Working with the RSI

WorkingwiththeRSI
b J h H d
byJohnHayden

POINT July7th 2010

Our Goals
OurGoals
Anunderstandingof:
1. Thenatureofthemarketplace.
p
2. Thedeterminationofthedominanttrend.
3 Theendofacontratrend,allowinga:
3.
The end of a contra trend allowing a:

Newentryinthedirectionofthedominanttrend.
I
Increasingourpositionsize.
i
ii
i

4. Theuseofatrenddeterminationchecklistwith
preciserulesfortrendidentification.

Increasingourprofitability!
g
p
y

Whatisthenatureofthestock
market?
Ifthemarketplacewassalivingentitynamed
f h
k l
li i
i
d
MissMarketwhatinformationdoessherequire
t li ?
tolive?
Orderflow(buyandsellorders).

DoesMissMarketknowanythingelse?
No,sheonlyunderstandsorderflow.

OnceMissMarkethasprocessedthe
informationcontainedwithintheorderflow,isit
stillvaluable?
No,ithasbeendiscounted.

Miss
MissMarket
Market&Google
& Google
AnExample:
A E
l
Jan12010,thereare100tradersinChinathatknowthatGooglewill
nolongerbecomplyingwiththeircensoringarrangementofthe
Chinese Communist
ChineseCommunist.
DoesMarketknowthisnow(1/1/2010)?No.Why?These100
tradersarenotactingonthisknowledge yet.
Asthese100tradersbeginselling(1/5/10)
As these 100 traders begin selling (1/5/10) Miss
MissMarket
Marketbeginsto
begins to
understandthattheorderflowfromChinaisbearish.
Thevalue ofMissMarketsknowledgedecreases assheseesever
increasing amounts of sells entering into her system.
increasingamountsofsellsenteringintohersystem.
Ifyouareluckyyouheararumor(Jan12)andcantakeaction(remember
buytherumorandthensellthefact).

Onceall oftheorderflowisdonetheknowledgehasbeenwidely
d
disseminatedandisworthless(Jan29).
d d
hl
(
)
Onlythenwillyouread(March13)abouthowGoogleisindeed
quittingChina.

Markets
Market s Knowledge
Knowledge

MissMarketisawareofbearishorderflow:MarkethasfullydigestedGooglevs.China
Mi
M k t i
f b i h d fl
M k t h f ll di t d G
l
Chi
k
knowledgeis
l d i
worthless.

Understanding Miss
Understanding
MissMarket
Market
Considerthefollowing
C id th f ll i
HeavysellingfromAsiaisimpactingaparticularstock
Astoryisbeingcommunicated.

Whatisthestory?>WhatinformationisMissMarkettellingyou?
Hint:themarketreactionisreflectingtheinformationleftbehind.
Price somepricescanbebearish,somebullish pendinganalysis
E.g..10yearTreasuryincreasingto1%yield
E g 10year Treasury increasing to 1% yield bearishorbullish?Dependsright?
bearish or bullish? Depends right?

Volume
Fallingprices,risingvolumevs.fallingpricesandfallingvolume?

Timing
Isthisontheopening,closing,duringlunchorafterhours?

Marketcapvaluechange
Isvastamountsofmarketcapbeingwipedout?Ex.BP

TTechnicalAnalysisattemptstodeterminethis
h i lA l i
d
i
hi
information.

What is the Story?

WhatistheStory?
Themarkethasknowledge translateit!
Onceall oftheorderflowisdone
Istheknowledge&experiencelost No!!!
Itiscapturedinthehistory/RSIs!
Footprintsintime,readyforunderstanding&interpretation

Tointerpret&understandinaprobabilisticframework.

Central
Centralpointisthatthisinformationcantellyoualot
point is that this information can tell you a lot
aboutyourobjective/prey
Retracingprice,volume,time&economicvaluechange
R t i
i
l
ti
&
i
l
h
Whatarethetools?Computers,technicalanalysis,news,horoscopes,palm
readers,tealeaves,moonphases,etc..

What is Technical
Whatis
TechnicalAnalysis
Analysis??

Isthisit?
hi i ?

