Relative Strength Index (RSI).

Among trading’s most popular indicators, RSI (Relative Strength Index) stands out. That is for a good reason, because, as a member of the oscillator family, RSI can help us determine the trend, time entries, and more. That's why most trading software has it as a default tool, and it is only necessary to adjust it according to our needs.

What is the 'Relative Strength Index – RSI?

The relative strength index (RSI) is a momentum indicator created by noted technical analyst Welles Wilder. It measures the speed and change of price movements by comparing the magnitude of recent gains and losses over a specified period. Its primary use is to identify overbought or oversold conditions in the trading of an asset.

What makes it a momentum indicator is that it provides an evaluation of the strength of a security's recent price performance in a relative way.

Overbought and Oversold in RSI.

The standard interpretation of the RSI is that RSI values of 70 or higher show that a security is becoming overvalued or overbought, and there may be a corrective pullback in price or a trend reversal.

On the other hand, an RSI reading of 30 or under is usually read as a signal of undervalued or oversold conditions that may signal a trend change or corrective price reversal to the upside.

Think Beyond the Crossovers.

When traders first learn about RSI and other oscillators, they tend to gravitate to overbought and oversold values. But, these are intuitive points to get into the market on retrenchments and can be a mistake in robust trending environments.

That means extended trends can keep RSI overbought or oversold for long periods of time.
RSI is not different from mostly oscillator with a centerline found in the middle of the range at a reading of 50. It becomes a white crayon in a pencil case compared to the indicator itself.

The centerline is used by Technical traders to show shifts in the trend. If RSI is above 50, it means opportunities to buy the market. A drop below 50 would indicate the development of a new bearish market trend.

Like many other oscillators, RSI defaults to a 14-period setting. That means the indicator looks back 14 bars on whatever graph you may be viewing, to create its reading.

Despite 14 being the default setting, it is not always the best setting for your trading.
The use of a smaller period is regular among short-term traders, such as a 7 period RSI, to create more indicator oscillator. On the other hand, a higher period, such as a 25 period RSI, is opted for longer-term traders for a mother indicator line.

What are other useful tools to use with the Relative Strength Index (RSI)?

As the name implies, RSI simply measures the relative strength of the underlying market. Identifying reversals using RSI, it is necessary to add other tools like candlestick analysis or trend line analysis.
A typical example of this is if RSI is diverging while you are reading a reversal candlestick near a trend line, then you have a trading opportunity being generated.

ADX Indicator.

Do you know what the ADX indicator is and what is it for?

Technical indicators are much more than colored lines that intersect in your graphic. They are the tools that help us work in our trading operations. For this reason, we are going to analyze the indicator ADX (Average Directional Index) in depth.

What is the ADX’s origin?

This indicator was created by the currencies and commodities trader Welles Wilder, in his book "New concepts in technical trading" whose purpose is to identify whether there is a trend in a market or not and the strength of it.

The indicator oscillates within a parameter between 0 and 100 and is calculated according to the differences of the lines + DI and -DI (directional indicator).

To understand how the calculation of both directional indicators is formalized, first, we must explain the concepts DM (directional movement) and True Range (true range).

The DM is calculated by the difference of a maximum or minimum of the session about its maximum or minimum of the previous session, therefore in a bullish move we will obtain + DM (maximum difference), and in a bearish movement, we will obtain -DM (minimum difference).

How to use the ADX indicator as a trend filter?

As the ADX compares the differences between + DI and -DI are increasing it means that the market is in trend, and the ADX will reflect a positive slope, on the contrary, if between + DI and -DI there are hardly any differences, it will result in an ADX in negative slope, which means that the market is lateral without bullish or bearish dominate the market.

Traditionally if the ADX reflects readings higher than 40 is a sign of strength, on the other hand, readings below 20 reflect weakness in the market.

If you want to trade in the stock market following trends, you need to find movements that give you enough margins to be able to perform profitable operations. That is why it is necessary to filter.

According to Welles Wilder, in his book "New Concepts in Technical Trading Systems," a trend-following system should not be used when the level of the ADXR is less than 20. In this way, we block any input signal - long or short- of a trend system until you have the indicator ok.

Another tip that can be useful is to use the ADX indicator to filter, but do not use it to give signals because when looking to follow trends, it is better to use the ADX indicator to condition the entries to the market.

ADX is not as recommended to signal the outputs, why? Because the theory says that when the ADX goes down the trend is losing strength.

Very well, it may be losing strength but still be very profitable. For departures, it is preferable to use some trailing stop that allows you to take advantage of the trends and control the risk.

Why is it useful?

If you know how a technical analysis indicator is calculated, you will be able to know what it does and how it does it.

Once you know this you will be able to adjust it better to your type of operative, adjust the temporalities, to identify with what other indicators to combine it, and obviously you will be able to interpret your signals better.

Moving Average Indicator.

