The Little Red Trading
Book
Top-Down Trading
“An airline pilot never leaves the runway without having
a destination and flight pattern.”
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Paul Dean
You Learn Forex
Spring 2009
2
THE LITTLE RED TRADING BOOK
This eBook is about how to become a first class trader in Forex or any
other financial market you choose. It’s about the steps you can take in
order to get to where you can trade on your own from the comfort of
your own office, home, condo, penthouse, mountain or beach home.
Unbelievable as it seems, I think the average person, of which I consider
myself to be, can learn the basic concepts of successful trading in a
matter of weeks.
This is one of the reasons I have called this eBook, The Little Red
Trading Book. I named it after a book of a similar title on writing and
because of a concept written about in the first chapter of that book.
That concept is a Top-Down Approach to writing. This book will take a
Top-Down approach to learning to trade as well as trading itself. TopDown trading is trading with “the conclusion in mind” as author
Brandon Royal summarizes with this quote, “An airline pilot never
leaves the runway without having a destination and flight pattern.”
What we will discuss in this eBook is how to start with a sophisticated
method of trading and fill in the tools you may already know how to
use, underneath. This is not a baby out with the bathwater book. If you
have no knowledge then you will get direction and if you have some
knowledge, even advanced knowledge you can gain from reading this
book.
Here is an illustration of Top-Down learning. I am sure many of you
have seen commercials for a complete set of tools that you could use to
build anything from a bookshelf to a house. If you buy all the tools, can
you build a house? Probably not, especially if you have never built one.
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So what would you do? You could read some books. You can even go to
school and learn about construction. You could become an architect.
You could even decide to get a job on a construction crew and learn
one nail at a time. All of those methods would be Bottom-Up in my
view and how most people go about learning.
Top-Down would be finding someone very good at building houses and
sticking to them like glue while they built a house. You would keep
notes, take still shots and put them in a notebook, or make movies of
each step and the order of each step. You would also participate in as
many of the on-site jobs as possible. After you had done this many
times you could probably build a modest house, then a bigger one and
so on. To me, this is the way to learn and the better the person you
learn from and the more knowledge of how to build a good house, the
better you will be. That is an example of Top-Down learning. Learning
with a specific end in mind before you start.
The same would be true of many professions or technical skills,
including trading. I have no doubt that if you were looking over my
shoulder day after day that before long you would be doing what I do
and making lots of pips. Therefore my objective here is to get you
started from the top, down.
Most Forex trading or trading of any kind is from the bottom up. That
would be learning about things like trend lines, moving averages, chart
patterns and formations, candlesticks or price bars, Fibonacci, Elliott
Wave, support and resistance, and on and on. Once you are done you
have a tool box of items but you still don’t know how to build a house
or make a trade, or read a chart.
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I assume that many, if not most, have a basic understanding of the
Forex market. It is not my intent to rehash those here. If you know
absolutely nothing then it would be best to get a book and read it first
or there are many websites that can give you the basics. If you would
like my opinion you can email paul@youlearnforex.com and give me an
idea of your trading knowledge and I can tell you what you might read,
if necessary before you read this book.
But let me reiterate, if you have some knowledge of trading and you
walked into my office and said, “Teach me how to trade.” I would teach
you from the Top, Down. A perfect example of this is golf which I played
and taught for many years. Golfers have problems because they are so
concerned with their grip on the club, their backswing, and their
downswing that they don’t think at all about the target until after the
golf shot has been attempted. That is not what our pilot does and not
what a good trader does. And let’s be clear about something from the
beginning. A good trader is someone at the end of the day, who makes
money.
There are 3 to 4 trillion dollars traded in the currency market every day.
Statistics tell us that 95% of retail traders will fail when trading the
Forex market. Statistics also show that there are about 1.5 billion Forex
traders across the globe. That means there are about 75 million retail
traders who are trading the markets and pocketing approximately 12
billion dollars a day.
How do you get to a place where you are getting some of that money?
Let’s take a look at this illustration to get started.
©Paul Dean, You Learn Forex
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TOP-DOWN TRADING
Primary Trading Tool Guidelines
Identifies Momentum in the Market
Provides an Accurate Target
Provides Accurate and Consistent
Entry Point and Stop Loss.