Is this "Technical
Isthis
TechnicalAnalysis
Analysis??
Trendline's&Patterns
dl '

Is this "Technical
Isthis
TechnicalAnalysis
Analysis??
AProgram:AMathFormula:
h
l

inputs:
FastLength(3),
SlowLength(10),
AlertLength(14),
ColorNormLength(14),
UpColor(Yellow),
DnColor(Red),
GridForegroundColor(Black);
variables:
ApplicationType(0),
ChaikinOscVal(0),
AnyVol(0),
ColorLevel(0);

ThebeginningsoftheBlackScholes model:
Define
S,thepriceofthestock.
V(S,t),thepriceofaderivativeasafunctionoftimeandstockprice.
C(S,t)thepriceofaEuropeancallandP(S,t)thepriceofaEuropeanputoption.
K,thestrikeoftheoption.
r,theannualizedriskfreeinterestrate,continuouslycompounded.
,thedriftrateofS,annualized.
,thevolatilityofthestock;thisisthesquarerootofthequadraticvariationofthestock's
logpriceprocess.
t atimeinyears;wegenerallyusenow=0,expiry=T.
,thevalueofthe portfolio.
R,theaccumulatedprofitorlossfollowingadeltahedgingtradingstrategy.
N(x)denotesthestandardnormalcumulativedistributionfunction.

ifCurrentBar =1then
ApplicationType =GetAppInfo(aiApplicationType );
ifBarType >=2then
AnyVol =Volume
else

N'(x)denotesthestandardnormalprobabilitydensityfunction.
AnyVol =Ticks;

ChaikinOscVal =ChaikinOsc(AnyVol,FastLength,SlowLength );
Plot1(ChaikinOscVal,"ChaikinOsc");
Plot2(0,"ZeroLine");

Technical Analysis is:

TechnicalAnalysisis:
Anattemptbyatradertosimplifya
complicatedreality.
p
y
Anattempttoquicklygrasptherealityof
what we are focusing our attention upon
whatwearefocusingourattentionupon.
Technicalanalysisbindsthetradertousing
numbers heisnotpermittedtousenon
subjective criteria.
subjectivecriteria.

Technical Analysis is:

TechnicalAnalysisis:
Technicalanalysisisthecreationofa
mathematicalconstructbaseduponmultiple
p
p
factorsinatimeseries,whichallowsour
minds to quickly grasp the reality of the
mindstoquicklygrasptherealityofthe
situation.

Making Money with Technical Analysis

MakingMoneywithTechnicalAnalysis
Rememberthenatureofthemarket itonly
values unknown information
valuesunknowninformation.

Thisiswhytradingwithjust movingaveragesorjust candlestickswillput

youinthepoorhouse!Usingmovingaveragesdoesnotrevealunique
information.
InotherwordsMissMarkethasmadethesemethodsineffectivebecause
theyarewidelyknown.

Unique&UnknownInformationRequiresthat:
YourmathematicalconstructMUSTbeunique!
OR
YourinterpretationofanonuniquemathematicalconstructMUSTbe
unique.Thisisourgoal!

Doyouwanttheredpillorthe
bluepill?
H
Howdeepdoyoureallywanttogodownthisrabbit
d
d
ll
d
hi bbi
hole?
Ifyoutaketheredpillyouwillseereality.However
If
t k th d ill
ill
lit H
thereisnobottom,noexotericmathematicalformula
that will ever give you the certainty you desire
thatwillevergiveyouthecertaintyyoudesire.
Ifyoutakethebluepillyouwillremainignorantof
reality.
reality .Yourlifewillbemuchsimpler.
Your life will be much simpler.
Ineithercaseyourprofitabilitymayormaynotbe
stellar.
Thereisnocorrectanswerregardingthis.Itsa
p
personaldecision.

The Goal of Technical Analysis

TheGoalofTechnicalAnalysis
Thediscoveryofuniqueinformation.
Theforecastingofthemoreprobable
The forecasting of the more probable event.
event .
Intheenditisthedesiretodecrease
uncertainty,andincreaseprofitability.
i
di
fi bili
IstheabilitytohearMissMarketbefore
y
everyoneelse.

Definition of a Profitable Trader:

DefinitionofaProfitableTrader:
Th
Theyinterpretmarketinformationbetter(andearlier)
i t
t
k ti f
ti b tt ( d
li )
thanothertraders!
Theymusthavetheabilitytogaintheknowledgeof
They must have the ability to gain the knowledge of
MissMarketbeforeshehasfullydiscountedthis
knowledge.
Atraderwhotakesprofitsandmin.loss.
AtraderthatcangainMarketsknowledgeina
predictable manner apply it consistently and have
predictablemanner,applyitconsistentlyandhave
infinitenumberoftrades.
Ability to apply unique knowledge & skills
Abilitytoapplyuniqueknowledge&skills.
Atraderthathasalotofselfdiscipline.

