Forex Trading - Learning To Predict Future Forex Prices With Rsi
Many people want to know how to predict future prices in Forex trading
. To do that you have to be at the "right place at the right time." This is true of hedge fund traders who made billions shorting the subprime market in 2008 or whether you are sitting in front of your computer trading a certain currency pair on a specific currency time frame. In both cases, it is important to be at the right place at the right time.
Looking back at how you trade, you can probably remember times when you entered a trade and "whamo" price took off and you made money. You were at the "right place at the right time." You can also probably remember times when the opposite happened. This post will explain why.
To go to the directly to the point, momentum happened. You must be at the "right place, at the right time" in a trade for momentum to work for you.
There are three kinds of momentum in the market. I will define two here to keep it simple. First, think of when the Space Shuttle prepares to take off. It takes time to get the shuttle to the launch pad, to run the tests and to prepare for the moment of take off. Often the shuttle gets cancelled however, because of the second kind of momentum.
If you live in Florida you understand that conditions for the space shuttle launches are sometimes uncertain because of the weather. But when it's time to go and the pathway into the sky is clear, the shuttle takes off with unbelievable force. So much so that it shakes the ground. This is the second kind of momentum.
Trading is exactly the same. You must consider both kinds of momentum. How often have you placed a trade because the conditions looked right but then there was no momentum to raise the rocket from the ground? This happens more than you might think and is the result of a lot of trading losses. For the trade to be successful both kinds of momentum must be present or more aptly, the conditions for both kinds of momentum should be present.
How can we be at the right place at the right time?
Two kinds of momentum gauges can be used, one is RSI, the Relative Strength Index, and the second is a keen sense of what will make the market move and when. RSI measures momentum in two distinct ways; neither of which many traders understand. For example, many traders use RSI as a check on whether a currency pair is overbought or oversold. This is a big mistake.
When a currency pair is in a downward trend inevitably it will retrace for some period of time.
A trader who understands RSI will not look to the RSI for the standard overbought and oversold signs that many analysts use.
For example, when RSI is retracing the trader is not looking for RSI to reach a high RSI level, considered overbought, he or she should be looking for a penetrating RSI to a lower level. This means that an RSI Range Shift has occurred. When this Range Shift occurs there is a good chance that the second kind of momentum is just around the corner.
The first kind of momentum as measured by RSI puts you in the "right place."
The second kind of momentum is created by a variety of things; large banks buying or selling for a client, hedge funds divesting itself from a position, or bad or good news for a government. These are the momentum types that give energy to the trade; the day to day transaction that create opportunity for speculation. This momentum allows the trader to be at where he or she needs to be, "at the right time."
Both forms of momentum must be present. If they are profits are made.
If the trader has a trading system which can be tracked he or she can determine when these "momentum times" are most likely to occur for their trading system which is a huge bonus.
Most traders over trade and it because there are not as many momentum moments during a trading day as traders think.
The RSI helps put the trader in the right place with the first kind of momentum so that the second kind of momentum can be used to generate profit in the form of pips. Knowing how these two kinds of momentum work together will help Forex traders make much better trading decisions.
Other things that RSI does to help the trader prepare to be in the right place are: Providing trend direction, Signaling Positive (Bullish Reversals) and/or Negative (Bearish Reversals), Placing of specific stops, Placing of specific targets.
Notice the omission in the above bullets of the concept of overbought and oversold as well as divergences. These are concepts that should be avoided when using RSI.
Traders who are serious about trading Forex should learn the intricacies of using RSI. When they do, they will make great strides in being at the right place at the right time.
by: Paul Dean
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