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Mikula Forecasting
Company: Trading Strategy #4.
====================
Written by: Patrick Mikula CTA
Copyright (c)2003-06 by Patrick Mikula All Rights Reserved.
(Please to not copy or foreword this article).
Mikula Forecasting Company
P.O. Box 152672
Austin, TX 78715-2672
USA
www.MikulaForecasting.com
support@MikulaForecasting.com
====================
Using Volatility with the RSI Range
Indicator.
If you know how to use volatility it can be your secret
weapon in finding markets which are about to make a pivot or
a breakout. Volatility does not have a consistent
correlation to market pivots but it can provide good
warnings of coming pivots and breakouts. The biggest problem
for traders when dealing with volatility is determining what
is high volatility and what is low volatility and when are
either of these occurring? To answer these questions we
calculate the RSI of the price bar range. This calculation
provides the trader with a volatility calculation which runs
from 0 to 100 and makes it very easy to see when volatility
is high or low. We consider a RSI Range value of greater
than 65 to be high volatility and a RSI Range value of less
than 35 to be low volatility.
There are four basic situations which a trader would look
for when using the RSI Range indicator. These are 1.)
Market Top with low RSI Range, 2.) Market Bottom with
low RSI Range, 3.) Market Top with high RSI Range and
4.) Market Bottom with high RSI Range. The first chart below
is the March 2004 Cocoa futures contract. At points A and B
the RSI Range has move up above 65 and the market formed
pivot tops at these two points. When the market moves up to
a top and the volatility is high the market usually can not
sustain the high volatility. The expected price action in
this situation is that the market would either form a
sideways pattern or the market would decline. On this cocoa
example the market declines. At point C on the chart below
the RSI Range has moved down below 35. This is low
volatility. In this situation we would expect a breakout.
This does not indicate a breakout up or down. Over the next
series of price bars we would expect larger price ranges an
increase in volatility which is often accompanied by a swift
market move.
The chart below shows the March 2004 U.S Bond futures
contract. At point A the market makes a small swing bottom
and the RSI Range has moved up to high levels. In this
situation it is common to see a market reversal and an
upswing. At point B the market seems to be moving in a
downswing and the RSI Range moves down to low volatility
levels. In this situation we would expect a market breakout.
This does not indicate a upward or downward breakout. From
point B we would expect a fact move with large bar
ranges.
The final chart below has only one point which is forming
right now. This is the continuous contract for gold futures.
This market has moved up while the RSI Range has move
down to low volatility levels. This indicates that there
should be a market breakout with larger price ranges and a
fast move. This does not indicate a up or down breakout just
that a breakout should occur over the next series of bars.
If you were trading this market you would watch for any
indication of the breakout direction and then you would
trade in that direction.
MORE
To see the most common market action which the
four situations below tend to lead to see the version of
this article on the MarketWarrior
owners page.
1.)
Market Top with low
RSI Range:
2.)
Market Bottom with low RSI Range:
3.)
Market Top with high RSI Range:
4.)
Market Bottom with high RSI Range:
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Mikula
Forecasting Company: Trading Strategy #4