Definition of a Profitable Trader:

DefinitionofaProfitableTrader:
Youmusteitherhave:
Insideknowledge
g oftenillegal.
g
Uniqueknowledge notillegal.

Youmustact
Y
t t onthisknowledge!
thi k
l d !

TheRelativeStrengthIndex(RSI)
byW.Wilder
Createdin:1978
A very widely used indicator.
Averywidelyusedindicator.
Availableinalmostallchartingapplications.
Itisamomentumbasedindicator,basedupon
theuseofatimeseriesofpricedata.
p
ItistheonlypublicindicatorIstilluse.

However,Iuseitinaveryunconventionalway.
l

TheRelativeStrengthIndex(RSI)
byW.Wilder

Itisaboundedindicator
i b
d d i di
(0
(0to100).
00)
Itsvalueisbaseduponthemomentumoftheratioofhigherclosestolower
closes.
ItisimportanttorememberthattheRSIvalueactslogarithmically.Asitsvalue
approachesitsupperorlowerboundsitmoveslessinrelationtothemovementof
theunderlyingprice.

Bullish & Bearish Divergence

Bullish&BearishDivergence
A
Anymomentumbasedindicatorwillhaveinstanceswhere
t
b d i di t
ill h
i t
h
theindicatorunderperformspricebehaviorcreatingeither
abullish/bearishdivergence.
Inotherwords,ifpriceactionismakinganewlow(alowerlow)but
yetthevalueoftheindicator(RSI)isnot makingnewlowsthenwe
cansaythatthebehavioroftheRSIisdiverging fromthatofthe
pricebehavior,i.e.itsunderperforming.
Ifthisdivergingbehaviorisseenwhilepriceismakingnewlows
g
g
thenitissaidthattheRSIisshowingaBullishDivergence.
Likewiseifthebehavioroftheindicator(RSI)isdivergingfromprice
actionaspriceismakingnewhighsthenitissaidthattheRSIis
g
g
showingaBearishDivergence.

Bullish Divergence
BullishDivergence
ABullishDivergenceimpliesaBullmarket
ll h
l
ll
k
yes??

Bearish Divergence
BearishDivergence
ABearishDivergenceimpliesaBearmarket

h
l

k
yes??

#1onourTrendDeterminationChecklist:

Bullish&BearishDivergence
Rememberthat:
R
b th t
BullishDivergences comeinaBearMarket!
Bearish
BearishDivergence
Divergences
s come
comeinaBullMarket!
in a Bull Market!
Adivergenceisonlyadetourintheprimarytrend.Itis
indicatingacontratrend.
Thesmallertheperiodisbetweenthebars themore
significantthedivergencebecomes!

Proveittoyourself:
Prove it to yourself:
IdentifyalongtermBulltrend,thenlookforabullish
divergence therearenone!
IdentifyalongtermBeartrend,thenlookforabearish
divergence therearenone!

Moving Averages
MovingAverages
Amovingaverageisbasedonpastpricesand
defines the current trend,butdoesnotindicate
thefuturetrend.
Itisveryeffectiveatremoving
It is very effective at removing noise,
noise ,oraprice
or a price
whichexceedsonestandarddeviationfromthe
data stream
datastream.
Becauseoftheirmathematicalformulathereisa
timelagfromwhenpriceschangedirectionand
i
l f
h
i
h
di
i
d
themovingaveragechangesdirection.

Common Moving Averages Formulass

CommonMovingAveragesFormula
Thereareseveralmathematicalconstructsusedbytraders.
Themostcommonare:

Simple Moving Averages (SMA)

SimpleMovingAverages(SMA)

Calculatesthetotalclosingpriceoverndaysthendividebyn.

WeightedMovingAverages(WMA)

Calculatedbyassigningavaryingweighttoeachclosingprice
overpriorndays,thenobtaintheaverage.Theweightisgreater
f t d l
foryesterdaysclosevs.andthedecreasesarithmeticallytozeroon
d th d
ith ti ll t
thenthday.

E
ExponentialMovingAverage(EMA)
i lM i A
(EMA)

Calculatedsimilarlytotheweightedmovingaverage,howeverthe
weightassignedistotheentiredataseriesisdoneexponentially.

