RSI, MA and swing counter: choose a good set up

Tuesday, 23 October, 2012, we attended a Nico Bakker seminar in which he presented the technical characteristics of his new dashboard. By applying these characteristics to trading, you can more easily recognize a good set up and achieve better results. In this article we look at the different technical indicators that play a role in this.

Tow rope or moving average

Before you invest, it is important to determine the trend of a stock or other security. You can do this by using a tow rope or moving average. Here you can use a moving average with 55 periods (exponential). When the price is below the moving average line, the price is mainly decreasing; when the price is above the moving average line the price is mainly increasing.

It is important to look at the colours of the candlesticks. A colour change (from, for example, green to red) can be an indication of top formation / bottom formation, provided the other indicators give sufficient reason for the assumption. Do not therefore simply buy at a high time. Buy when the indicators tell you that the highest moment may have passed and that there is a possible trend reversal.

RSI or relative strength index

The RSI or relative strength index can be used in multiple ways. When the RSI is below 30, this means that the security is over-sold. The probability that the price will rise later is then quite real. When you are short, it is wise to get out. You can then buy when the RSI is again above 30.

When the RSI is above 70, the effect is over-bought. It is therefore wise to get out if you are long. Going short when the RSI touches the 70 is then a real possibility.

Divergences are an even stronger indication. When the price at the second rise makes a higher peak, but the RSI has a lower top, there is a big chance of a trend reversal.

When the RSI touches 50, this is a strong indication of a trend confirmation.

Swing counter

According to Nico Bakker, you can determine a top or bottom by applying the swing counter. You count candlesticks. Start with counting (if you are long) when the closing price of the first candlestick is higher than that of the previous four candlesticks. When the closing value of the previous candlestick is higher than the first candlestick in the series, you can count to nine; there is then a big chance of an upswing. With a declining price (short), this obviously goes the other way.

Conclusions

Trend

  • Above MA = increasing
  • Below MA = decreasing

RSI

  • OB (over-bought) get out
  • OS (over-sold) get out
  • OB-cross get in, short
  • OS-cross get in, long

Swing

  • +1 … + 9 a top is forming
  • -1......+9 a bottom is forming

The reason for set ups

Please note that these are only reasons for possible set ups! Eventually you will have to decide yourself whether you want to get in or not. After all, these are only technical indicators, not methods that predict the price trend with certainty. Nico Bakker is developing a dashboard for RBS in which these indicators are automatically indicated as green (rising trend indication) or red (falling trend indication). As soon as this tool is released, we will mention this on trading.info.

set upExample applied to the Apple stock, 15 minutes graph, MA 55 exp, RSI 15, here is indeed a short bottom; note that the rate is still below the MA, so there is no immediate reason to go long!

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