So I want to tackle that if I may because these sort of questions are sort of the most important ones I consider related to trading.
When I want to know how to trade at the moment, I usually like to know which phase are we in long term so that I reflected on my trading in the short term.
I want to give an example with the Euro and Oil because they relate a lot to my analysis on usd.
So here we have a chart of the EURUSD on the weekly. We see that the 20 EMA (yellow) has crossed below the 50 EMA (blue). This tells me that the trend is bearish.
What I learned (similar in a bit to Elliot Wave Theory) is price moves in one direction, retraces then extends further in the direction of the initial move.
My definition of a move in one direction, is one that leads to the crossing of the 20 EMA either above or below the 50 EMA. When 20 moves below the 50, the move is bearish and vice versa. So here the move is bearish.
Much like Elliot Wave, the next step is for price to retrace. How I do this, is wait for stochastic to move from oversold to overbought. Once stochastic reaches overbought, the retracement is near the end. We can see this is the stage we are in with EURUSD.
Once the stochastic crosses to the downside, The continuation move downwards is set to continue. This is what sets my analysis apart from any other, I can define a rather accurate area for the end of retracement. Most systems look for the break of the initial low instead.
All this I have discussed earlier and you guys know it. Its conclusion is that EURUSD is in a retracement and we should look to sell it soon.
What I want to add here today is deciding which pair is likely to see the strongest move, this is where my use of RSI comes in.
This is a very interesting finding to me. When observing the retracement, I look at the level of the RSI and divided to four important zones: 1) between 33.3 and 40. 2) Between 40 and 50. 3) Between 50 and 60. 4) Between 60 and 66.6.
In a short, the lower the level the stronger the move. In a long, the higher the level the stronger the move. That sounds very simple. Here is where it get’s interesting, what the four zones mean.
In a short, when stochastic reaches overbought, crosses downwards and the RSI is between 33.3 and 40: We have a very strong and rapid move coming. Usually extending to at least 2.618 of the original move.
If RSI is between 40-50: We have a strong move coming, but not as rapid as zone one. For example usually reaching an extension of 127.2-161.8.
If RSI between 50-60: We have a weak move that is likely to go sideways, we will be lucky if we reach the original low.
If RSi is between 60-66 (and higher even): The pair has reversed and we are likely to see the 20 EMA cross above the 50 EMA in the future.
Applying this to EURUSD, the value is currently 46.8. This means if EURUSD stochastic crosses lower next week withan RSI between 40 and 50, we will see a good move downwards that will not reach parity but break it as well.
BEAR IN MIND THIS IS AN ASSUMPTION, STOCHASTIC HASN’T CROSSED BELOW YET.
I will not share an image of Oil to keep the post shorter but I advise you to check it out. The stochastic has crossed downwards from an overbought position, starting next week we will see good shorting opportunities. The RSI is at 51.8 meaning we are at zone 3, price will likely go sideways and may be reach the low of $42.
Of course this depends on what happens from now to the end of the week.
I was just requesting an in-depth calculationof it because it seemed contradictory only in USD, not the rest.
