The limitations of rules in trading
Why there are no rules
Many new traders are brainwashed by various experts out there into believing that there are certain rules in trading. For example some say, “Never margin to more than 10% of your account size.” Others go, “Ignore the RSI totally.”
Traders can sometimes become confused about what they refer to as ‘rules’. Rules may be self imposed boundaries as part of a personal strategy or method. However, some traders take these to mean that their rules have some force of authority over the markets. The markets respect nobody’s rules.
In this post I wanted to clarify my position on the RSI. Overall I think it is a stupid indicator. I still use it in certain situations. I itemise what may be some uses (as I see it) then follow up with a chart of some evidence on NY Orange Juice.
The RSI can be useful:
- In assessing price momentum (not time momentum).
- RSI divergence can be useful but is pretty limited.
- Extremes of RSIs especially on weekly to monthly time frames can herald a reversal of price to about a 70% probability from my observations.
- RSIs can be used to spot individual patterns in particular instruments.
The NY Orange Juice 1D chart shows that extremely low RSIs have a good chance of being exploited for limited travel north. This does not mean that the same principle applies to all charts/instruments.
The markets know no rules. The markets are the collective will of thousands of people. The markets do not have a mind. They are chaos. We have rules in our heads. The market has no ‘head’ to know any rule. Even ‘what goes up must come down’, is a rule (as we see it) that is irrelevant. Why? The markets do not know ‘up’ from ‘down’.
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