Using Moving Averages

UsingMovingAverages
Placea9periodsimplemovingaverageonthe
close,andanotheroneontheRSI.
,
Placea45periodweightedmovingaverageon
the close and another one on the RSI
theclose,andanotheroneontheRSI.
Arrangethepanelssothatthepriceactionin
onthetoppanel,andtheRSIpanelisonthe
bottom panel.
bottompanel.

Using Moving Averages

UsingMovingAverages

#2onourTrendDeterminationChecklist:
Fast&SlowMovingAverageTrends
Wecandetermine2typesoftrendusingmovingaverages.
W
d t
i 2t
ft d i
i
FastTrend:Whereisthevaluewhichisbeingcalculatedin
relationshiptothefastmovingaverage(the9periodSMAin
thisinstance)?InotherwordsisthecloseabovetheSMA,or
h
)?
h
d
h l
b
h
belowit?
Aboveit=Uptrend.
Belowit=Downtrend

SlowTrend:Whereisthefastermovingaverageinregardsto
theslowermovingaverage?
Ifthefastermovingaverageisabovetheslowerthenitsauptrend,or
viceversa.
GenerallyIwillsaythatthemovingaverageshavegonepositive(the
f t i b
fasterisabovetheslower),orthattheyhavegonenegative(the
th l
)
th t th h

ti (th
slowerisnowabovethefaster).

Disadvantages of Moving Averages

DisadvantagesofMovingAverages
Thatthereisasignificanttime lag inmovingaverages.
Thateverytraderintheuniversehasaccesstothesamemoving
averages no unique information.
averages
information
Combiningmovingaveragesondifferentindicatorsin
j
p
g
g
conjunctionwithpriceandthenusingthemtogetherisnota
significantuniqueadvantage.
Theonlywaytousemovingaveragestoyouradvantageisto
useamovingaveragewhichisconstructeduniquely
i
hi h i
d i
l
unfortunatelytheseareveryexpensiveandcomputationally
intensive.

Bull/Bear RSI Rangess

Bull/BearRSIRange
Forgeteverythingyouhaveread,hereisthe
realdeal:
IftheRSIisabovethe60level,thebullsarein
charge!
ThebullsstayinchargeuntiltheRSIgoesunder
the 40
the
40 level.Whenthishappensthebearsarein
level When this happens the bears are in
charge.
Thecyclerepeatsoncethebullsmanagetoget
Th
l
t
th b ll
t
t
thecloseabove60.

Bull/Bear RSI Rangess

Bull/BearRSIRange
TheBullishRSIRange:40to80
TheBearishRSIRange:60to20
The Bearish RSI Range: 60 to 20
Remember:
ThattheRSIbehaveslogarithmically astheRSI
becomesoverboughtoroversoldittakesan
increasingdrasticpricemovetomaintainthose
RSIlevels.
TheRSIcanbecomeoverbought/oversoldandstay
g
thereforalongtime!

Bull/Bear RSI Rangess

Bull/BearRSIRange

#3onourTrendDeterminationChecklist:
WhatisthecurrentRSIRange?
TrendisupwhentheRSIrangeis:40to80
TrendisDownwhentheRSIis:60to20
Trend is Down when the RSI is: 60 to 20

Definition of a Trend
DefinitionofaTrend
DefinitionofaUpTrend:
HigherHighs&HigherLows&mostimportantlywhat
wasResistanceisNowSupport.

DefinitionofaDownTrend:
LLowerHighs&LowerLows&mostimportantlywhat
Hi h & L
L
&
i
l h
wasSupportisNowResistance.

MomentumDiscrepancyReversal
Points(MDRP)
Thi
ThisconceptIlearnedin1996inaseriesofseminars
tIl
d i 1996 i
i
f
i
byAndrewCardwellaC.T.A(atthetime).
Mr.
Mr.Cardwellofferedliveseminarscoveringmanyaspects
Cardwell offered live seminars covering many aspects
oftechnicalanalysisnotcoveredinanybooks.Oneofthe
manyconceptshetaughtwaswhatInowcallM.D.R.P.
Mr.Cardwellwasinturnintroducedtotheconceptofthe
Mr Cardwell was in turn introduced to the concept of the
RSIgeneratingbuy/sellsignalswhilehewasworkingasa
futuresbrokerbyaclientofhiswhotradingporkbellies.