Allows for the Determination of
Trade Worthiness
Objective Judgments
Secondary Trading Tools
Geometric and Patterns
Trend lines
Chart Patterns
Fibonacci Analysis
Moving Averages
Support and Resistance
Price Action
Candlesticks
Time Frames
Gann Analysis
Behavioral
Elliott Wave Theory
Oscillators
COT
Dependent Trader
Technical Trader
Fundamental Trader
Find Something or Someone to do
the Trading.
Learn the Basics Tools of Technical
Trading
Learn the Basics of
Fundamental Trading
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The chart on the previous page is the structure of how one should learn
to trade in my view. In general the most specific tools are put in use
first by showing a trader all the elements of what makes a trader a
good trader.
For example, what if you won a day at the golf course with Tiger Woods
and he was going to teach you how to properly swing a golf club. What
if you spent the evening cleaning your clubs, in particular your driver.
When you arrived the next morning what if Tiger greeted you and ask
you to pull out your most important club. I wonder how many would
pull out their putter.
If you were asked what your favorite tool was for trading, what would
you choose and why. I am suggesting that the list of things in the Red
Box above need to be met first before moving on to any other trading
tool.
Next, working from Top-Down would be what I call Secondary Trading
Tools. This is where most traders gravitate much as tool lovers do when
they head to Lowe’s or Home Depot. These are without question the
tools of the trader but how many of them will meet the criteria of the
Primary Trading Tool Guidelines in the red box?
The last boxes are where many people start and some never really get
out of these first three boxes. However, by starting from the Top Down
you may entirely eliminate even having to decide anything. These three
boxes represent the choices made to people when they decide to learn
about Forex. You see this illustrated in forums and webinars. People are
trying to decide what is the best method for them to take. Let’s take a
minute to talk about each of the boxes at the bottom.
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Dependent Trader – This person is looking at the option of having
someone or something else do the trading for them. We would all love
it if we could buy a computer program that traded for us and deposited
thousands of dollars in our bank accounts over night. Unfortunately this
is not the case and no matter how attractive this idea may sound it has
not proven effective. If it had, all of trading would be automated and/or
mechanical.
Another aspect of this possibility is finding a person (expert trader) to
do the trading for you. This is risky business. You should never have
anyone trade your money who cannot present hard evidence of their
success rate and, in my opinion, a clear explanation of how they
approach the market. There are many people who will never recover
from recent stock market losses because many money managers could
not read the basics of the charts they were looking at.
Many of the experts hide under the guise of selling you a trading
program that is graphically appealing and seems to have the basis of a
sound system. If you read “About Paul” on my website you will get a
flavor for what this can be about and the money it might cost you.
The Dependent Trader is looking for someone else to do the hard work.
If this is the case, then this trader should also be ready to accept losses
that perhaps they didn’t count on, and frankly who does?
Here is a list of other things that the Dependent Trader will come across
eventually.
1. Selling trading platforms – These are often offered in a free
webinar setting where the charting package which can do
everything including take you to the moon on weekends. It will
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have snappy features and handsome graphics none of which have
anything to do with making money.
2. Proprietary Trading Methods – This is an interesting method of
hooking the Dependent Trader. This can come in the form of a
carrot. In other words to get this trading method you would need
to sign up for a $6000 training program from a top Forex training
company. In return they have a proprietary trading method that
you will gain access to. I have been there.
3. A Trading System in the Process of Development – I bit on this
too. Someone teaching their own method of trading that isn’t
quite completed yet, it’s in process. They are often selling a fancy
indicator that you need to have in order to trade the system. Or
they may be offering a membership to a monthly webinar. You
also see this in forums. The problem here is that some people just
never get the hang of the system being used and no one makes
money.
The Fundamental Trader
There are many traders who fall under this category. After all, how can
you not be concerned about the fundamentals; interest rates,
unemployment, GDP, Existing Home sales, Retail Sales. The onslaught
of economic indicators come day after day, hour after hour. You are
told that the best way to trade is to focus on one or two currency pairs
and get to know them well. Study all aspects of the economy before
you make your decision to trade. Weigh everything in regard to which
pair is going to have the upper hand.
