Lets look at a trade session of crude oil which our team conducted today. For the trade we experimentally used a combination of 10 minute graphics and five indicators (tools) which helped our decision-making throughout the trade.
The first tool we used is SMA (simple moving average) adjusted on 20-day period and painted as a yellow line in our graphics. Another SMA in addition to this one is placed in blue color reflecting 89- day period. The use of this instrument was designed to smooth out the effects of price volatility and create a clearer picture of changing price trends. Traders use an SMA, sometimes in concert with another SMA for a different period, to signal confirmation of a change in price behavior.
The next tool used is SMA envelope which represents the two red lines wrapping around the Heikin-Ashi candles that can be seen on the picture. This so called “channel” is adjusted by our team according to the time scale of graphics we use (10 minutes in this case) and has proven fairly successful to predict the boundaries of crude oil fluctuation.
The two separately drawn indicators at the bottom of our graphics are called RSI (Relative Strength Index) and DMI ( Directional Movement Index).
RSI is technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions. An asset is deemed to be overbought once the RSI approaches the 70 level. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold. The period used for this indicator is 14 days.
DMI is an indicator used for identifying when a definable trend is present. In general, when the +DI line (painted in green) is above the -DI line (painted in red), the market is moving upwards, and when the -DI line is above the +DI line, the market is moving downwards. The ADX line (white on the graphics) shows the strength of the move with an absolute value. It represents the difference between the +DI and -DI as it reaches an extreme level it tends to indicate a trend reversal.
Our first decision came with the RSI indicator plunging beneath the extreme oversold level 30 to the level of 10. The RSI remained in the oversold zone for three hours and we used its lowest point to enter in a long position with 20 barrels at the price of $107.37.
Looking at the DMI indicator, after having diverged +DI (green line) and -DI (red line) began slowly to approach one another. At the point where crude oil reached session low, RSI hit its lowest point for the day while ADX (white line) hit its highest – suggesting a strong price reversal signal.
At this point we expected the price to rebound and meet the first resistance level at the 20-day SMA (yellow line). About five minutes later, after we noticed a rebound in RSI which made the price reversal even more certain, we decided to add to our position another 10 barrels for a stronger result.
About two hours later, as expected the price has reached the twenty-day moving average (yellow line). Our team decided to lock in the profit at a price of $107.64.
This simple combination of moves led to a small but relatively risk-free profit of $10.68.