This article focuses on the RSI – A momentum indicator of choice
Price action in the chart is the reflection of the “commitment” of traders and Investors. This price action can give the trader high probability information about short term turning points as prices move up and down in trends and consolidation areas. As we really never know when the trend will end momentum indicators can give very strong hints.
If trading is about looking for the high probability entry points then the exit should be based on high probability turning points as well. This is where the stop loss can be executed to take profits or minimise losses. When analysing price action in any time frame it is very common to find these “momentum type indicators” which give an indication of a “high price area” or a “low price area”.
In this example of BAL while the whole move is not captured, over the period from the 1st of January 2015 up to the 13th of October 2015, the RSI gave 10 buy and 10 sell signals producing $6.07 of profit and 12 cents of losses. A buy signal is when the RSI closes over the 50 level and a sell signal is when the RSI ( 7) closes below the 50 level.
The study used the daily closing price for the entry and the daily closing price for the exit.
We can see that a clearly defined trend developed over this period in hindsight. Keeping in mind as traders we never know when a trend will continue or end.