In every case that I have found of fundamental trading eventually the
fundamental trader has to look at the charts and make technical
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decisions about when to enter. In a paraphrase of Andrew Cardwell,
Technical’s can tell you about the fundamentals but fundamentals
cannot tell you about the technical’s.
I have traded entire weeks without knowing what the economic
indicators were. Without looking at the stock market, oil prices, gold,
CNBC or any business news. Fundamental trading can sometimes be
the definition of paralysis by analysis. And even when you are sure
about the direction of a trade, you can be wrong. What you will end up
doing is spending hours online trying to build a consensus of opinion.
Unfortunately you will most likely gravitate to the side of the argument
you would like to come true. I will leave it at that.
The Technical Trader
I believe the best traders are technical traders. I believe the best
technical traders understand two things better than all other traders
that puts them in the winner’s circle time after time; market
momentum and target.
Why Market Momentum and Target?
As I will list later when we talk about the Secondary Trading Tools,
there are many ways to approach trading. You can for instance, draw a
trend line on chart where is touches three points which is the
conventional method of drawing trend lines that you will read in every
book. But that definition although not wrong is misleading because all
you are doing is imposing your trading method on price rather than
letting price tell you what it is going to do. That is why people who say
that price is all that matters are right. The problem, once you know that
is, what is price telling you?
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If you are going to trade from the Top Down your method has to have
the target in mind from the start. This is because the target is telling
you what the value of that currency should be; the future value. If I am
the pilot of a 757 leaving Los Angeles I know the future value of my
target and it is four hours later in New York on a runway.
Momentum is what takes me there. Momentum is also directional if
the trader knows what to look for. That last sentence should be
repeated over and over until it is never forgotten. If it is it will save you
from many false entries.
Let’s assume we are a currency trader. What we are waiting for before
we trade is momentum in the market with a highly accurate known
target. That is not the concept of most traders. Instead they are
thinking entry and how much they can afford to lose. They are often
following one or two of their favorite pairs rather than seeing the
market as a whole. Very traders have the target in mind first along with
the evidence that there is the momentum to get to the target. A signal
to buy or sell with no momentum is no signal. It’s a jet on the runway
with no fuel. If you don’t know when and where momentum is coming,
you will lose many trades to “noise”.
When the target(s) are known and the engine is reviving the trade will
have a much higher success rate. This is why Top-Down trading works
and why traders should tip their idea of learning on its head.
©Paul Dean, You Learn Forex
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The RED BOX
The First Step in the Top-Down Process
Primary Trading Tool Guidelines
Identifies Momentum in the Market
Provides an Accurate Target
Provides Accurate and Consistent
Entry Point and Stop Loss.
Allows for the Determination of
Trade Worthiness
Objective Judgments
The items in this box outline what a highly profitable trading system
must have. These are not so much tools but concepts that your trading
tool or system must have to succeed.
Identifies Momentum in the Market
We have already discussed momentum to some extent. But my idea as
far as I know has not been expressed by other traders. Obviously, even
though I have read over 100 books, hundreds of articles, and spent
endless hours on forums for more than four years almost 7 days a
week, I could never exhaust all the ideas of traders. However no one I
know of has put these thoughts down in any form that I have seen. I
don’t claim them as mine, but I do believe without them it will be
extremely difficult to succeed. An extensive treatment on Momentum
and Target will be part of my third book on RSI Advanced Trading
Techniques.
©Paul Dean, You Learn Forex
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My theory is based on my use of RSI signals on trading charts and the
commonality of those signals across a wide array of currency pairs at
the same time on a particular time frame. In other words, if I am
looking at 12 different pairs on the hourly charts nearly all of them are
showing an initial readiness at a particular hour and then a
confirmation signal in the next. I interpret this as momentum that is
affecting all of the currency pairs. It is like an airport when all is
relatively quiet and subdued. People are reading magazines and
sleeping. Then you begin to hear the PA as flights are preparing to
arrive. People get somewhat restless, some begin heading for gates.
Then the planes arrive and people get off and head toward baggage
while others are getting on the same planes that arrived. The planes
arriving were the signal that something was about to happen. The
planes lining up on different runways and taking off are the
confirmation. The momentum is the fuel and the take-off.
Or consider a herd of elephants or antelope threatened by a predator.
