RSI and Trend

Beginner Questions
1

Hi everyone, I am trading with a small amounts of money and am looking to use RSI, as I have read that it is a ‘forward’ or ‘predicting’ indicator. But would you agree this is true? Can any indicator, which uses past data, as this is all we have, be considered as a predicting indicator?

My second problem I have with this is I also read that traders new to trading should ‘trade with the trend’, and I want to stick with this. So I am looking at RSI above 70 or below 30, and a pinbar, as a setup, but this is almost always counter trend, which I am not comfortable with. Today I entered a setup like this, and then realised that it came after a strong trend opposite to the direction I was trading, so I closed for a very small profit. So is there a way of using RSI for WITH trend setups? Is it a matter of using it to find the end of pullbacks?

Sorry for sounding mixed up, and as always, your help is appreciated.

Dave.

2

I’ll give that one a big, round, perfectly-formed “no”.

As you rightly observe, it’s compiled from previous prices.

As is true of all indicators, it’s very easy indeed to cherry-pick examples which “illustrate” its “predictive powers”, and there are books, websites, forums and courses full of them.

If wanting to use RSI at all - and I’m not trying to talk you out of it - I’d suggest that it may be worth your while investigating a related indicator called “stochastic RSI”. (I’ve posted elsewhere about it, if that helps).

Pin-bars can help to identify reversals, indeed. It’s not a pattern which will be helpful to you if you’re trying to concentrate on with-the-trend trading. (I like pinbars, myself, and find them very helpful, and in my opinion they’re quite widely underrated).

Yes, there are many. (Whether they confer any statistically provable “additional edge” or not is another matter altogether, and people will always have their own opinions about that).

If it helps, here’s a very viable little system which uses RSI: [B]301 Moved Permanently

3

PS: If you want to see a viable pin-bar method which also uses the RSI indicator, there one here (but it’s inherently reversal-based, rather than trading with a longer trend, of course): [B]301 Moved Permanently

4

All indicators are lagging behind price. If you look at charts from the past you’ll notice patterns from indicators giving you “clear” buy/sell signals, however, when you start trading and see the chart in real time the indicators haven’t formed yet and give confusing signals. RSI can be good indicator but you should mostly focus on price itself, i.e. support/resistance zones and patterns and candlestick patterns while you learn (also moving averages are good for beginners).

5

Hi Lexys,
In the trading system link you posted it says to do the following:

[B]Entries:
Enter long at the start of the next M10 bar after an M10 bar has closed with the fast moving average having crossed up above the slow moving average [/B]

Excuse the possibly ignorant question, but is the faster moving average the 18 period one or the 6 period one?

Cheers,
Simon

6

Hi Lexy - In the ‘simple easy to execute trading strategy’ you advise the standard 14 period RSI. Could you please confirm this is not the stochastic RSI you also mentioned?
Also, if it is not too cheeky of me, do you have a recommendation for a system on the daily timeframe? This would probably be easier for me too cope with at the moment.
Best regards,
Dave.

7

The 6-period one.

“Faster”, in this context, means “responding more quickly to price-changes”, i.e. measured over a shorter period of time so that recent prices have a greater [I]pro rata[/I] significance.

The shorter/shortest-period of two or more moving averages always responds faster, i.e. it follows changes in price-trend more quickly, i.e. it “lags less” behind the price. :slight_smile:

General note about moving average crossovers as entry-signals: faster ones lag less and give more signals, each of lower accuracy; slower ones lag more and give fewer signals, each of greater accuracy. If you compare 6-period and 18-period MA crossovers as an entry signal with, say, 12-period and 36-period MA’s, the crossover of the 12/36 period ones will give fewer signals, but their signals will have a higher “win-rate”, i.e. be more accurate. You can’t deduce from that, though, that they’re necessarily either any safer or any better, overall. Sometimes having more trades of lower accuracy produces more overall profit than fewer trades of greater accuracy. You just have to be careful with position-sizing to allow for a “bad run”.

