Date: December 22nd, 2005 - 14:00GMT
Expert: Igor Belitsky, Analyst of FX-Dealer.com
Topics:
- General RSI trading rules
- Composition of RSI and Bollinger Bands
- Trading System example
Who Igor Belitsky?
Igor Belitskyis a specialist in applied mathematics and trading systems development. Since 1996 he has been working as a forex market analyst in a Moscow based financial company
Speech Material:
Using RSI in trading systems
1. General RSI trading rules
Relative Strength Index (RSI) is the most popular technical indicator. Below are 4 well-known RSI trading rules:
RSI levels of 70% and 30% (80% and 20%) are known as overbought/oversold levels. Buy signal generated when the market is oversold, sell signal generated when the market is overbought. These levels are only working good inside range phase and produce losses during trend phase.
EMA often plays the role of support and resistance just the same as for the price itself. Buy signal generated when RSI rises above its EMA, sell signal generated when RSI drops below it's EMA. EMA is always lagged behind and often produce buy signal when up-trend is over.
Bullish divergence and buy signal occurs when price makes a new low which is not confirmed by RSI, bearish divergence and sell signal generated when price makes a new high while RSI fails to make a new high. The main drawback of divergences is that they are trying to predict trend reversals instead of trend-following signals.
Chart formations like trends, support/resistance, triangles, head and shoulders and so on are applied to RSI just the same way as they are applied for the price. Bad thing is that chart formations like trends and triangles are very subjective and could not be used in trading systems.
2. Composition of RSI and Bollinger Bands
We apply Bollinger Bands study to RSI indicator. Buy signal is triggered when RSI falls below Lower Bollinger Band. Sell signal is generated when RSI rises above Upper Bollinger Band. There are many signals against the trend so we need to use some trend filter. We add MACD indicator as trend filter. If MACD>0 the trend is upward, if MACD<0 the trend is down.
The main advantage of using RSI with Bollinger Bands is that it helps to catch trading signals inside trend phase while standard overbought/oversold levels are useless inside trend. We believe that RSI(Bollinger Bands) composition study is working good both in range and trend phase while 80% & 20% RSI levels are only suited for ranges.
3. Trading System example
Below is USD/CHF 240 minute chart with sample automatic trading system. Sell signal is generated every time RSI rises above Upper Bollinger Band while MACD<0. Buy signal is generated when RSI falls below Lowe Bollinger Band while MACD>0.
Click to enlarge :
Click to enlarge:
If we used RSI overbought/oversold levels on the chart above we would have missed sell signals inside down-trend as well as buy signals inside up-trend phase while composition of BOB(RSI) works fine.
Below is equity chart for this trading system based on target order = +400 pips and stop-loss order = -200 pips. There are 222 trades with total profit of 6040 pips. Spread of 5 points was included. We tested it on historical USD/CHF 240 minute chart with 2500 bars. This system is not perfect because maximum drawdown is more then 1500 points.


















Special session Kathy Lien's of FXCM FX outlook for 2006
Date: December 20, 2005 15:00GMT 10EST
Expert: Kathy Lien, Chief Currency Strategist at FXCM
Topics:
Who is Kathy Lien?
Kathy Lien is the Chief Currency Strategist at Forex Capital Markets. Kathy is responsible for providing research and analysis for DailyFX, including technical and fundamental research reports, market commentaries and trading strategies. A seasoned FX analyst and trader, prior to joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross Markets and Foreign Exchange Trading. Kathy has vast experience within the interbank market using both technical and fundamental analysis to trade FX spot and options. She also has experience trading a number of products outside of FX, including interest rate derivatives, bonds, equities, and futures. She has a Bachelors degree in Finance from New York University. Kathy has written for Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO Magazine. She is frequently quoted on Bloomberg and Reuters and has taught seminars across the country. She has also hosted trader chats on EliteTrader, eSignal, and FXStreet, sharing her expertise in both technical and fundamental analysis.
Session Summary:
DailyFX proudly releases our 2006 Fundamental and Technical Market Outlooks for the 7 Majors.
For the year ahead, see what are the:
- Major Trends
- Major Risks
- Who Faces Political Crises
- Which Central Banks will be Shifting Policy
How they impact the currency market
EUR/USD Click each currency pair to read more:
2005 has been a phenomenal year for the US dollar with 2004 losses now nothing more than a distant memory. After having fallen eight percent on a trade weighted basis in 2004, the dollar ended up over ten percent this past year. Like a boxer still standing tall in the ring after absorbing repeated blows, the dollar still managed to come out ahead despite soaring energy prices and devastating natural disasters The US economy proved to be much more resilient than even the most respected analysts from the biggest banks had predicted as the country quickly recovered from Hurricanes Katrina and Rita which temporarily drove oil prices above $70/bbl.
This helped the mighty greenback hold onto its title, but the win was far from a clean sweep as some currencies actually held their own against the dollar while others managed to outperform it. Regardless, a number of major themes impacted the market throughout the year, all of which are still unfolding as we enter 2006
USD/JPY Click each currency pair to read more:
Interest rates and oil pushed the yen to multi-year lows against the dollar in 2005. At the beginning of May USD/JPY traded at 104.18, but by December, the pair hit 121.38 with the dollar rising a full 1700 points higher turning the yen into the worst performing major against the greenback in 2005. The decline of the yen is a testament to the power of the carry trade as US rates rose in 2005 from 2.25% to 4.25% creating a 425 basis point interest rate differential between the dollar and the yen. The critical question facing traders in 2006 is whether this spread will continue to widen or will it be the end of the great dollar carry trade? Part of the answer will of course depend on the greenback. If the US economy continues to perform as well as it has in 2005, if the US housing market does not suffer any significant slowdown and if the Japanese and the Chinese continue to fund the US capital account by buying US Treasuries then USD/JPY may well continue to go higher. However, the other part other part of the equation - the yen - could see some strength of its own.