They are at first agitated, then anxious and when threatened enough
they will run away or in the case of elephants stampede.
As a trader I am looking for that momentum in Forex across currency
pairs because it gives me a sign that my signals are correct and the
direction that I am trading is correct. I have traded as many as 12 pairs
of currencies at once with stop losses of only 30 to 40 pips in which
none of the trades were stopped out. That could be called Directional
Momentum.
It also reduces the chance that I will be stopped out by noise. When a
plane takes off it goes in one direction. When elephants stampede they
go one direction and nothing gets in their way.
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Provides an Accurate Target
Why is target so important? Without a target you have no reason to
trade, no prediction or estimate of the future value of a currency pair
or other financial instrument. There is no destination. To trade
successfully traders need to know where price is going if the trade is to
produce the full potential of the trade. And it must be based on
objective measurement that has proven to be true. If this not the case
then the trade is not only a weak speculative trade, it is a subjective
trade.
For example, many traders have a goal of making 20 pips. If the trader
reaches twenty pips then they are out except sometimes when they
decide to stay in because they have a good feeling, or perhaps because
the trade shot up to 40 before they could do anything about it. That of
course is a good thing but if they don’t take their profit, which they may
not, thinking the trade will continue to move in their direction, they
may find that the profit they made was impulse buying at the last
minute and then a sudden drop occurs. How much will they let it drop?
What if it drops to below 20? Hopefully they will get out but some
traders will hold on thinking it will go back up. Then the next bar forms
and price goes lower. If you have traded long enough you know what I
am talking about. You’ve been there.
Top-Down trading means there is a specific and objective target well
established by acceptable trading theory. It is one quarter of the
equation however, as a target without a specific entry point that relates
to the target and a specific stop which relates to the risk is just as bad
as no target. The fourth part of the equation is the Reward to Risk Ratio
and the question, Is this trade a trade I should take?
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Provides Accurate and Consistent Entry Point and Stop Loss
We discussed this above but any Top-Down method of trading needs to
be able to know where the entry point will be in reference to both the
target and the stop loss. The entry point is more than just a place that
the trade starts, it is a reference point for Risk and Reward.
Once you have an entry you can decide the Risk and here is where
many wannabe traders get into trouble and it’s really not their fault.
Most trading systems leave it up to the trader to decide on Risk. In
other words, how much can you afford to lose? That is arbitrary and
subjective. But a stop or Risk should be based on where the trade has
gone wrong. The trader should know in advance based on their trading
system, where a trade has gone wrong. If your trading system cannot
tell you where the trade is gone wrong then you do not have a trading
system. You are gambling.
Let’s illustrate this now taking Momentum, Entry, Stop and Target
together.
We find an entry point when the market is ready to move. This would
be a signal to buy or sell with momentum. We have take-off with
engines running. We also have determined out pre-flight plan, we have
a target. And our stop is the end of the runway. Hopefully that will not
be a problem!
Our signal to get in the market is to BUY.
Our Entry is: 1.3000
Our Stop is: 1.2960 pips and based on where the trade has gone wrong.
Our Target in this case is: 1.3120
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Are we ready for clearance from the traffic controller in the tower?
No!!!
Allows for the Determination of Trade Worthiness
What is Trade Worthiness? Trade worthiness is your Reward to Risk
Ratio and asks the question, under the circumstances do we take this
trade? Is the tower going to give the pilot an “all clear?”
We can decide that quickly.
Risk = Entry – Stop Loss
Risk = 1.3000 – 1.2960
Risk = 40 pips
Reward = Target – Entry
Reward = 1.4200 – 1.3000
Reward = 120
Reward to Risk Ratio = Reward/Risk
RRR = 120/40
RRR = 3:1
The last question is what RRR do we find acceptable in our trading
system? In my opinion 3 to 1 is a minimum. For example, $1.00 traded
has the potential to return $3.00.
©Paul Dean, You Learn Forex
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In this case the trade is ALL CLEAR!
1. We have momentum across the majority of pairs.
2. We know the target.
3. We place the trade.
If the trade nears the target and momentum suddenly slows down
(clouds or bad weather), we take all or a percentage of the profit. If we
take a percentage we would move our stop. We could also be moving
our stop as the price approached our target.
