Stocks & Commodities V.

24:10 (16-23): Forex Focus by Ian Copsey

FOREX FOCUS
Access to foreign exchange trading has opened up exciting trading options for the retail trader. You can now trade alongside corporations and institutions in a highly liquid market that is global, traded around the clock, and highly leveraged. Before jumping into this market, however, we must understand the factors that affect the forex market. With that in mind, STOCKS & COMMODITIES has introduced Forex Focus to better prepare the retail trader to participate in the currency market.

Relative Spread Strength As A Long-Term Cyclic Tool

Having a hard time identifying cycle peaks? This indicator can help confirm cycle highs and lows.
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use time cycles within my analysis a great deal, but one of the common problems in doing so is identifying cycle peaks. So I set out to create an indicator that could be used as a proxy for cycle highs and also help confirm cycle lows. The indicator I ended up with is quite simple, simply measuring the relative strength index (R SI ) of the spread between two simple moving averages. This is why I refer to it as the relative spread strength (R SS ). The objective was to record the strength of the expansion of the spread that occurs in a move in one direction and then record the contraction as the market corrects, causing the moving averages to move back toward each other.

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FIGURE 1: RELATIVE SPREAD STRENGTH. Note how the price levels correlated with the oversold and overbought levels of the RSS.

WHAT IS THE RELATIVE SPREAD STRENGTH? The indicator is simply a measure of the difference between the two averagesvery simply, measure the difference between the two averages by taking the value of the longer moving average from the shorter moving average. You then put the result through the RSI formula and smooth the result with another average. See Figure 1 for the application. See how every extreme occurred when RSS has either

dropped below 30 or risen above 70. This is quite common and works well with longer-term charts, especially weekly charts. Divergences do form as occurred at the 1.1640 low in November 2005, and this strengthens the signal. Readings above 70 or below 30 merely identify the potential for price to reverse and should not be taken as a trade signal. When an extreme is made, you should study

It is always risky taking a divergence as the only signal; it is often useful to wait for a further signal.

by Ian Copsey Copyright (c) Technical Analysis Inc.

DEALBOOK FX (GLOBAL FOREX TRADING)

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Stocks & Commodities V. 24:10 (16-23): Forex Focus by Ian Copsey

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RAPID RSI Here is the formula for the rapid RSI: Following this select Build and select Verify Module from the top menu bar. You will be prompted to enter a name for this analysis technique. Write in Rapid RSI. Select Build again, and this time you should see this succeed in the output window at the bottom of the studio. Then select Build again but this time choose Install Module. The module will be installed into the User Modules. You will now be able to access rapid RSI in the charting application via the set-up Indicators icon at the top of the chart. EASYLANGUAGE CODE FOR RAPID RSI Here is the EasyLanguage code for the rapid RSI for use in TradeStation software.
Inputs: Price(Close), Length(14), OverBght(70), OverSold(30); Variables: Counter(0), RS(0), UpSum(0), DownSum(0), CRS(0); If Length > 0 Then Begin UpSum = 0; DownSum = 0; For Counter = 0 To Length - 1 Begin if Price[counter] > Price[counter+1] then UpSum = UpSum + Price[Counter] - Price[Counter+1] ; if Price[counter] < Price[counter+1] then DownSum = DownSum + Price[counter+1] - Price[counter] ; End; End; if DownSum <> 0 then RS = UpSum / DownSum else RS = 100 ; If currentbar > Length and UpSum <> DownSum Then CRS = 100 - 100 / (1 + RS) Else CRS = 0; Plot1(CRS, Rapid RSI) ; Plot2(Overbought, OverBght) ; Plot3(Oversold, OverSold)

Rapid RSI = 100

100 1 RS

where RS = sum of x days up closes divided by sum of x days down closes. CTL CODE FOR RAPID RSI Here is the Common Technical Analysis Language code for the rapid RSI for use in Global Forex Tradings software.
indicator RapidRSI; input price = close, period = 14, Hi_Base = 70, Lo_Base = 30; draw RS(RSI), line_hi(OverBought), line_lo(OverSold); vars b(number), f(number), i(number), j(number), k(number), line(series), u(series), d(series), dif(number), SumUp(number), SumDn(number); begin f := front(price); b := back(price); //definition of line_hi and line_lo line_hi := makeseries(f, b, Hi_Base); line_lo := makeseries(f, b, Lo_Base); //Set values to u[i] and d[i] // for i := f + 1 to b do begin dif := price[i] - price[i - 1]; if dif > 0 then begin u[i] := dif; d[i] := 0; end else begin u[i] := 0; d[i] := -dif; end; end; //Set values in RS[i]// for j := f + period + 1 to b do begin SumUp := 0; SumDn := 0; for k := j - period + 1 to j do begin //make SumUp & SumDn for period j// SumUp := SumUp + u[k]; SumDn := SumDn + d[k]; end; if SumUp + SumDn = 0 then begin //make RS for period j/ / RS[j] := 50; end else begin RS[j] := 100*SumUp/(SumUp + SumDn); end; end; end.

