Get to know the Relative Strength Index (RSI).
This indicator was developed and introduced in 1978 by J. Welles Wilder, Jr., who was a mechanical engineer,
Even so, he is better known as a technical analyst who gave birth to several well-known indicators besides the RSI.
The RSI indicator is almost similar to the Stochastic indicator that we studied earlier.
Use of the Relative Strength Index
Do You Understand the Meaning of RSI?
The RSI can help you predict overbought and oversold conditions. The market is considered overbought if the RSI is below 30, and is considered overbought if the RSI is above 70.
In general, the RSI is used to look for buy and sell signals, as well as other indicators. Sell signals are sought when the RSI has entered the overbought area, while buy signals are sought when the RSI has entered the oversold area.
A sell signal confirmation is when the RSI drops from the overbought area and is below 70. A buy confirmation is when the RSI rises from the oversold area and is above 30.
The RSI is not as aggressive as the stochastic. RSI is an indicator that rarely gives buy or sell signals. Therefore, the RSI may not be suitable for aggressive traders, i.e., traders who want to make as many and frequent transactions as possible.
However, because the RSI rarely generates a signal, the appearance of a signal is usually followed by a fairly long movement. Therefore, the RSI is suitable for traders who tend to be calm and who are very patient waiting for the RSI signal to make transactions.
There are several tips that you can use in order to anticipate the emergence of fake signals. We call it the six-step RSI stance.
Steps to Buy Using RSI
Buy Rule Steps Using RSI
The RSI should be in the oversold area (below 30).
Wait until the RSI breaks out of the oversold area (up above 30).
As a reminder, make sure there is a bullish candlestick when the RSI breaks from the oversold area.
Wait until the candlestick is finished (closed).
entry (buy) at the opening of the next candlestick.
Place the stop loss slightly below the previous swing low.
The illustration of the steps above is as follows:
Using the RSI (Buy) Indicator in Steps 1-3
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Step 4–6 Using the RSI (Buy) Indicator
And what happened next was...
Don't place your stop loss exactly at the last swing low. As a precaution, keep it slightly below the swing limit.
With experience and lots of practice, you will become more familiar with the characteristics of the market so that you can estimate where you should place your stop loss.
Steps to Sell Rules Using RSI
Selling Rules Kick Using RSI
The RSI should be in the overbought area (above 70).
Wait for the RSI to break out of the overbought area (fall below 70).
As a reminder, make sure there is a bearish candlestick when the RSI breaks from the overbought area.
Wait until the candlestick is finished (closed).
entry (sell) at the opening of the next candlestick.
Place the stop loss slightly above the last swing high.
The practice of the moves above is as follows:
Steps 1-3Using the RSI (Sell) Indicator
Step 4–6 Using the RSI (Sell) Indicator
And... voila!
Combination of Divergence with RSI
Merging Divergence with RSI
RSI can also recognize when a divergence occurs. The method is the same as recognizing divergence on other indicators such as the stochastic and CCI. An example of a bullish divergence using the RSI:
The following is an example of a bearish divergence with the RSI:
Alright, that's our discussion of RSI. Keep practicing, so that your sensitivity gets honed!
Quick Tips: How to Quickly Master Trading with RSI
- Complete this course on the relative strength index (RSI).
- Try out your RSI knowledge on a demo account.
- Try trading based on the buy and sell strategy on a demo account.
- Evaluate each transaction to hone your analytical skills.
- Practice on a demo account consistently.
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