Objective Judgments
What does this mean when we talk about trading? When you look at
every tool in the yellow box of Secondary Tools, many of them with the
exception of Oscillators are subjective in nature. This is what is meant
by that. A trend line is subjective if the trader is drawing the line on the
chart because 10 traders looking at the same chart could draw trend
lines from different points. Even the Elliott Wave which has many
followers and takes many years to master is subjective. Traders rarely
agree as to the wave patterns.
An oscillator used properly can make trend line placement on price an
objective exercise as the indicator dictates where the trend line must
go. And these trend lines are from only two points, not three.
The reason that I put Objective Judgments last was because any trading
method to have consistency must have objective cornerstones in which
to establish themselves; it is foundational.
Does the highly respected Fibonacci Analysis do this? Yes and no. One
of the best books on Fibonacci Analysis is by Constance Brown. One of
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her main points is that Fibonacci ratios are often improperly drawn.
They must be drawn so that the lines of the ratios find the areas of
previous support and resistance that have been respected by the
market. If you are trading using Fibonacci then you have to ask yourself
if 1.5 billion traders in the world are trading the EURUSD where are
most of them placing Fibonacci ratios? Do you think there might be
some differing opinions? And then add to that where the majority of
traders are drawing them in terms of time frame and it is not hard to
see that this is not the most objective method of trading.
Brown has a very unique method of using Fibonacci ratios to locate
confluence which can be very helpful but again as much as she tries to
define objectivity in the placement, when you have millions of people
using Fibonacci ratios, the placements are going to be different and
they all haven’t read her book so they will not be doing it all the same.
And if everyone did do it the same then there would be no market
because everyone would be on the same side of the market!
Enough about objective judgments except to say the trading method or
tool that is used in Top-Down Trading must have a high level of
objectivity to it. The oscillator that I depend on is the Relative Strength
Index which is a momentum oscillator and it is a leading indicator. It
answers all of the above criteria. We will talk about it more a little later
on.
Following is a brief summary and discussion of Secondary Trading Tools.
©Paul Dean, You Learn Forex
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SECONDARY TRADING TOOLS
Secondary Trading Tools
Geometric and Patterns
Trend lines
Chart Patterns
Fibonacci Analysis
Moving Averages
Support and Resistance
Price Action
Candlesticks
Time Frames
Gann Analysis
Behavioral
Elliott Wave Theory
Oscillators
COT
Trend Lines
1. Trend lines fall under the umbrella of the Geometric method of
trading.
2. Basic trend line placement is 3 points that touch a line. Although
this is the standard subjective idea, I propose that 2 points
objectively placed is more accurate.
3. Price is not determined by the trend line. A trend line is only a
method to frame what it thinks price is doing. It is just a visual
tool of what the trader thinks the market is doing.
4. It indicates the direction of the trend.
5. It can also be used to indicate patterns that are recognizable and
repetitive, something that will be discussed later.
6. Sometimes the most obvious place to draw a trend line is not the
best place to draw it, nor is it the correct place.
7. A trend line with no objective purpose cannot tell you the truth
about price. No matter how well you think you have detailed your
chart with trend lines and other methods if they are subjective
based on your instincts they will be wrong more than they are
right. The only way to know you are going to be right more than
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you are going to be wrong is to change from a subjective method
of trading to an objective method of trading.
8. When you draw a trend line can you find any reason other than
your own subjectivity as to why the trend line you have drawn
should be there?
Moving Averages
1. Moving averages are calculated over time.
2. The reason moving averages are used is to determine trend.
3. Moving averages are less static then trend lines as they adapt to
price as it moves.
4. Moving averages are lagging indicators.
5. Using moving averages to enter the market makes stops less
accurate as well as targets.
6. As a standalone trading method, moving averages do not give us
all the information we would like to have. They have value for
helping to determine trend but that information may not be
current enough for us to trade it successfully.
Chart Patterns
1. Pattern recognition. May traders use the many trading patterns
that occur on charts, defined by trend lines, to trade. This is less
subjective then many methods and falls under the method of
Pattern Recognition.
2. Traders speculate that prices will for example, break out in the
direction of the previous trend.
