One of the key parts of my eBook RSI Fundamentals: Beginning to Advanced is the chapter on using Bi-Channels in conjunction with RSI Reversals. RSI Reversals are not the same thing as divergences. Many traders use divergence as a signal but statistically these do not perform as well as Reversals. As far as I know, this website is the only site that has done statistical studies on the success rates of divergences vs. Reversals. The bottom-line is that divergences signal Reversals. Below we show where the Bi-Channels were draw on the H4 and then we will show the trade using an RSI Negative Reversal and the set up.
Here is an example of the long range view for Bi-Channels which we use to locate key Reversals. The Green Channel define the long-term channel on the H4 time frame. The Yellow dashed channel is the immediate channel. Our goal is to look for the Reversal that occurs either at the top of the immediate channel in the direction of the long-term channel or at the break of the immediate channel. Typically we look for the trade signal on a lower time frame. See below.
In this particular case we get a negative RSI Reversal just before the close of the market. Because the probability of success increases when we trade in the direction of the long-term trade this becomes a potential trade opportunity.
You could play this one of two ways. The first way would be to place a Sell Stop below the close of the signal bar at the time of the signal. This would have opened the trade 3 bars later. The only downside to this is that you are in the trade over the weekend.
Another more conservative way to handle this trade would be to wait until the final bar of the day and place a Sell Stop 5 or 6 pips below the lowest low after the signal. In this case the green horizontal bar on the chart below. Typically when the market opens it gaps up or down on Sunday night. In this case it gapped down and and dropped 70 pips.
Make sure you can be in front of your computer when the market opens. If you have a Sell Stop on and the market went up, then you are protected from being in the trade. When the market gaps in price it typically moves back to fill in that gap fairly soon so be aware of that as you manage the length of your trade.
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