A Top-Down Trade Executed Solely on RSI

Trend Line Analysis

Welcome to this fifth monthly feature-length blog post sponsored by the Trendline Mastery home-study course
and membership service, available exclusively from Forexmentor.
Last months article was entitled Drawing Tend Lines On Things Other Than Price. In that article, we
showed how the Relative Strength Index (or RSI) is unique among technical indicators by virtue of being
amenable to Trend Line (TL) analysis, which we had previously reserved exclusively for the price panel. We
also showed in that article that TL Analysis on the RSI panel can often show you things that are not possible to
see on the price panel. Of course, the two variants of TL Analysis applied together can produce optimal insights
into trend, momentum, support/resistance and reversals.
In this months installment, were going to bring you a case study example showing how TL Analysis
applied only on the RSI panel (again, using the default period setting of 14 on all timeframes from highest to
lowest) was able to provide the following functions on a specific trade:
Identifying a strong multi-timeframe trend;
Identifying a corrective setup;
Providing a real-time trade entry trigger;
Monitoring an open position through to completion.
If there was ever a case to be made for including any one technical indicator in your chart template, for the
purpose of facilitating TL Analysis, then RSI is clearly the only choice. Simply put, you cannot replicate its
functionality in this regard with any other indicator, be it MACD, Stochastics, CCI, and so on.

The pair that were going to look at for this case study is theAUD/NZD cross, for the Daily session
of Wednesday, May 11th, 2016, with a short bias.
One of the neat things about TL Analysis, whether applied on the price panel or the RSI panel, is that once you
get good at it (through sufficient practice), it takes hardly any time to do. Literally from scratch, you can have all
six of the core timeframes (Monthly down to 15m) marked up to tell you whether youre dealing with a strong
top-down trend reading or not.

So what were going to do for this case study is pull up all six charts comprising the core template, and see what
TL Analysis on the RSI panel had to say as of May 11th for the pair of interest. We dont have to worry about the
fact that these chart annotations were done after the fact, because in every single example, the trend line
identified was specifically in force to the live edge of trading identified on each chart, at the time the trade setup
and entry triggers materialized.
So lets get to it then, starting with the Monthly chart.

Before we do, though, please keep an important consideration in mind: As of the point in time this case study
was prepared (into May 12th, 2016), all RSI trend line analysis we are presenting was as shown on the various
chart captures weve included. Depending on when you read this article, which may be anywhere from days to
weeks after the fact, that trend line analysis may have changed, resulting in readings different on your own
charts in real-time. Please keep in mind that with the passage of time, any sharp and/or sustained price reversal
to the upside could have the effect of changing the RSI readings when you next look at them. Just know that as
of the date this article was prepared, the intact trend line analysis at that time was exactly as weve shown it
here. With indicators, the only readings that count were the ones available in real time.
Chart Extract 1: AUD/NZD Monthly chart

At the dashed vertical line weve drawn through the monthly bar for May, 2016, we can see that RSI is in the
process of breaking down and through a Demand TL which connects back to a RSI Swing Point on the monthly
bar of March, 2015 (connecting to higher lows for October and December 2015, and February, 2016). Of
course, the price panel itself indicates a much longer term downtrend from early 2011 onwards, but the bearish
RSI trend line break for the current month (as of May 11 th) did indicate also a short-term reversal within that
longer term downtrend. As long as RSI was pointing lower below its own recent Demand trend line break, we
could say that the directional bias on this timeframe was bearish into May 11th.
Chart Extract 2: AUD/NZD Weekly chart
Where weve drawn a dashed vertical line on this timeframe as well (the Weekly bar for May 9 th, 2016), we can
see that RSI had recently broken down and through a prior Demand trend line, going back to the low for the
week of January 11th, 2016. And, as was the case with the Monthly chart referenced above, as long as RSI
continued trending lower below that broken trend line, we had ample reason to call a downtrend in progress on
the Weekly chart. So at this point, were two-for-two: RSI analysis showed recent trend line breaks on both of
the two highest timeframes concurrently.
Chart Extract 3: AUD/NZD Daily chart

