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RSI and BB

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Ninja
Super Contributor
Everyone wants to be the hero and claim that he or she picked the very top or bottom of a currency pair. However, aside from bragging rights, is there really anything that pleasant about repetitively selling at every new high in hopes that this one would finally be the top? The answer is a resounding "no"! One of the biggest pitfalls encountered by novice traders is arbitrarily picking a top or bottom with no indicator support. The pure fade trade is an intraday strategy that picks a top or bottom based upon a clear recovery following an extreme move. The strategy looks for an intraday reversal by using a combination of three sets of Bollinger bands and the relative strength index on hourly charts. The trade sets up when the RSI hits either an overbought or oversold level. Overbought is defined as RSI above 70, while oversold is defined as RSI below 30. This signals to us that we can start looking for a possible reversal. However, rather than just immediately buying in hopes for a trend reversal based solely upon RSI, we add in three sets of Bollinger bands to help us identify the point of exhaustion. The reason why we use three sets of Bollinger bands is because it helps us to gauge the extremity of the move along with the extent of the possible recovery. Created in the 1980s by John Bollinger, the originally developed Bollinger bands strategy was based upon two standard deviations (SD) above and below the 20-day moving average. The theory was then to buy or sell when the prices hit the Bollinger band because using two standard deviations ensures that 95% of the price action will fall between the two bands. In our strategy, we add on the third standard deviation Bollinger band. When prices hit the third band on any side, we know that the move is within the 5% minority, which then characterizes the move as extreme. When we move away from the third standard deviation Bollinger band and into the zone between the first and second standard deviation Bollinger bands, we know that the currency pair has hit its extreme point at the moment and is moving into reversal phase. Finally, one last thing that we look for is at least one candle to close fully between the second and first standard deviation bands. This last rule Part 2 High Probability Trading Setups High Probability Trading Setups for the Currency Market 49 e-book helps to screen out fake moves and makes sure that the previous move is really an exhaustion. This is a low-risk, low-return trade for those who simply want to scalp the market for small profits. We recommend using only hourly charts with the following rules: Rules for a Long Trade 1) Look for the relative strength index to be lower than 30. 2) Watch for the price to hit the three standard deviation Bollinger band (SD BB). 3) Wait for the candle to move from the 3SD-2SD BB zone into the 2SD-1SD BB zone on hourly charts. 4) After one candle closes fully within the 2SD-1SD BB zone, buy at market. 5) Place stop at swing low minus 10 pips. 6) First target for half of the position is the amount risked; move stop to breakeven. 7) Second target is tag of the second SD BB on the top side. Rules for a Short Trade 1) Look for the relative strength index to be greater than 70. 2) Watch for the price to hit the three standard deviation Bollinger band (SD BB). 3) Wait for the candle to move from the 3SD-2SD BB zone into the 2SD-1SD BB zone on hourly charts. 4) After one candle closes fully within the 2SD-1SD BB zone, sell at market. 5) Place stop at swing high plus 10 pips. 6) First target for half of the position is the amount risked; move stop to breakeven. 7) Second target is tag of the second SD BB on the down side. Part 2 High Probability Trading Setups High Probability Trading Setups for the Currency Market 50 e-book
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