Technical Analysis Basics: How to Correctly Use Indicators With the Trend

Difficulty Rating: 2/4 (Intermediate)

**This is a part 2 of the video tutorial from Indicator Warehouse with a lesson from TraderHelpingTraders.com Erich Senft.  The video is the same, but the explanations below are continued from part 1.  We’ve separated this into 2 posts because the lesson in this part is very critical for CORRECLTY USING STANDARD TECHNICAL ANALYSIS INDICATORS such as RSI, CCI, and Stochastics that most amateur and intermediate traders DON’T pay attention to. These standard technical analysis indicators are so common you can find them on any stock chart website orstock charting software.

PRESENTER: Erich Senft, TradersHelpingTraders.com

Part 1: Faster Technical Analysis by Adjusting Standard Technical Indicators: RSI, CCI, Stochastics

RSI Example

Looking at a first example with RSI, with the period cut to 7, and not doing anything else different by just trading the standard 60% overbought vs. 40% oversold regions. How would you use the RSI indicator with these settings for your technical analysis? In the Corn Futures chart example, we have a 55-period moving average, but you can use any moving average line you like. I find 55-period moving averages to be pretty good, or maybe 60. Some people like 20, although for this particular purpose I might find 20-period moving averages a little bit too fast. You may like 100-period moving averages or 120-period. Anything over 120-period moving averages, at least for the commodities markets on a day scale may be a little too slow. But as long as you choose something between 50 and 120 for your moving average, and use this to determine your trend, you should be doing alright.

The way RSI is traditionally traded is when the market is overbought and it crosses below the 60% line it is a sell signal. When it is oversold and it crosses above the 40% line, that is a buy signal. What we’re going to do in this example is we’re only going to use this indicator in conjunction WITH THE TREND! As we just said, as long as the market is above the moving average line you set as the trendline, we’ll only be looking for BUY SIGNALS. (because the market is in a positive position when it stays above the trendline, so we’re looking for buying opportunities in this positive position).

We will be ignoring all these sell signals that the RSI indicator shows. Yes there will be odd occasions where the market responded well to a sell signal and moved a little bit in the right direction, but overall on this chart, the sell signals were very short lived. What would happen if we just followed the buy signals? As you can see in this chart and in this video, each of the 5 buy signals indicated by the RSI led to significant gains, adding up to the major runs of this bullish rally.

By shortening the length of the RSI indicator’s period, TRADING ONLY THE TREND SIGNALS, and not doing anything else different, we would’ve had several very good winning trades. So next time when you try incorporating an indicator into your trading system, consider shortening the trading period of the indicator, putting a moving average line onto your chart, and only trading WITH THE TREND. I think you’d be pretty happy with the results.

 

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