(Please make sure you have read the Article that explains the RSI Trendline Technique before reading this article.
click here for that article – RSI TRENDLINE TECHNIQUE )
An Invalid RSI Trendline
The RSI Trendline Forex strategy Trading Zone filter. When drawing the RSI Trendline it is possible that the trendline is too steep. When the trendline is too steep it becomes more and more unreliable and could cause you to enter deals in a highly trending market.
See Trendline 1 in the chart below
A Higher probability RSI Trendline
When drawing a trendline there are normally 2 or more waves above or below a trendline. Ideally you want to see 2 or more full-bodied wave above or below your trendline. When the trendline is too steep it does not have full-bodied waves.
Trendline 1 above has 3 poorly formed waves. Trendline 2 has 2 well-formed (full-bodied) waves
The RSI Trendline Solution (a trading zone)
To resolve this problem, we have introduced a trading zone filter. This trading zone filter will let you use setting that prevent trendlines that are too steep. So the rule is that the RSI trendline violation must happen in the trading zone. If it is outside of the trading zone it will be ignored. The blue shading represents the trading zone. Trendline 1 is violated outside of the trading zone and is not a valid entry signal. Trendline 2 is violated in the trading zone is a valid trading signal.
When a trendline violation is ignored (such as trendline 1 above) the EA will wait until a second trendline is drawn (such as trendline 2 above). If the trendline violation of the 2nd trendline is in the trading zone it will count as a valid entry signal. If is not the EA will not look for more trendline violations based on the last overbought / oversold status.
The Trader needs to decide the size of the RSI Trendline Trading Zone
It is up to the trader to decide the size of the trading area. This is often done by personal judgement or even optimisation. The barriers of the trading zone should ideally be the same distance from the RSI 50 line e.g. 30 / 70 or 20 / 80. The setting should add up to 100 to avoid a buy or sell bias.