Why Learning Reversal Signals Will Make You Profitable

One of the reasons RSI has been such an important indicator for trading over the last 30 years is that it is a measure of momentum. Momentum is very important to placing a trade entry. It is also important to get the direction of the momentum right.

Using RSI however, with the traditional rules as outlined by its creator Welles Wilder can lead to many losses. Trading short for example at the 70 RSI which is considered overbought is a myth and can be easily disproved as to its inconsistency. The same can be said for 30 RSI for being oversold. The real strength of RSI is a "little known" trading signal discovered on RSI that many traders have never heard of; RSI Reversal signs. These were discovered by Andrew Cardwell.

Many traders confuse these signals with the more wellknown Divergences both Positive and Negative that are located on RSI. Divergences do provide trading entries but statistically they do not perform as well as Reversals. There is a good reason for this. In actuality Divergences most often signal when the trend is retracing. This is fine but it is very difficult to determine how much of a return will occur. Plus it is always better to trade with the trend if possible.

What makes Reversals better? First there are two signals just like divergences; Positive Reversals and Negative Reversals. These two signals in my opinion were misnamed because they are actually actually signal when a trend reverses. What they do is even better. These two signals occur when then the currency you are trading is trending. They continue to signal as the market trends.

It is much less likely that a trend will reverse then that it will continue. So a signal that repeats as the trend repeats allows the trader to enter at multiple points. This is important if you trade for short periods of time in your trading time zone and do not like to hold trades through the night. However, if you are a long term trader Reversals that continue to form in the direction of the trend are excellent signals that the trend is going to continue. The RSI Paint Indicator can be used to locate Divergences and Reversals automatically making it easy to be alerted to more than one timeframe or currency.

In summary, RSI Reversals are strong and consistent points of entry with momentum and they typically do so with little or no drawdown making the trade entry even better.

Source by Paul W. Dean

Related Posts