GBP/USD Click each currency pair to read more:
GBPUSD Outlook
2005 has been a brutal year for the British pound, which fell 12% from its high of 1.9325 to its low of 1.7048. The key reason for the pound’s weakness in the past year was the fact that the Bank of England became one of the first major central banks to reverse the tightening program that it began in 2003 by beginning to lower UK interest rates this year. As one of the first central banks to raise rates 2 years ago, the pound's growing interest rate differential and solid fundamentals attracted a significant amount of speculative capital. Such glorious days are now only a distant memory as those same speculators watched the pound's interest rate premium to the dollar shrink to a mere 25 basis points. With 200 basis points of that differential taken off the table in 2005, the exodus of speculators has been the primary catalyst for the currency pair's collapse. In the year ahead, the differential is expected to tip into the dollar's favor, which should weigh even more heavily on the GBPUSD.
USD/CHF Click each currency pair to read more:
Who would have thought as 2005 was coming to a close that aside from the US, tiny, staid, Switzerland would emerge as the fastest growing economy among the majors in the second half of the year? Yet, low unemployment improving consumer sentiment and a lower franc, which spurred the growth of the nation’s export sector have all combined to produce stellar economic results. In the third quarter, Switzerland registered an impressive 4% annual growth rate in its GDP, while the county’s most important economic statistic - the KOF index of economic indicators - has risen to its highest level since 2000. The unit’s one weakness is its ultra low interest rate of only 100 basis points which has made the Swissie vulnerable to carry trade flows especially against the dollar whose own interest rates increased by 225 basis points this year. Nevertheless as a model of political stability and steady economic growth, the franc stands ready to perform well in 2006.
Political Peace
USD/CAD Click each currency pair to read more:
USDCAD Outlook
For most market participants 2005 could certainly be considered the year of the Big Dollar with the greenback rising against all of the majors. But for many traders the past year will also be known as the year of the Little Dollar (as the CAD is affectionately called in the currency market). Buoyed by a more than 50% rise in oil prices, the loonie was the only unit to have gained on the greenback amongst the world’s most liquid currencies. From its January 3rd value of 1.2074, the USD/CAD lost more than 500 points dropping to a low of 1.1441 by the end of 2005. The near continuous decline in the pair which began in earnest in the middle of the year was precipitated by a rise in crude as well as a tightening monetary policy that made the Bank of Canada one of the few major Central Banks willing to raise interest rates in 2005. As a result, the CAD became the new carry trade, setting all time highs against low-yielders like the Japanese yen, with the CAD/JPY cross rising nearly 2000 points from 85.40 at the beginning of the year to 105 by the end of 2005. Will the loonie strength continue? To a large extent the answer depends on the price of oil and the resolution of political turmoil within the country. For now, however, these are heady times for a currency, which only a year ago bought 65 US cents for each Canadian dollar. At present exchange rates of nearly 87 US cents to the Canadian dollar, the loonie has put smiles on many faces across the Great White North
AUD/USD Click each currency pair to read more:
AUDUSD Outlook
In contrast to many of the other major currencies, the Australian Dollar has held up very well in the face of this past year’s strong US dollar rally. Having increased interest rates once this year, the Reserve Bank of Australia (RBA) has been able to save their currency from facing a similarly dire fate as the British pound. Yet in retrospect, interest rates alone were not the primary reason the Australian dollar only experienced a gradual decline against the US dollar. Buoyant demand from China as well as soaring gold prices have both lent support to the currency and helped to offset some of the drag brought on by the resounding strength of the greenback throughout the past year. However the Aussie has not been without its own problems. The booming housing market finally started to sputter in 2004 and remained relatively weak throughout 2005, putting a big damper on consumer spending throughout the year. Looking forward to the year ahead, there is a lot to watch out for when it comes to determining the fate of the Australian dollar. To figure out where the currency may be headed next, we need to watch for the answers to three key questions
NZD/USD Click each currency pair to read more:
NZDUSD Outlook
The New Zealand dollar has ended the year virtually unchanged at approximately 0.7000 against the US dollar. Throughout the year however, there was quite a bit of volatility, with the NZD/USD reaching a 22-year high of 0.7462 in March and a low of 0.6683 in July. The wide ranges this past year primarily had to do with the tug of war between US rate hikes and New Zealand rate hikes. Next to the US, the New Zealand Central Bank was the most aggressive monetary authority this year, having raised its interest rates three times. In fact, New Zealand’s status as the highest yielding country in the developed world has only enhanced as its interest rates increased from 6.50% to 7.25%. Even though the US has increased interest rates by 200bp, New Zealand’s interest rate differential against the US has only shrunk from 4% to 3%. New Zealand has been far less consistent with its rate hike campaign than the US, therefore each rate hike or time period leading up to the rate hike has corresponded with a strong rally in the Kiwi. However shortly afterwards, the currency would give back its gains and become driven by dollar factors instead as the market becomes uncertain about when it will see the next move. In the year ahead, the Reserve Bank of New Zealand is expected to drop its hawkish bias, keep its interest rates on hold and move to a wait and see mode to determine whether there is a need to shift to an easing campaign. Whether they do so or not will depend on the resilience of consumer spending and housing demand as well as the price of oil which if it remains subdued, would reduce inflation pressures and validate the RBNZ’s on-hold stance.
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