Post of the Day: RSI and Trading with the Trend

[B]Student’s Question:[/B][B][/B]

I would entre the trade around the 15-16 as I was waiting for the indicator to turn below the 70 mark. I also noticed there was a doji or the other name I forgot, that’s similar to a doji that indicated a reversal. I am not too sure about my stop as placing it at the last high is allot. I would have to be going for double in pips and I see no indication for where I should put a limit. Can you assist?

[B]Power Course Instructor’s Response:[/B][B][/B]

You have the right idea about using the RSI and waiting for it to move below 70 to short a pair is correct.

More importantly, however, is that at the time of the trade (mid September, 2008) the pair was in an uptrend. Under that scenario, we would only be looking for buying opportunities as those would have the higher probability of success. Rather than a short, the prudent trader would wait until price action “bottoms out” on about the 21st and then take a long position (in the direction of the overriding trend) with a stop below the lowest level of price action at the time. See the chart below…

In the short trade that you mention, you are correct that the entry would be a fair distance from the stop which would equate to more risk. As far as placing a limit goes, one way to do it is to simply double the distance of your stop. A 100 pip stop would require a 200 pip limit for a 1:2 Risk Reward Ratio.

The candlestick pattern that you referenced is an Evening Star.