3. An interesting view point on Chart Patterns is the following quote:
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It is most valuable to recognize when a pattern has failed and the
majority of people have been caught off guard. And that failure
happens when the market suddenly destroys the pattern that it
tricked the majority of the people into believing was being formed.
Here are some of the questions you might ask after reading the
quote and assuming it was true or made sense.
How do you know when the pattern failed?
Wouldn’t that only be evident when it failed and wouldn’t
everyone know by then?
How would you know what failure was? Wouldn’t it be based on
what you thought was success? And if success is when failure
happens, “when the market suddenly destroys the pattern” then
when would you know which was which?
Fibonacci Analysis
1. This falls into the Geometric Pattern of trading categories.
Constance Brown, who has written extensively on Fibonacci,
points out that many people place their start and end points for
Fibonacci Ratios incorrectly. If nothing else Fibs can fib. In other
words everyone using Fibs do not draw them from the same place
nor on the same time frame.
2. Fibonacci analysis attempts to establish points of retracement.
Although this can seem objective in nature it is relative and
therefore subjective in many cases. It can be like drawing a line in
the sand and saying don’t cross this line. Some people will and
some won’t. If no one crosses than you can say the line was
reliable.
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3. Fibonacci can be used to predict targets. Fibonacci extensions to
find a target have merit.
4. Stops for Fibonacci trading can be somewhat subjective.
5. Constance Brown in her book, Fibonacci Analysis discusses finding
points of confluence using multiple Fibonacci ratios. This is a very
interesting technique and well worth reading however it is
somewhat of a skill that takes time to develop and even after
development, may not produce consistent results because the
placing of Fib points top and bottom is so varied trader to trader.
Price Action
1. Price Bar or bars that indicate price direction may be changing the
direction of the trend. This is a method that Martin Pring
developed when he discussed his Pinocchio bar. This is a bar that
has a long nose and opens and closes within the previous bar.
The nose of the bar is lying to you that price is going to continue
in the direction of the nose but then changes its mind and goes
the other direction.
2. Targets are not easily predicted primarily because Price Action
does not have a sense of momentum.
3. There are other Price Action bars: Double Bottoms with Higher
Closes, Double Tops with Lower Closes, Engulfing Bars and Inside
Bars. Many of these have been studied at forum websites as
James16.
4. Price Action bars should be used in conjunction (confluence) with
other methods to help eliminate false signals.
©Paul Dean, You Learn Forex
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Elliott Wave Theory
1. This is a total trading concept and falls under the Behavioral
methods.
2. The Elliott Wave takes much study and experience to learn. It is
also open to many interpretations.
3. It is best used with another method that allows for precise
entries, stops and targets.
Confluence
This is not so much a tool as a method of finding places where
multiple trading methods merge at one point. For example, a
Fibonacci level with a wave that coincides with Elliott Wave
Theory.
The Definition of Confluence
1: a coming or flowing together, meeting, or gathering at one point
<a happy confluence of weather and scenery>2 a: the flowing
together of two or more streams b: the place of meeting of two
streams c: the combined stream formed by conjunction.
Non-Correlation
This concept is presented by Constance Brown. She presents several
categories in which trading tools fall. We have discussed several of
them; Pattern Recognition, Geometric and Behavioral. The idea is that
before placing a trade the trader should have an agreement using a
trading method from each category.
©Paul Dean, You Learn Forex
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An example might be: Chart Patterns (Pattern Recognition), Fibonacci
Analysis (Geometric), and Elliott Wave Theory (Behavioral). If two or
three of those methods agree then you have a better chance of
succeeding.
I think this is a powerful tool to embrace. The question is which of the
methods we have discussed is best and in what combination?
©Paul Dean, You Learn Forex
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THE ANSWER
What follows is an answer to Top-Down Trading. It answers the
question of Identifying Momentum which none of the Secondary Tools
listed can do. Remember without momentum we have no take-off. Also
momentum combined with set ups across a set of currency pairs can be
a very positive factor in the determination of direction. Next is Target.
The Target must be in place before you enter or take off. Third, Entries
and Stops that don’t just tell you what you are willing to risk, but where
the trade has gone wrong. Fourth, you must decide Trade Worthiness
by calculating the Reward to Risk Ratio and last, is your method of
trading objective or subjective?