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Stocks & Commodities V. 24:10 (16-23): Forex Focus by Ian Copsey

FOREX FOCUS
the lower time frame to look for a trade signal. The trade signal could be a break in the trendline or confirmation of a reversal pattern. Let us look at the daily chart for the reversal at 1.1640 (Figure 2). In this chart, the RSI plotted on the subchart is not your conventional relative strength index. It refers to the rapid RSI, which is a variation of the RSI. The formula for this indicator can be found in the sidebar Rapid RSI. Note how the rapid RSI formed a divergence at the low. It is always a little risky taking a divergence as the only signal; it is often useful to wait for a further signal, such as a break of a trendline or resistance. This does occur, and while there was a pullback, the move higher was confirmed. In addition, note that on the large retracement to 1.1825, rapid RSI moved below 30 for the first time and provided a good buying signal with a second, but smaller, bullish divergence.
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FIGURE 2: RAPID RSI VS. PRICE LEVELS. Divergences between these two usually indicate which way prices will go. However, it is always a good idea to use a further confirmation signal before placing your trade.

A BROADER PICTURE Let us look at another example, this time of the US dollar/yen, USD/JPY (Figure 3). The situation is similar, although where there is an abnormal amount of volatility, the slow reaction of the moving averages does not seem to cause the same CTL CODE FOR RSS Here is the Common Technical Analysis Language code for the relative spread strength (RSS) for use in Global Forex Tradings software.
Indicator RelativeSpreadStrength ; input RSperiod = 5, E1period = 10, E2period = 40 ; draw Smooth(RSS), line_hi(Cycle High), line_lo(Cycle Low); vars b(number), f(number), Spread(series), RS(series), i(number) ; begin f := front(close); b := back(close); line_hi := makeseries(f, b, 70); line_lo := makeseries(f, b, 30); for i := f + 1 to b do begin Spread := SMA(close,E1period) - SMA(close,E2period); RS := RSI(Spread,RSperiod) ; Smooth := SMA(RS,5) ; end; end.

degree of volatility in RSS. Thus, RSS is slow to react with signals that can be somewhat late. This again stresses the point that while RSS provides broad warnings of a possible price reversal, it is always important to confirm the analysis in the lower time frame. Note the

Then select Build again but this time choose Install Module. The module will be installed into the User Modules. You will now be able to access RSS in the charting application via the set-up indicators icon at the top of the chart. EASYLANGUAGE CODE FOR RSS Here is the EasyLanguage code for the relative spread strength (RSS) for use in TradeStation software.
Inputs: Vars: RSLength(5), EMA1(10), EMA2(40) ; E1(0), E2(0), Spread(0), RS(0), Smooth(0) ;

Following this, select Build and select Verify Module from the top menu bar. You will then be prompted to enter a name for this analysis technique. Type in RSS. Then select Build again and this time you should see this succeed in the output window at the bottom of the studio.

E1 = XAverage(Close,EMA1) ; E2 = XAverage(Close,EMA2) ; Spread = E1 - E2 ; RS = RSI(Spread, RSLength) ; Smooth = Average(RS, 5) ; Plot1(Smooth, RSS) ; Plot2(80, High) ; Plot3(20, Low ) ;

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Stocks & Commodities V. 24:10 (16-23): Forex Focus by Ian Copsey

FOREX FOCUS
bearish divergence at the 121.34 high in December 2005 and which precipitated a large correction. Now that we are seeing RSS at low levels, we should be looking at any reversal signals in the daily market. Figure 4 displays the daily USD/JPY market along with rapid RSI applied in the sidebar. At the 121.34 cycle high, there was a clear bearish divergence and a break of the very steep uptrend line. Along with the weekly bearish divergence in RSS, there was a clear selling signal. Note how during the consolidation, rapid RSI has provided key extreme readings at appropriate points. Even at the cycle low at 108.96, there was a small bullish divergence. It would be well worth watching for a pullback in the rapid RSI to the oversold level, which would look like a possible buying point. The RSS can be easily built. The coding is shown in the sidebar Code for RSS.
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FIGURE 3: A LAGGING INDICATOR. You can see that during volatile activity, the RSS tends to be slow to react with signals.

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Ian Copsey joined Global Forex Trading (GFT) as a currency analyst writing commentary and interday analysis. He began his career at Barclays Banks forex trading room in 1982 before moving to head their foreign exchange sales desk in Hong Kong in 1988. In 1993, he moved to Tokyo with Dow Jones Telerate as a technical analysis specialist, later as regional manager of technical analysis products, and then continued to develop his unique blend of forecasting tools. He is an expert indicator and system designer. Copsey created the FXS group of indicators and writes the daily Pro Commentary for forex support. SUGGESTED READING Copsey, Ian [1999]. Integrated Technical Analysis, John Wiley & Sons.

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FIGURE 4: REVERSAL POINTS. The cycle high and break of a steep upward sloping trendline in November 2005 as well as a divergence in the rapid RSI indicates that the bull rally may be over.

See our Traders Tips section for program code implementing Ian Copseys technique.
See Traders Glossary for definition

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