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By Vadim Pokhlebkin

If you’re vain like I am, you’ve probably googled your name before. Just to see what comes up.

During one of my most recent googling sessions, I came across a curious repartee on a forex forum website. Here’s the gist of the conversation between two traders who happened to read one of my Forex Focus articles:

Trader A: “Who cares about all this junk: news, economic reports, wave counts, blah blah! That’s not how you make money trading, anyway.”

Trader B: “Exactly. Wait until the big guys are buying or selling, jump in and ride it – that’s the only way to go.”

OK, I thought, just a couple of trend-followers talking shop. Nothing wrong with trend following: “The trend is your friend,” we all know that.

But then I realized something else. That conversation perfectly illustrated a crucial point about the way many forex traders approach the markets. Here’s how: If it goes up, buy it. If it goes down, sell it.

A perfect description of herd mentality in the markets, wouldn’t you say? Traders herd – meaning, they let their emotions, not facts or careful analysis, govern their trading decisions. Could that be one of the reasons why 90% of them lose money?

As an Elliott wave trader, you can learn to use these herding impulses to your advantage. People chasing trends is precisely why Elliott waves appear in the markets. The herd’s emotions follow a fixed pattern: 5 waves up, 3 waves down (or vice versa, in a bear market). Once you know what wave you’re in, you can estimate which one comes next.

It’s not always that simple, but it often is.

There are many fx charts available for download in the web. Some of them are free and the rest need a subscription. One should analyze what type of traders and choose the appropriate fx chart that suit you. Some available chart can be seen here Forex Chart Resources

What is RSI?
RSI is an indicator that falls under the category of oscillators, and it is an extremely simple indicator to use. RSI works well in range-bound markets, but it has limited value in trending or breakout markets. RSI was created by Welles Wilder, who also created ATR, Parabolic SAR and other well-known indicators.

The Concept of Oscillators
Oscillators are chart studies that are designed to show the strength of the current price in relation to the recent price action. As such, they display the short term momentum of the market, giving signals that the bias of the market is shifting before the price actually changes directions.

The principle upon which oscillators are based is that of regression to a mean. Essentially, a large part of a statistical sample should be within a certain number of standard deviations from the mean of the sample, and if the price strays too far from this center, then it will likely revert back to the rest of the sample. In terms of trading, the price should not rise or fall too far in too short a time.

Oscillators are not usually displayed on the same graph as the price itself, but are most often placed at the bottom of the chart to show that the fluctuations do not occur on the same scale as the price movement.

What RSI Does
Like all oscillators, RSI offer indications of when a currency pair is overbought/oversold. RSI essentially calculates the strength of all upward candles (green) against the strength of all downward candles (red) over the course of the specified time frame.

Parameters
When pulling up RSI on a chart, the charting application will prompt you to select how many periods you would like to include in your study. The most commonly number used is 14, and most traders do not alter this default setting. Some traders do use 9 or 25 period RSI’s instead of the standard 14. Of course, increasing the number of inputs will decrease the number of signals and increase the reliability of these signals. Decreasing the number of inputs would have the opposite effect.

How to Use RSI in Trading

Can be used to determine overbought/oversold levels
Used to spot divergences, which indicate potential weaknesses in trends
Overbought/Oversold
If RSI is above 70, the pair is considered to be overbought. Some traders enter short at this point, but this can be dangerous as the price may still be rising. Enter short when the RSI crosses back under 70, as this may indicate that the momentum has turned. If the RSI is below 30, the pair is considered to be oversold; enter when RSI crosses back above 30. Like most oscillators, RSI works best when the market is range-bound – in other words, when the market is expected to simply gravitate between an upper and lower level. In trending or momentum-driven markets, using the overbought/oversold levels offered by RSI is generally of limited value.

Divergence.
RSI can also be used to signal when a trend is weakening. If a currency pair makes new highs in its price but RSI does not – meaning there is divergence between the price movement and RSI – it may signal that the trend is not strong, and that a reversal may be imminent. If candlestick patterns confirm, a trader can use this as an opportunity to enter a position.

Developed by John Bollinger, Bollinger Bands is an indicator that allows users to compare volatility and relative price levels over a period time. In short, the Bollinger Bands provide a relative definition of high and low.

The indicator consists of three bands which usually encompasses the majority of price action.

A simple moving average in the middle

An upper band (SMA plus 2 standard deviations)

A lower band (SMA minus 2 standard deviations

The basic interpretation of Bollinger Bands is that price tends to stay within the upper- and lower-bands. Because standard deviation is a measure of volatility, Bollinger bands adjust themselves to the market conditions. When the market become more volatile the bands widen (move further away from the average) and during less volatile periods, the bands contract (move closer to the average). The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply.

The following are the characteristics of Bollinger Bands. Sharp price changes tend to occur after the bands tighten as volatility lessens.

When price moves outside the bands - a continuation of the current trend is implied.

Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend. A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.

These characteristics make this indicator a versatile one and if interpreted properly it can give an accurate picture of the price action.

But these following points should be followed for an accurate interpretation.

Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band.

Tags (touch) of the bands are just that, tags not signals. A tag of the upper Bollinger Band is not by itself a sell signal. A tag of the lower Bollinger Band is not by itself a buy signal.

Bollinger Bands Divergence Strategy

This indicator has certain characteristics, which make it ideal for predicting a reversal of trend.
Firstly, because of the way it is calculated, 85% of the price action is contained within the bands and hence it gives a very good indication of the price being overbought or oversold, in that time frame

Secondly, the widening of the bands shows increasing volatility and the narrowing of the bands show decreasing volatility.

Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend.
When price approaches the upper or lower bands, there is almost always a reversal or a strong continuation. If there is a reversal, we want to identify it correctly and get in early.

The price of any currency, commodity, futures etc. across all time frames display a unique characteristic that signals a change in trend.

It is generally observed that price will make a last thrust in the direction in the prevailing trend, before changing direction.

This could be trend exhaustion or a final running of stops in the market. This movement of the price is made with reducing momentum, which is observed as a divergence between the price action and any indicator.

The Bollinger bands show a distinct advantage over other indicators/oscillators, as it shows when the trend change takes effect.

We can potentially identify divergence when the market has a close outside the band, followed by a close within the band.

As mentioned above, this is a typical characteristic of the Bollinger bands, which signals a reversal. But price could move again in the direction of the prevailing trend, thus making this move the final thrust in the previous direction.

Though this is observed as a divergence, the other indicators / oscillators do not tell us when price will reverse. But the Bollinger bands do.

The next reversal which takes place inside the bands, signal the change in direction.

This simply means that in case of a downtrend, the next reversal of price in the upward direction will take place above the lower band. The lower band thus acts as a support for price, which signifies the change to uptrend.

This can be seen very clearly in this chart.

In other words, once the final thrust has been made but finds support at the lower band, there is a high probability that there will be a reversal. Good Trading

Reading a foreign exchange quote may seem a bit confusing at first. However, it’s really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.
The US dollar is the centerpiece of the Forex market and is normally considered the ‘base’ currency for quotes. In the “Majors”, this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading forex you will often see a two-sided quote, consisting of a ‘bid’ and ‘offer’. The ‘bid’ is the price at which you can sell the base currency (at the same time buying the counter currency). The ‘ask’ is the price at which you can buy the base currency (at the same time selling the counter currency).