TheconceptappliestoANYmomentumbased
indicator.
Onceunderstood,youcanuseamathematicalformula
Once understood you can use a mathematical formula
togeneratepricetargetsandarisk:rewardratio.

DefinitionofaMomentum
DiscrepancyReversalPoints(MDRP)
In
Inanymomentumbasedindicatorthereareinstanceswheretheindicator
any momentum based indicator there are instances where the indicator
overperforms(orexceeds)pricebehavior(theoppositeofadivergence
whichunderperformspriceaction).
Inotherwords,ifpriceactionisnot
In other words if price action is not makinganewlowrelativetoa
making a new low relative to a
previouslowi.e.,ahigherlow,yetthevalueoftheindicator(RSI)is
makingalowerlowvisavisthepreviouspricelowthenwecansaythat
thereisadiscrepancyinthebehavioroftheRSI.Thisistheoppositeofa
divergence.
Ifthisdivergingbehaviorisseenwhilepriceismakingahigherlowandyet
theRSIismakingalowerlow,thenitissaidthatthereisabullish
discrepancy in the RSI This is often a point in time where prices then
discrepancyintheRSI.Thisisoftenapointintimewherepricesthen
reversehigheri.e.,aMDRPBuy signal.
Likewiseifpriceismakinglowerlowsandyetthebehavioroftheindicator
(RSI) is making higher highs then we can say that there is a bearish
(RSI)ismakinghigherhighs,thenwecansaythatthereisabearish
disprepanceintheRSI.Sincethisisoftenapointintimewhereprices
reverselowerwecallitaMDRPSell signal.

An Example of a MDRP Buy Signal

AnExampleofaMDRPBuySignal
A
Alowclose(pointA),followedbyincreasingprices,then
l
l
( i t A) f ll
db i
i
i
th
followedbydecliningpriceswhicharestillmorethantheclose
atpointA.
NowcomparethecurrentRSIvaluetothatatpointA
N
th
t RSI l t th t t i t A isthe
i th
RSIvaluelower?Ifsothenwehaveapotential MDRPBuy
signal.
Ifafteraperiodofdecliningcloseswegetaupclose(pointB)
If ft
i d f d li i
l
t
l
( i t B)
theRSIwillalsoincrease,creatingahook.IftheRSIvalueatthe
low(thedaybeforethehook)islessthanpointAandtheprice
is greater then we have a locked in MDRP Buy signal
isgreaterthenwehavealockedinMDRPBuysignal.
Wecandeterminetheupsidepricetargetoneitherthe
potentialorlockedinsignalbytakingthedifference
between points A and B and then adding it to the highest close
betweenpointsAandBandthenaddingittothehighestclose
betweenpointsA,B.

MDRP Buy Chart of GLD

MDRPBuyChartof
GLD
AnExampleofaMDRPBuyonGLD10/28/09
An Example of a MDRP Buy on GLD 10/28/09
Wehaveanewlowon9/25/10@97.00(A)
Followedbyarallytoahighcloseon
10/13/10 @ 104 26 (C)
10/13/10@104.26(C).
Followedbyadecent(B)to10/28/10@100.73
NotetheBearDivergence.
Target=(B
a get (
A)+C
) C
107.99=(100.73 97.00)+104.26
NotetheRSIvalueatBwas48.85
indicatingthebullswerestillincharge.
Ifweenteredabulltradewhenthe
high(97.81)ofthe25th wasnegated
andweusedthelowofthe25th (96.77)as
ourexitstopthenourriskwas$1.06
p
$
(96.76 97.82).
Yetourtargetedgainwas$3.73givingwas
arisk:rewardratioof1:3.5 notabadratio!

MomentumDiscrepancyReversal
Points(MDRP)
ThingstoRemember:
Thi
t R
b
ThestrengthofaMDRPsignaldependsuponthenumberof
bars(timeperiods)betweenpointsA&B.Theshorterthe
b
better.InotherwordsaMDRPBuysignalwithonly1bar(2
h
d
l
h l b (
periods)ismuchstrongerthanaMDRPBuywith20bars
betweenA&B.
MDRPreversalpoints(B)arealwayssignificant
support/resistancelevels regardlessifthepricetargetishitor
not.
Thepricetargetisvalidatedonlywhenthecloseexceedsthe
targetedlevel(anintradayhigh/lowdoesntcount).
AMDRPsignalwhichfails(pricetargetisnothit)isjustas
g
(p
g
) j
significantasasignalwhichworks.
ThepriceatpointBisalwaysimportant.Itwillbecomefuture
pp
p
g p
supportorresistancedependinguponthetrend!

