I trade Forex everyday and I teach Forex everyday and the most significant thing that helps losing traders become winning traders is reducing the number of indicators on their charts, learning to trade 4 RSI signals and understanding that a trade without momentum is not a trade.
Many traders find themselves with moving averages on their charts, a set of pivot points for support and resistance, maybe an occasional Fibonacci and an indicator or two, not to mention trend lines and channels of some kind. Are you one of those traders? If you are, how do you decide which indicator is the most important and which one is next important and so on? Have all you indicators seemed to be saying, “trade, trade, trade” and then price just sits there or worse, it moves dramatically in the wrong direction? I think all of us have been there and understand this phenomenon.
What do we do? Do we look for another indicator that makes it all work? No. First we have to reduce the number of indicators. The reason is simple. Your trade signal will only be as good as your best indicator. In other words, if you are using a MACD on your chart along with two or three other indicators and the MACD does the best job of signally successful trades, it is the only one that matters. Using the others to confirm adds no value. The same is true for what traders typically call confluence. The idea that by having two or three indicators telling you the same thing makes a better trading condition is not true although it sounds good in theory.
Traders, to succeed, need to understand one simple concept, trade when momentum is in the market and in the direction you wish to trade. That should make so much sense it does not need defending. You wouldn’t get on a bus that is going nowhere. You would only get on a bus that was going somewhere and at the time you wanted to go. Price can be like that.
Momentum can be measured using the RSI, Relative Strength Index, and the 4 signals that RSI produces; positive divergences, negative divergences, positive reversals and negative reversals. These signals alert the trader to two kinds of momentum, retracement momentum and continuation momentum. Once a trader knows these 4 kinds of signals and what they reveal about a currency pair, he or she only needs to learn when and where to get on the bus. And believe it or not, for each currency pair there is a schedule. It is this momentum, Momentum 3 that makes the difference.
RSI signals can be statistically studied to determine when it is most likely to trade them; when momentum is in play. Statistical studies show that over the 10 year period of 2000 to 2010, RSI reversals traded at 47% success rate if RSI Core Principles were followed with an 8 to 1 Risk/Reward Ratio (Average successful trade 76.4 pips, average loss 9.7 pips) on the EURUSD Hourly chart and with Momentum 3, this can significantly improve.
Going to Google to learn about RSI is probably going to lead you astray unless you are lucky with your search words. Stay away from the standard, overbought and oversold and divergence mantra you read on nearly every site and in nearly every book. It will only get you in trouble. Look for information on: Reversals, RSI Range Shifts, and Momentum 1, 2 and 3.