Any Forex trading system should have a signal that is clear and concise. The best systems are those that are semi automatic Forex systems. The reason is simple. Not all signals created in Forex trading are successful. That is a given. No trading system regardless of what the sales copy, is always right.

The signal should be programmable so that it does not take interpretation in order to trade. The signal should also tell the trader if the trade is short, long or neutral.

One of the most successful trading signals, not known to many Forex traders, is an RSI Reversal. This signal is created by RSI, the Relative Strength Index and price. It is not the same as a divergence. Divergence occurs in bullish situation when the second point on the RSI is higher but the price is lower. Many traders and trading books see this kind of divergence as an indication that price is going to move higher. If one plots these divergences with the idea of trading them long and plots negative or bearish divergences with the idea of trading them short, they will lose money.

The signal that most people are unaware of on RSI is the Reversal. It is different from divergence in that its signal is an alert that price is going to rejoin the trend. Most traders are confused by this signal and do not know how to locate it.

There are two types of Reversals just as there are two types of divergence. A positive or bullish reversal occurs when the second point (a confirmed valley on RSI) is lower but the price is higher. The negative or bearish reversal is where a second point (a confirmed peak on RSI) is higher but price is lower. Statistically these signals are as much as 3 times more successful than divergences. The reason is simple, Reversals move with the trend which is where the power is or the momentum.

If you plot each peak and valley on RSI you can begin to see what price on a currency pair is doing and will do. For example, if price is trending down on a currency pair and positive divergences begin to appear, it means that price is slowing and that there is a good chance for retracement before negative reversals will occur. The patient trader will wait for the negative reversal as the risk and overall reward will be greater. To automatically see divergences you will need to employ an indicator such as the RSI Paint Indicator.

RSI Reversals are what I call a semi automatic Forex system of trading because rather than automatically trade each one as they occur, the trader uses them as alerts or clues as to what is happening therefore making larger and more predictable profits.

Paul Dean is the owner of You Learn Forex. He is a writer of 5 eBooks on Forex trading and posts daily on his site about trading Forex.
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