Yes: that one’s just a standard RSI, not a stochastic RSI.

Not a specific one, I’m afraid, because I’ve never traded from daily charts.

Both the systems above will also work from daily charts, though (and more reliably than they do from faster charts): they just won’t have so many trades and will be boring and slow.

Generally, paucity of trades is what has always put me off daily time-frames, but I’ve never had a job to contend with (the nearest I ever got to that was being an undergrad student at university, and even then I could always get online multiple times per day and to be honest my courses were somewhat less time-consuming than many others, too).

If planning to trade from daily charts, myself, I would certainly be thinking about [U]break-out[/U] systems, because forex break-outs of daily highs and lows - and especially of [B]2[/B]-daily highs and lows - can be quite significant. (But there speaks a price action trader who doesn’t really like indicators :stuck_out_tongue: ).

8

Hi lexys, thanks for taking the time to explain with such detail, it’s much appreciated :slight_smile:

I’m in a bit of catch 22 with my demo account with Oanda though in that on Oanda Mt4 i dont have a 10 minute time frame, whereas on my FXTrade demo account I do. However, on my FXTrade demo account my Full Stochastic indicator deosnt have a setting for horizontal lines as required by your simple system.

Would the settings need tweaking slightly do you think for a 15 minute time frame, or could i leave them the same?

Cheers,
Simon

9

It doesn’t have a “setting”, [I]per se[/I], but it’s still easy to do: just click the little thing in the top-right-hand corner of the chart, select “horizontal trendline” from the drop-down menu (exactly as if you were drawing one on the price-chart), and then click to drop the horizontal line on the indicator-panel instead. :wink:

Yes, they would - but it’s not trivially easy to work out, as you’d want to do it pro rata to the volatility rather than to the periodicity. It’s easy to put horizontal lines on an fxTrade indicator-panel, I promise. (And even easier if, while doing it, you temporarily minimise the price-panel and expand the indicator-panels as much as you can).

General principle for trading/practising/researching: don’t allow the parameters of your trades to be determined by what your charting software can/can’t easily produce for you. Make it do what you need, or change software - the trader needs to control and limit the tools, not [I]vice-versa[/I]! :slight_smile:

10

Simon,

If it helps, here’s a current chart from that system, saved 1 minute ago, from an Oanda demo-account using fxTrade (EUR/USD, 10-minute chart) …

for-Simon.jpg700×390 46.7 KB

11

Magic, thankyou very much :slight_smile:
I will use this system on my FXTrade demo account, and as you advise will record the outcomes of 200 consecutive trades.

And whilst waiting for each trade to close it gives me ample time to continue my study at the BabyPips school too.

Thanks again lexys, it’s great that experienced traders such as yourself take the time to show us newbies the ropes.
I dont know where you get your patience from though as i need to learn that particular life skill myself! :slight_smile:

Cheers,
Simon

12

You’re welcome. Looking forward to hearing how it goes, for you.

The chart’s not a thing of beauty, I know. On that fxTrade interface, I always find white or yellow bars on a black background easier to see than dark colours on white (you can almost lose sight of the price that way!) but white on black doesn’t save/post very well in the forum. :stuck_out_tongue:

On the other hand, it looks from a quick glance at it that today was quite a decent day for that system, though? :wink:

13

Hi Lexys,
This morning I found that the trade conditions were met on the GPB/USD so I triied to place a buy order witha stop loss of 9 pips and a take profit of 15 pips based upon my capital of £5047.67 (£5k plus one winning trade :slight_smile: )

However, after using the position size calculator and risking just 1% of the capital as a stop loss, the trade has been rejected due to insufficient funds.
Would you mind please having a quick look at the attachment to see if you can spot where I’ve gone wrong?

