We are now ready to move on to the detailed part of the Barry Thornton course
The Relative Strength of currencies
When you look at the relative strength of 2 currencies you will see that in general they relationship between the currencies varies from minute to minute. Every tick of trading data can show the one currency (the base currency) strengthening in relation to the other currency (the quoted currency). Sometimes it can feel that knowing the strongest and weakest currency in the market is of no value because of these constant changes.
This complex and constant variation is difficult to interpret and understand. Especially when looking at different time frames where a currency can appear to be in a strong and weak position at the same time. These conflicting readings actually create great trading opportunities for those who know what is going on but great distress to less experienced Forex traders.
Measuring the relative strength of currencies
Barry uses a number of special indicators to measure the beat or vibration rates of currencies.
The first one is the Relative Strength Index or more commonly known as the RSI indicator. As the name indicates the RSI measures the relative strength of the base currency relative to the quoted currency all the time. When the base currency is strong this indicator becomes overbought and when the base currency is week it becomes oversold. One only needs to look at most currencies to see this dance between a base currency being strong and base currency being weak to realize that a strong currency is not strong or weak all the time as discussed in the Magic Momentum Course
When a currency is consistently strong for a while the RSI will stay overbought for a very longtime and that is a signal of a trend. Momentum indicators like the RSI can become unreliable in trending markets and can result in false signals due the RSI staying overbought or oversold in those conditions. Using short timeframe signals to enter trades in the direction of the trend works well in these conditions such a discussed in the WATO Course.
The ZigZag indicator ( Forex vibrations )
With the RSI moving from overbought to oversold it would be good to know the distance (in pips) the currency travels in it journey between those 2 points. Barry calls these distances the currencies HEART BEAT or its VIBRATION RATE. The beat and Forex vibrations are easy to see on the charts when using a simple ZigZag indicator which automatically identified the highs and lows of the beats and vibrations. When the currency is trending the beat in a particular direction will be big compared to the beat in the other direction. When ranging or trading sideways the beats can be very similar. These beats can be seen on all time frames but the 4 hour to daily charts give the best information. The Good Vibrations course covers aspects of this.
The ZigZag indicator becomes a leading indicator in most trading circumstances. So when a currency is ranging with a beat or vibration rate of say 150 pips and the currency has already strengthened by 140 pips it would be a reasonable assumption that the currency will some get very tired and stop strengthening and start weakening for say 150 pretty soon. This will follow the natural beat or vibration rate of the currency. So Barry would start anticipating a sell due to this leading indicator. He uses the Good Vibrations indicator
But you cannot just blindly sell because the beat number has been reached. That is where the RSI and other trading skills come in. Remember the RSI is measuring the same thing in a different way. As we have seen the RSI can be used to enter the actual trade when early changes in direction occur using a staged 3 to 4 time frame trading approach.
A RSI based Strategy
So a simple version of this strategy is.
- Watch the ZigZag indicator for currencies that are reaching the end of their beat or vibration rate on the longer term charts.
- Watch the RSI when it starts shown signs of momentum running out or increasing on a number of aligned timeframes eg. 15min, 1 hour and 4 hour.
- Look for other supporting information such as support and resistance, channel or trend lines lines, divergences on momentum indicators, double tops, candle formations , Multiple MA charts etc.
- Trade or enter the RSI on short time frames when the reversal is confirmed with a small position low risk position.
- Use the Beat or Vibration rate on the longer term charts as a possible expectation for the deal
- Add to your position aggressively when you are right (The deal goes in your favor) and when longer time frames confirm new signals using the Double in a Day principles and strategies of low risk lot size increases. See the previous Barry Thornton Article TOPUP
- If your small position fails keep on trading until your catch the reversal unless there are fundamental reasons that point towards a potential trend developing. In that case only trade in the direction of that trend by using the above method with even faster time frames to enter.
- Using the multicurrency WATO approach can add value to the above process’
Give it a go
Most of the above principles have been covered in previous Barry Thornton articles and in the Financial Turning Point course.
Why not give this a go in the next few weeks – you have so much to gain and very little to lose.
Please ask any questions you may have using the facility below.