MDRP Sell Chart of MON)

MDRPSellChartofMON)

An Example of a MDRP SellonMON

AnExampleofaMDRP
Sell on MON
Wehaveanewhighon1/19/10@81.42(A)
Followedbyadeclinetoalowclose(C)on
2/8/10@74.21
Followedbyarallytohighclose(A)2/17/10@78.10
F ll
db
ll
hi h l
(A) 2/17/10 @ 78 10
NotetheBullDivergenceatC.
Target=(B A)+C
74.21=(78.10 81.42)+74.21
NotethelowRSIvaluejustpriortoCwas
28.75indicatingthebearswerenowincharge.
Ifweenteredabeartradewhenthe
lowofthe17th (77.61)wasnegated
andweusedtheWMAofthe17th
d
d th WMA f th 17thth (78.80)as
(78 80)
ourexitstopthenourriskwas$1.21
(77.60 78.81).
Yetourtargetedgainwas$3.39givingwas
a risk:reward ratio of 1:2.8 notabadratio!
arisk:rewardratioof1:2.8
not a bad ratio!
Note:WeusedtheRMAvalueinsteadofthehigh
ofthe17th asthehighwas78.49veryclosetothe
RMA.

MomentumDiscrepancyReversal
Points(MDRP)
Remember:
ThattheMDRPisNOTlookingforatopora
g
p
bottom.
TheMDRPislookingfortheendofacontra
The MDRP is looking for the end of a contra
trend,allowingyoutoenterintoatradewitha
high reward to risk ratio
highrewardtoriskratio.
ThebestMDRPsignalsare:
Wheretheperiodissmall.
Wh
th
i di
ll
Thefirstsignaloppositetheprevioustrend.

#4onourTrendDeterminationChecklist:
WhatMDRPSignalsareweseeing?
IfweareseeingMDRPBuySignalsthenthe
maintrendisUP.
If
IfweareseeingMDRPSellSignalsthenthe
i
S ll Si l h
h
maintrendisDOWN.

TrendDeterminationusingtheRSI
BullMarket
ABulltrendisyourfriend!
A B ll
di
f i d!
Step#1:AreweseeingBearDivergences?
Step#2:Whatarethemovingaveragestellingus?
Whatarethemovingaveragesonpricetellingyou?Ideally
b th th f t t d ( l
boththefasttrend(close>SMA)andtheslowtrend
> SMA) d th l t d
(SMA{close}>WMA{close})arebullish.
WhatarethemovingaveragesonRSItellingyou?Ideally
What are the moving averages on RSI telling you? Ideally
boththefasttrend(RSI>SMA)andtheslowtrend
(SMA{RSI}>WMA{RSI})arebullish.

Step#3WhatistherangeoftheRSI?Isit40to80?
Step#4AreweseeingonlyMDRPBuys?

TrendDeterminationusingtheRSI
BearMarket
ABeartrendisyourfriend(evenmoresothanabull)!
AB
di
f i d(
h
b ll)!
Step#1:AreweseeingBullDivergences?
Step#2:Whatarethemovingaveragestellingus?
Whatarethemovingaveragesonpricetellingyou?Ideally
b th th f t t d ( l
boththefasttrend(close<SMA)andtheslowtrend
< SMA) d th l t d
(SMA{close}<WMA{close})arebearish.
WhatarethemovingaveragesonRSItellingyou?Ideally
What are the moving averages on RSI telling you? Ideally
boththefasttrend(RSI<SMA)andtheslowtrend
(SMA{RSI}<WMA{RSI})arebearish.

Step#3WhatistherangeoftheRSI?Isit60to20?
Step#4AreweseeingonlyMDRPSells?

TrendlinessbaseduponMDRP
Trendline
based upon MDRP
SignificantlyValidTrendlinescanbedrawnbaseduponMDRPpointsA
f
l
ld
dl
b d
b d

andB.

TrendDeterminationusingtheRSI
WhatSymbolisthis?
Wh S b l i hi ?
BearorBull?

Trend Determination using the RSI

TrendDeterminationusingtheRSI

The Only Divergence that works!