On the Daily chart shown here, weve dropped a dashed vertical line through the May 11 th juncture. It is
interesting to note that the prior days session generated an Inverted Hammer candle, which would easily fulfill
the function of a top reversal signal ending the rally from the low of May 6 th. If we then consider the trendline in
force on the RSI panel to May 11th, we note a Supply (aka Falling Resistance) trend line dating back to a RSI
Swing Point High for March 9th. As is so often the case with trend lines, the strongest ones are those which
allow for multiple connection points on the trend line; in this case, there were at least three (arguably five)
establishing that the trend line in question as valid and believable.
The other interesting point about this particular example is that it reflects the concept of RSI divergence: From
the first to last connection points on the trend line, we see RSI trending down. But during the equivalent span of
time on the price panel, price is making not lower highs, but rather flat highs. When you have line studies on a
price panel and an indicator panel not concurrently sloping in the same direction over a significant span of time,
you have divergence. To be specific about it, this chart view sports a so-called Hidden Negative Divergence: flat
highs on price against lower highs on RSI. Regardless of the jargon, the trend direction on RSI here is clearly
bearish, and that means all three of the highest timeframes weve looked at thus far are in agreement; the trend
bias seems to be down.
Chart Extract 4: AUD/NZD 4hr chart
The dashed vertical line on our 4hr chart extract shown here is for the timestamp of 20:00 (8pm) GMT on
Wednesday, May 11th. The main technical event of interest on the RSI panel lies a few bars to the left, in the
form of the circled downside break of a corrective Demand trend line, which commenced from the low of 8am
GMT on May 9th. How could we have know at the time that this trend line was corrective rather than trending?
Simple: the preponderance of trend line analysis on all of the higher timeframes, as we have already shown, was
bearish at the time.
In any event, with both price and the RSI indicator trending down to the right-hand side of the chart, there is
little doubt as to what the directional bias is by the time we get to the live edge of trading at the dashed line on
the right. Not only that, but with all four timeframes we have thus far looked at in agreement, we have a
powerful Quad Screen trend reading. This is the formula we are always reflecting in the bi-weekly Forecast
Pack PDF reports we post to the Trendline Mastery Traders Club site.
Chart Extract 5: AUD/NZD 60m chart
At this point, we drill down further, leaving the upper timeframes behind for a closer look on the intraday
timeframes. The dashed vertical line on the above chart is drawn through the 60m bar for 22:00 (10pm) GMT on
May 11th. Before the close of that bar, RSI made two level highs, allowing us to draw the horizontal resistance
line shown. This is another example of RSI divergence: lower highs on price matched with flat highs on RSI.
So, in the context of a higher level downtrend, we see over a shorter time interval on the 60m chart, a recently
completed resistance event, which is certainly far more likely to have bearish implications than not.
Chart Extract 6: AUD/NZD 15m chart

The timestamp of interest noted on the sixth and final timeframe in succession which were including within our
top-down review is on the vertical dashed line at 22:30 (10:30pm) GMT on May 11 th. The RSI panel at this
point is interesting because it shows us two different trend lines, each of which is useful in different ways. The
longer of the two line segments is a Supply trend line which aligns well with the horizontal resistance line we
just drew on the 60m chart, not to mention the preponderance of bearish trend readings on all of the higher
timeframes. The short of the two line studies is a Demand trend line, which outlines a short-lived corrective
rally on the 15m chart. This latter element provides an early warning of a pending setup, because, as we know,
as trend traders on the short side, we pretty much always want to be selling a rally top of some kind.
So RSI trend line analysis has thus far given us a strong top-down trend reading, but as we look to the 15m
chart, we see it fulfilling another function, that of generating a setup. The only thing left to do at this point is
wait for RSI to break its own corrective trendline, which it does on the close of the 22:30 GMT candle. And
that, in turn, means we have an entry signal on the short side on the open of the next bar, or 22:45 GMT. The
open price of that bar was 1.0805, and the highest high on the same bar was 1.0811, which means that the
drawdown (ignoring spread) was only 6 pips. Thereafter, price collapsed quite convincingly, without at any time
coming close to triggering the Initial Protective Stop. So with a corrective trendline break providing the entry
trigger, we can count up three different functions that RSI trend line analysis has correctly and efficiently
provided us.

After getting risk out of the trade by trailing the Initial Protective Stop to breakeven on attainment of floating
profit of 15-30 pips, the only other thing that was left for us to do was determine an exit strategy. Here, too, RSI
can be of assistance. Simply hold on in real time (if you have enough hours available in the day to monitor open
positions) until RSI crosses a bearish trend line in the upwards direction on no lower than the 60m chart.
Though we didnt show that even on our 60m chart annotation above, it did occur on the close of the 2:00am
GMT bar for the following day, May 12 th. From the open price mentioned above to this signal to close the
position (@ 1.0760), the profit potential on the Day Trade was +45 pips.
Of course, there are always a variety of other exit strategies available to suit your own personal preferences in
terms of scale of profit target, time in the trade, and so on. Those strategies are beyond the scope of this article
to describe; suffice to say that whether one had pursued the above trade setup as a Position, Swing, Day or Scalp
trade, there was absolutely no reason not to do better than an absolute worst-case scenario of a breakeven stop.

Concluding Remarks
In this latest instalment in our monthly Blog series for theTrendline Mastery Traders Club, we have shown how
Top-Down Trendline Analysis applied on the RSI panel can fulfill all of the most important technical aspects of
signaling a high-probability trend trade, including establishing a trend bias, identifying a setup, entering the
trade, and managing an open position. Just think: Not a single one of those aspects required reference to other
indicators, chart patterns or even price itself for that matter! And the end result was a correctly executed trade
attempt into the trending direction. The nicest aspect about all of this is that when you have taken the time to
understand the underlying trend-based chart technicals as weve shown here, the entire analysis can be
completed in a tiny fraction of the time it has taken you to read this article. Not bad!
In conclusion, Id like to thank you for joining us here today. I sincerely hope that this blog article has provided
you some useful insights into the topic of trendline analysis for Forex trading. If I can ever answer any questions
you might have, please see the Members Forum available at the Trendline Mastery membership site
(www.forexmentor.com/trendline), or send us an email message (with the subject header Question on TL
Analysis) to: info@forexmentor.com. Please also be sure to follow our Twitter feed (@fxmtrendline).
Good Trading!