The Road to Successful Trading

relative to the previous decline. You would enter a long position as soon as the RSI turns 
upward from this second bottom.
The buy signal is especially strong if the first RSI low drops below the oversold reference line. This 
indicates that selling pressure is near exhaustion 
and a directional change (upward) is imminent.
Note in the chart that blue arrows indicate long 
or buy signals. The circled trough in the RSI 
reading indicates the “previous decline” that did 
move below the lower reference line.
How to Design and Construct An Effective Trading Plan 
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A higher trough in the RSI accompanied the 
subsequent low in the stock. The upside move was explosive. A bearish divergence that gives a 
“sell” or short signal occurs when prices rally to a new near-term peak but the RSI makes a lower 
peak than during

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the previous advance by the stock. This calls for selling short or purchasing a put option as soon as 
the RSI turns down from this second peak. Place a protective stop above the stock’s latest minor 
high. Sell signals are especially strong if the first RSI peak is above the upper or overbought 
reference line. 
Note in the chart that the red arrows indicate short or sell signals. The circled RSI peak coincides 
with the previous advance that moved above the upper reference line. A lower peak in the RSI 
accompanied the subsequent higher peak in the stock. Note how the substantial downside move was 
predicted by the RSI. 
There is a lifetime of indicators and mix of indicators to use as filters in selection and to home in on 
the best trade. Those presented in this section represent the most common and most traders will 
have at least two or three of them in their trading paradigm.
It’s important to understand that technical indicators are very effective in helping narrow down 
promising selections from the broad universe of possibilities. Once a list of candidates has been 
selected by computer, the next step is to focus on the fundamental analysis. Even though indicators 
are nice and neat, they are far from the full story. In fact, many traders have put so much faith in 
the technicals that many trading programs are based only on technical indicators and custom 
algorithms. In fact, once the parameters have been programmed into the computer, some traders just 
place orders as they are spit out of the program. Talk about mechanical! However, price and volume 
data are just a history of what has already happened and a possible indication of what the future 
might bring. Future information that might affect price movement are most often hidden in the 
fundamentals and between the lines in press releases. For this reason, traders may be well advised to 
not forget the importance of fundamentals.