’self coupled with support and resistance. Indicators lag price. So, if price decides to make a contrary move to what the indicator said just a moment ago, it’s already too late, usually by a lot of pips.

I’ve heard people say they don’t like trading off of support and resistance. Well, if you want to be successful it should be a part of your trading, because just about all successful traders use it to some extent.