Wizard of Trading

Inside days can be very profitable if traded correctly. First of all it is necessary to identify an inside day.

At the close of the market you are following take a note of the high and low for that day (day two). For it to qualify for an inside day the high must be lower than the high of the previous day (day one) and the low of the day must be higher than that of the previous day.

In other words the bar (day 2) must be inside that of the previous day (day one). This is the set up. I like to trade this in two ways.

The first method is to place a buy order a few ticks above the high of day 2 and a sell order below the low of day 2. Once your orders have been placed it doesn’t matter which direction the market goes you will have a position.

You can place your stop loss order in one of two ways. You can use a dollar amount or if the inside day (day 2) is not too large you can place a stop loss a few ticks above the high of the inside day. If you are taken short or a stop loss a few ticks below the low of the inside day if you are taken long.

I like this trade to work on day 3 only. If it has not worked on day 3 I cancel the trade. It may still work after day 3 but in my research it tends to make the most gains if it works in day 3.

The second method is to first identify an inside day on a daily chart and then trade it intraday. If you are trading intraday you can monitor price action at the low or the high of day 2 and either enter the market as the high or low of day 2 is taken or enter on the first rally or dip as the case may be on a smaller time frame.

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your exit price and where to put your stop loss..
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History

Relative Strength Index was developed by J.Welles Wilder Jr. and introduced in his book ‘New Concepts In Technical Trading Systems’. It is one of the most popular technical tools around. Relative strength Index (RSI) is measured on a scale from 0-100 with a reading above 70 being overbought and a reading below 30 being oversold. Originally he recommended a 14-day period as the setting but many other time periods have now become popular. Wilder discusses 5 uses of RSI in his book.

Tops and Bottoms
These are indicated when the readings go above 70 (top) and below 30 (bottom)
Chart Formations
The RSI may form chart formations that may or may not appear on the actual bar chart e.g. you might see a head and shoulders formation on the RSI but not on the bar chart.

Failure Swings
When the RSI goes above 70 or below 30 this is a strong indication that the market is ready for a reversal.

Support and Resistance
It is sometimes more apparent that support or resistance is forming in the RSI than can be seen on the bar chart.

Divergence
When price makes a new high or low and this is not confirmed by the RSI this can be a very strong indication that a reversal is imminent.

My Use Of RSI

My own favorite use of RSI is that of divergence. When the security you are trading makes a new high and the RSI turns down that is bearish divergence.

The same is true of bullish divergence. When price makes a new low and the RSI turns up that is bullish divergence.

I also prefer to see divergence at major tops and bottoms. That is to say, if we have been in an up trend for some time and I am already thinking this might be topping and I see divergence then I am a lot more confident that it has in fact topped and vice versa.

I don’t like to use RSI as a sole trigger for a new position but rather I like to use it in combination with other indicators to help build a picture. You will notice that in most cases of divergence the security makes a low as does the RSI, then the RSI begins to turn up but the security continues down. The same applies to highs.

Now the security makes a new low and the RSI does come down but not as low as the previous low and that is the point where action can be taken. The fact that the RSI has not dropped lower than its previous low and the price has, is the point of recognition. If I also have a break of a trend line or it has reach a projection or some other confirming analysis then I would enter a trade.

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History

Relative Strength Index was developed by J.Welles Wilder Jr. and introduced in his book ‘New Concepts In Technical Trading Systems’. It is one of the most popular technical tools around. Relative strength Index (RSI) is measured on a scale from 0-100 with a reading above 70 being overbought and a reading below 30 being oversold. Originally he recommended a 14-day period as the setting but many other time periods have now become popular. Wilder discusses 5 uses of Relative Strength Index (RSI) in his book.

Tops and Bottoms
These are indicated when the readings go above 70 (top) and below 30 (bottom)
Chart Formations
The RSI may form chart formations that may or may not appear on the actual bar chart e.g. you might see a head and shoulders formation on the RSI but not on the bar chart.

Failure Swings
When the RSI goes above 70 or below 30 this is a strong indication that the market is ready for a reversal.

Support and Resistance
It is sometimes more apparent that support or resistance is forming in the RSI than can be seen on the bar chart.

Divergence
When price makes a new high or low and this is not confirmed by the RSI this can be a very strong indication that a reversal is imminent.

My Use Of RSI

My own favorite use of RSI is that of divergence. When the security you are trading makes a new high and the RSI turns down that is bearish divergence.

The same is true of bullish divergence. When price makes a new low and the RSI turns up that is bullish divergence.

I also prefer to see divergence at major tops and bottoms. That is to say, if we have been in an up trend for some time and I am already thinking this might be topping and I see divergence then I am a lot more confident that it has in fact topped and vice versa.

I don’t like to use RSI as a sole trigger for a new position but rather I like to use it in combination with other indicators to help build a picture. You will notice that in most cases of divergence the security makes a low as does the RSI, then the RSI begins to turn up but the security continues down. The same applies to highs.

Now the security makes a new low and the RSI does come down but not as low as the previous low and that is the point where action can be taken. The fact that the RSI has not dropped lower than its previous low and the price has, is the point of recognition. If I also have a break of a trend line or it has reach a projection or some other confirming analysis then I would enter a trade.

As you can see from the two charts below one is exhibiting bearish divergence and the other bullish divergence. In both cases it signified the end of a trend.

USD/CHF

USD/CHF

Good Trading

Mark McRae

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.

This Blog was sponsored by Mark McRae.
Visit his site here: Learn Forex Trading

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History

George Lane was the originator of the sochastics in the 1970’s. Lane observed that as prices increase in an up trend, closing prices tend to be closer to the upper end of bars and in a down trend closing prices tend to be nearer the lower end of bars. Lane developed stochastics to discern the relationship between the closing price and the high and low of a bar.

Typically used to identify overbought and oversold conditions the indicator consists of two lines: % K and %D. These two lines fluctuate in a vertical range between 0 and 100. Readings above 80 are considered overbought and readings below 20 are considered oversold.

Stochastics can also be use to generate buy and sell signals. When the faster %K line crosses above the slower %D line and the lines are below 20, a buy signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a sell signal is generated.

My Own use Of Stochastics

Well as usual just to be contrary to everyone I don’t use the stochastics to signal overbought or oversold although I do take note of the readings. I like to use them as possible buy and sell opportunities after defining a trend. If the trend is up as in the example below on the AUD (Australian Dollar) I like to only take buy signals regardless of the reading as long as the trend remains in place. I ignore the sell signals. I purposefully weaken the stochastics to give me more signals and I use 8,3,3 as my settings.

This gives more signals and shows the hand of the weaker players. The same is true of selling in a down trend. I ignore the buy signals and only take the sell signals. I don’t use stochastics on their own as trading method as all the settings I have tried ultimately resulted in to many wipsaws. Experiment with different settings and consider adding this indicator to your trading arsenal.

AUD/USD

Good Trading

Mark McRae

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.

This Blog was sponsored by Mark McRae.
Visit his site here: Learn Forex Trading

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