TheOnlyDivergencethat
works !
A
AHiddenDivergenceSignal!
Hidd Di
Si l!
ItisnothingmorethataDivergenceinthemiddleof
th h t! It i hidd b
thechart!Itishiddenbecausemosttradersonlylook
tt d
l l k
foradivergenceatthetoporbottomofthechart.
They
They work
work becausealmostallofthetimetheprice
because almost all of the time the price
willdoexactlyasthenameimplies!
Rememberthattheystillfollowthesameruleasa
Remember that they still follow the same rule as a
regulardivergencei.e.,BullishDivergencescomein
aBearTrendandviceversa!
Lookatthepreviouschart thehiddenbearish
g
g g
divergencesarehighlighted.

MDRPssareeverywhere!
MDRP
are everywhere!
Everymomentumbasedindicatorhas
divergencesandMDRPsignals!
g
g
InvestorsBusinessDailyinThursdaysedition
looking at commodity charts
lookingatcommoditycharts.
Stochastics
MACD
ROCandsoon.
ROC d

Closing Thoughts
ClosingThoughts
UsingRSITheorywecan:
U i RSI Th
1.
2.
3.

MaketheTrendOurFriend.
Wecanidentifythetrend usingourrules.
Wemustthepatiencetowaitforacontratrendtoappear.

4.

WepatientlywaitforthemomentumoftheRSItooverextenditself(the
rubberbandisnowtaunt)visvisapreviouspriceanditscorrelatedRSI
value.
Onlythendowegofishingforthatbullorbearfish.

Ourprotectivestop(pukeuppoint)isknowntousatthetimeof
entryallowingustodefineourrisktorewardratio,andifwe
y
g
,
actuallywanttogofishing.

OurgoalisthediscoveryofUniqueKnowledge!
Being the first with this knowledge is our edge!
Beingthefirstwiththisknowledgeisour
edge !
Rememberthatlargetraders(theelephants)always leave
footprintsthatwecanusetoeitherfadeorgoalongwith.

A Sounding
A
SoundingBoard
Boardfortraders.
for traders

It is my attempt to solve some trading problems In particular:

Itismyattempttosolvesometradingproblems.Inparticular:
Provideprofessionaltradersawaytosolvetheirproblemofsizingatrade.
Provideawayforsystem/programdeveloperstochecktheirmethodologyagainstadifferent
timetestedmethodology.
Provideafairwayofpricingsearchaservice.
P id f i
f i i
h
i

PlentyOfStocks.comprovidesadatabaseofvarioustrendindicators,buy/sell
signals,andexitstrategiesallbaseduponuniquemathematicalconstructs.
Compliments a traders unique approach against my approach asanitycheck?
Complimentsatradersuniqueapproachagainstmyapproach
a sanity check?
RegisteredusershaveaccesstoafreehistoricaldatabasewhichincludeMDRP
signalsandothermuchmoreadvancedindicators.Theonlylimitationisthatno
dataisprovidedwhichismorerecentthan30daysago.Registeringisfree.
Thosetraderswhowantcurrentdatamaysubscribetotheservice.
h
d
h
d
b b
h
Accesstocurrent(todays)islimitedto100traders.
Themonthlyfeeisdeterminedbyamonthlyauction.The100traderswithhighest
bid will each pay what the lowest bid was (out of those 100 highest bidders) This
bidwilleachpaywhatthelowestbidwas(outofthose100highestbidders).This
pricestheservicemostfairly.ThisisthesameauctionusedinsellingTreasury
debt.

Resources

Books:
The21IrrefutableTruthsofTrading:ATradersGuidetoDevelopingaMindtoWin,byJohn
Hayden
TheDisciplinedTrader:DevelopingWinningAttitudes,byMarkDouglas
TheZurichAxioms,byMaxGunther
Th Z i h A i
b M G h
PeaksandValleys:MakingGoodandBadTimesWorkForYou AtWorkandinLife,by
SpencerJohnson

Websites:
RealClearMarkets.com Newsfortraders free,links.
FirstVolgaInvestments.com WhereIpostvariousgraphsandcomments.

Newsletters:
TheGartmanLetter
The Gartman Letter TheGartmanLetter.com
TheGartmanLetter com

Programs:

ThinkOrSwim.com TradingPlatform
TradeStation.com TradingPlatformandBrokers.
DataSharks.biz DownloadFreeStock,Futures,andotherdatafromaroundtheworld.
eSignal.com IndependentrealtimedataproviderofFOREX,Stock,Options,andFutures
Data.

Contact Information
ContactInformation
John@FirstVolgaInvestments.com