Am new to forex trading and have been trying to trade using the 4 hour and 1 hour charts. I am using MA, stochastic and RSI identifying trend on 4 hour chart and then trying to spot entry on 1 hour chart. i need to know what parameters are best to use for stochastic and rsi on the 1 hour and 4 hour charts. right now my stochastic is (5,3,3) and RSI (4). please help me especially with the rsi
Hi,
As a matter of interest what is your understanding of Relative Strength Indicator (RSI)? I am asking this question since you stated that you have been trying to use it.
As you may already know RSI covers a range of 1-100%. All indicators like RSI etc are nothing but normalised oscillators (0-100%). Take RSI itself. In a bull market (say GBP/USD up for two or three days), a simple RSI will give misleading values. Let us work it out
RSI = 100 - 100 x 1/(1+RS)
RS = SUM OF CLOSES in the past say 14 periods where CLOSE > OPEN)/ SUM OF CLOSES in the past 14 periods where CLOSE < OPEN
Now in a bull market where in the 14 periods (last 4 hours period whatever) there was no condition for => CLOSE < OPEN, then RS = infinity and hence RSI approx = 100% (i.e. 100 – 100x 1/(infinity) ). Well does that mean it is all overbought? Not necessarily. The reverse will be RSI approching very low values like zero.
So you need to judge yourself how to relate a 4 hour chart with 1 hour chart. In general a shorter period is a subset of longer period and so the credit goes to higher period.
With regard to specific of RSI I would state the following:
RSI > 60 strong uptrend
50<RSI<60 weak uptrend
RSI around 50 (ranging) or thin market (little trading activity)
40<RSI<50 weak downtrend
RSI<40 strong downtrend
HTH
Both stochastics and RSI are momentum oscillators (not price) and with the setting you have that are so close together…one being a 5 bar period, the other 4 bars , they will basically say the same thing (oscillate fairly equally) on the same timeframe, so one of them is actually redundant.
However, if you make one of them have a longer lookback period, it is in effect showing a higher timeframe’s momentum. When the indicator with a shorter look back period is going in the same direction as the longer one, then momentum in that direction is in sync, and then trading in that direction has a higher probabililty of getting some positive pips when used in conjuction with your entry signal method…whatever that is.
As for what lookback period settings to use, you need to try a few different ones to best fit the indicator oscillations with the price swings…(both long and short). Since different pairs have different volalitilty, one setting does not fit all. Occassionally even that best fit will not stay best fit for a couple of reasons…1) it was set at a time when volatility was higher or lower than normal, or 2) volatility became higher or lower than normal. You may need to tweak them from time to time but they can last for a while before/between tweakings…lol.
Hope that helps 