Cheers,
Simon

rejected.jpg649×700 42.6 KB

14

What is your leverage set to, Simon? You would have had insufficient funds for the trade you tried to enter, if you were trading with insufficient leverage? (That little “order entry window” says - on the top line of what’s printed at the bottom - the number of units available for you to trade, and it’s less than the number of units you were trying to trade). I’m guessing your leverage is set to 10/1, and you might want to change that to 50/1. The stop-loss you enter yourself isn’t the one that Oanda uses, for that calculation:[I] for purposes of permitted position-sizing[/I] they use a much, much wider stop, just to allow for “sudden unexpected disasters/news” causing a fast-moving market.

Also - though nothing to do with your question above - at what time of day were you entering a trade on Cable? :wink:

Edited to add: also - it’s a Bank Holiday in America, today, so I’m not trading Cable, myself: [B]301 Moved Permanently

15

Hi Lexys,
Yes you are right in that my leverage is 10 : 1, primarily because I dont want to borrow more than that really to purchase currency. But saying that when I start trading for real I imagine I’ll need a bigger bank roll to trade with lower margin, which is the downside I suppose…

And again you’re spot on in that I forgot about the condition to avoid the opening of trading the first 30 minutes of the main trading hours, because I placed the order 5 minutes after the UK trading hours opened…oops :slight_smile:

I have placed one trade so far (and won) so only another 199 to go! I’m recording them all in a journal so it will be interesting to see how this system performs over time.

Cheers,
Simon

16

There is nothing wrong to use the RSI and the trend, but you need one or two more indicators for confirmation. RSI by it self can produce lot of false signals because it can go in oversold or overbought territory and stay there for a long period of time while price can still drastically move from that point.

17

Hi there

If you are just starting trading, why not just start with backtesting at least 100 trades, then forward test another 50-100 trades and see what results you get? I don’t know if anyone on this forum would have tested out the same system that you want to use, and even if they claim to have done so, would you just take their word for it, and be able to trade this system without verifying that it is profitable yourself?

I have experimented with many systems before, most of which I got the idea for from forums like babypips, then modified a little and did backtesting on. My conclusion is that almost all systems that have a logical and sound reasoning, and that have been proven profitable in extensive backtesting, would be profitable in live trading, provided they are traded by the right trader with the right mindset. What do I mean? It means acknowledging that any system would experience drawdowns and losing streaks, and it takes a lot of confidence in your system and yourself to trade through the losing streaks. This is my own personal experience in my past 4-5 years of trading. I have also done what many traders have done, that is once I hit a losing streak trading one particular system, I lose confidence in it and try to find another system, and then the cycle goes on again and again.

In addition, if you aim for say $150-$200 for every $100 that you risk, you don’t even need to win half your trades to be profitable. Of course when starting out if you can hit a win rate of 60-70% with at least 1:1 reward to risk on your trades, that would be a great confidence booster. If you try to get 1.5:1 or 2:1 reward to risk on your trades, your win rates would drop and that means possibly longer losing streaks, and resulting drop in confidence levels. Only you can tell what reward to risk you should be going for, being in actual trade situations.

So to conclude, my point is that you should do your own backtesting with a fixed set og entry and exit rules, and if you like the backtesting results, forward test on demo accounts, then gradually move on to trading micro lots while continuing to collect data on your trades, because the more trades you have, the larger the sample size and the more accurate the data that you collect become. There is no shortcut and substitute for hard, back breaking backtesting, before you can say absolutely that you are confident in any system, and then have the confidence to trade the system through any losing streaks that you have. Good luck!

18

+1 on that. I think the biggest mistake and misuse of the RSI is the thinking that a level below 30 is an automatic buy signal and that a level above 70 is an automatic sell signal. As with just about every other aspect of trading, the majority just does not understand how to use a tool and then blames the tool for not working.

19

Having the RSI as one and only indicator it will not give you a very accurate signals. Usually, there are more than one indicators needed in order to get more accurate signals. RSI can go in overbought or oversold territories and stay there, while the price will continue moving.