The moving average is based on past prices and can be categorized as an indicator that follows the trend. It shows the average value of the price of an instrument during a certain period. When the Moving average is calculated, the price of the instrument is mathematically averaged over a given period. Its average value increases or decreases depending on the price change.

There are several types of moving averages: simple (also called arithmetic), exponential, smoothed and weighted.

The Moving average can be calculated for any sequential set of data, including the opening and closing prices, minimum and maximum, trading volume or other indicator values. Often the moving averages of the same moving averages are used.

The only thing in which the Moving averages of different types differ substantially is different weight coefficients that are assigned to the latest data.

In the case of the Simple Moving average, all the prices of the considered period have the same weight. The Exponential Moving average and the Pondera (Exponential Moving average and Linear Weighted Moving average) assign more value to the latest prices.

The most common way to interpret the moving average of the price is to compare its dynamics with the dynamics of the same price. When the price of the financial instrument rises above the value of the Moving average, the purchase signal appears, when it drops from the indicator line - the sales signal jumps.

How to use the Moving average Indicator?

It is really important to know the characteristics of the indicators that we use since this will help us to understand which situations work best and how to get the most out of the information they provide.
This trading system using the Moving average is not designed at all to guarantee entry to the market strictly at its lowest point, and the exit from it - just at its peak.

It allows you to act according to the current trend: buy after prices have hit bottom, and sell after the peak has been formed.

Depending on the method there are three types of mobile media: simple mobile average (SMA), smoothed mobile medium (SMMA) and exponential moving average (EMA).

The analysis of moving averages has the following principles:

• The direction of the moving average shows the direction of the movements of the prevailing prices
• The smaller the period of the moving average, the more false signals can occur, and the longer the period, the greater the backwardness of the indicator
• To increase (decrease) the sensitivity of the moving average, it is necessary to decrease (increase) its period.
• The use of moving averages is more reliable when the trend is evident.

Comparison of the dynamics of moving averages with the dynamics of asset prices:

• A strong signal for the purchase (sale) is considered the intersection of the lower part (top) of the moving average an increase (low)
• A weak signal for the purchase (sale) is considered the intersection of the lower part (top) of the moving average low (growth).

Comparison of the dynamics of moving averages with different periods:

• A strong signal for the purchase (sale) appears when the growing (decreasing) moving average, with a small period, crosses for the lower part (top) a growing average (low) with a considerable period
• A weak signal for the purchase (sale) appears when the growing, moving average (decrease), with a small period, crosses the lower part (top) a mean in low (growth) with a significant period.

Moving Average Convergence Divergence (MACD).

MACD is not just any indicator; intelligent use of this indicator can help us to be in tune with the market and gain precision when positioning ourselves in the profit line. The MACD indicator allows us to measure the intensity of the market, see if the trend of the movement is going to continue or is going to turn in the opposite direction. It is based on the use of moving averages combined with a histogram of the oscillator.

How does MACD work?

The first thing you have to know is that it is an indicator of the trend-following type with two parts. The MACD itself (the lines) and the MACD histogram (the bars). The MACD histogram (known as MACDh) only measures the distance between the two MACD curves, but visually it is advantageous because it tells us at every moment who is in charge, whether the bulls or the bears.
Not only that, but it also shows us if those in charge are still strong or if, on the contrary, they are losing ground.

MACD is a measure of how two moving averages (usually two exponential averages of 12 and 26 periods, respectively) come together and move away.
Subtracting the position of these two means, you get the mainline of MACD The second line considered the signal line, is not more than a moving average of the first line (specifically an EMA9, an exponential of 9 periods) and that will be crossed every few time with the mainline.

How do we use that information?

MACD lines can be used in two ways:

• Either we buy and sell attending to the crossings between these two lines
• Or, we buy when both go above zero and sell when they go negative.

Keep in mind that the first is more nervous (typical of swing trading) and the second more oriented to a medium or long-term operation, where you are willing to take strong corrections without disheveling.

These are the two classic ways to use MACD as an input and output signal in your operations.
But, why stay there?

MACD and Stochastic: A Double-Cross Strategy.

Using this strategy, you will be able to change the intervals, finding optimal and consistent entry points. That way both active, traders and investors, can be in the first line with a simple adjustment.
Don’t be shy about using both indicator intervals and you will realize how the crossovers will line up differently, so the rest is select the number of days that is more suitable for your trading style.
Just for fun, add a relative strength index (RSI) indicator into the mixer and get a profit drink.

Botton line

The MACD Indicator is an exciting source of price direction changes when looking for trend lines, supports or resistances.

It is very dangerous to trade only with the signals given by the indicator; this can make a strong profit when we enter vertically but also to a minor in stages.

The divergences between the MACD and the price chart can anticipate partial or permanent address changes of the asset, but they are just a message, they should not be taken as a definitive signal.

AUDUSD Breakout Signal March, 4

AUDUSD Breakout Signal March, 4