The system of four lines

The first major step in this direction - building lines showing better condition PP than standard levels of 30/70. Levels of 30/70 are selected as the average recommendation in fact markets are too different to all of them invariably obeyed a common reference. Specific timetable can form very different levels, and these levels may change over time.

The graph in the figure itself prompts, where the levels of PP. Here above is a range in which the RSI was for quite a long time; top and bottom of it is limited slanted parallel lines. Within this range, the two lines clearly visible consolidation extreme parallel lines on which the plot unfolds, either up or down. The two inner lines are the real landmarks for the states of the PP market. Too many turns indicator began precisely on these lines, rather than the standard levels of 30/70.

The second important step is to require that the line break in the RSI was confirmed break of the corresponding line on the chart. One of the main features of market charts - that significant price movements begin after significant breakthroughs line consolidation (trend lines, borders, channels, support and resistance levels). Not every line break chart oscillator precede significant price move. But if the price breaks and some strong line, likely to "catch" a good move increases. This rule allows the confirmation drop a very large number of false alarms.

How to build four lines

In the beginning it is necessary to pick up the line that best passes through extremes - either from the lows or highs in the RSI. Local minima in the figure RSI very well lie on a straight line. Once the line is carried lows, its parallel line is drawn through the highs (top RSI). Then, within this range hold two parallel lines through the consolidation pivot points indicator. Internal lines are usually easy to detect: it is necessary to find an arrangement of lines to many RSI reversals occurred as a reflection of the lines up or down.

A handy tool for building four lines - Standard Error Channel (in the notation of the package MetaStock; similar functions available in many technical analysis package). The program calculates the regression line, and she holds two parallel lines above and below, at a distance proportional to the magnitude of the standard deviation. If the parameter Standard Error Channel taken to be 2.0, the upper and lower lines correspond to the extreme values of the indicator, as the output indicator outside the lines will be a very low probability events (with a probability of less than 0.05). Lines for the parameter equal to 1.0, the corresponding probability of 0.32 out indicator above the top or below the bottom line. Varying the parameters of the inner lines, you can pick up very good boundaries of overbought and oversold (nA figure in the bottom chart RSI caused Standard Error Channel with parameters 2.0 and 1.2).

It is worth paying attention to how many have in common lines drawn by hand, and computer (mechanical) lines. This suggests that the eye and the hand of a trader are a very powerful statistical analyzer.