There is only one tool I know that is objective in regard to momentum,
target, entry, stop, RRR and that is The Relative Strength Index (RSI).
RSI makes all the methods that are in the Secondary Tool Box into
useable and reliable tools no matter which ones you use. It is also a
standalone trading tool. It is called an oscillator as it measures
momentum in the market. If there is no momentum there is no market
to carry trades through to fruition. The use of this indicator across all of
the currency pairs you are trading is the first signal that momentum has
entered and/or slowed. It is a measurement of the collective behavior
of the market, the psychology if you will.
Welles Wilder developed RSI to determine overbought and oversold
conditions. RSI does a poor job of determining overbought and oversold
but many traders still refer to it for that purpose which is totally wrong
and makes some traders think it is not valid. It also is used to locate and
trade divergences. This method of trading has also been found to be
incorrect.
©Paul Dean, You Learn Forex
25
Andrew Cardwell discovered that divergences create the opposite of
what many traders believe.
So what is RSI good for?
Cardwell also discovered Reversals. These Reversals are the key to
trading RSI and in my opinion the key to successful trading. Reversals
are not subjective, they are found on charts and can be traded from an
objective point of view. Collectively I have found how currency pairs
use this method to create and indicate momentum. The method has a
Top-Down Target before the trade begins as well as an entry, stop and
RRR calculation to determine if the trade should be taken.
Once the trader learns this technique he or she can read a chart in a
matter of minutes and know what is happening. Also because it is a
“leading indicator” the trader can determine when the trade is about to
leave the station and there is a simple method to confirm the trade.
It allows the trader to get the total overview of the market rather than
spend hours trying to figure out waves as in the Elliott Wave theory.
Having said that, the Elliott Wave Theorist can use RSI techniques to
pin-point their trades and significantly improve there profits.
And this is true of all of the Secondary Trading Tools that we have
discussed. They can be used to establish confluence and noncorrelation with RSI to increase the probability of success and
confirmation of a trade signal.
©Paul Dean, You Learn Forex
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Conclusion
Trading currencies or trading any financial instrument is one of the
most difficult things someone can take up. The trade off is how
rewarding it can be. The problem is how to get from 1 on the scale,
where you know little, to 10. Most people will think that you must go
from 1 to 2 then to 3 and 4 and so on to 10. I have attempted to show
here that through my experience, that is the wrong approach.
I believe the Top-Down approach is the correct method. As I said
earlier, if you came into my office I would not start at point 1, I would
start at 10. After all if you learn 10 you may not need 3, 4, 8 or 9.
The next step is yours. I hope that you take the opportunity to learn
some of the items I have discussed above and see the products listed
on the products page of the You Learn Forex website. There is a video
that simply teaches you what you need to know to get started trading
RSI Advanced Techniques in 64 minutes. In 64 minutes you will have
what you need to become profitable. I know because I have RSI
Advanced Traders who have paid for the video, eBook or both in on
trade. The video is short so that you do not need to take days and hours
going through videos. The concepts are clearly presented and you can
easily repeat them.
The book does the same thing only it takes a little longer to read
through. However there are things in the eBook that were easier to
illustrate then the video. I would recommend either for learning RSI
Fundamentals: Beginning to Advanced, or both. Either however, on
their own will give you all the information you need.
©Paul Dean, You Learn Forex
27
I refer to RSI as “Advanced” not because it is difficult but because
almost no one knows about this method of trading. It took me nearly 4
years of studying trading day after day before I came across it.
Fortunately I was alert enough to see that it made more sense than
anything I had used in the past. You can actually use it as a standalone
trading system and it will teach you more about trading currencies than
any book I have read.
I have enjoyed bringing you this material and trust that it will help you
on your journey. Please feel free to email me: paul@youlearnforex.com
We also have Free weekly webinars that are free where we discuss
many of the topics above and a Daily Briefing that comes with a free
month when you purchase the video or the eBook.
Thanks again and much success,
Paul Dean, President, You Learn Forex
About Paul
More about RSI
Testimonials can be found with each product on the Products page.
Other references can be provided on request.
©Paul Dean, You Learn Forex
28
©Paul Dean, You Learn Forex