22.How to Trade the Relative Strength Index (RSI) Like a Pro



Practice these concepts with a free practice charting and trading account here: http://bit.ly/apextrader For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/3946-relative-strength-index-rsi-trading.html For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcourses And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com VIDEO NOTES A lesson on how to trade the RSI for traders and investors using technical analysis in the stock market, futures market and forex market. In our last lesson we looked at 3 different ways that the MACD indicator can be traded. In today's lesson we are going to look at a class of indicators which are known as Oscillators with a look at how to trade one of the more popular Oscillators the Relative Strength Index (RSI). An oscillator is a leading technical indicator which fluctuates above and below a center line and normally has upper and lower bands which indicate overbought and oversold conditions in the market (an exception to this would be the MACD which is an Oscillator as well). One of the most popular Oscillators outside of the MACD which we have already gone over is the Relative Strength Index (RSI) which is where we will start our discussion. The RSI is best described as an indicator which represents the momentum in a particular financial instrument as well as when it is reaching extreme levels to the upside (referred to as overbought) or downside (referred to as oversold) and is therefore due for a reversal. The indicator accomplishes this through a formula which compares the size of recent gains for a particular financial instrument to the size of recent losses, the results of which are plotted as a line which fluctuates between 0 and 100. Bands are then placed at 70 which is considered an extreme level to the upside, and 30 which is considered an extreme level to the downside. Example of the RSI The first and most popular way that traders use the RSI is to identify and potentially trade overbought and oversold areas in the market. Because of the way the RSI is constructed a reading of 100 would indicate zero losses in the dataset that you are analyzing, and a reading of zero would indicate zero gains, both of which would be a very rare occurrence. As such James Wilder who developed the indicator chose the levels of 70 to identify overbought conditions and 30 to identify oversold conditions. When the RSI line trades above the 70 line this is seen by traders as a sign the market is becoming overextended to the upside. Conversely when the market trades below the 30 line this is seen by traders as a sign that the market is becoming over extended to the downside. As such traders will look for opportunities to go long when the RSI is below 30 and opportunities to go short when it is above 70. As with all indicators however this is best done when other parts of a trader's analysis line up with the indicator. Example of RSI Showing Overbought and Oversold: A second way that traders look to use the RSI is to look for divergences between the RSI and the financial instrument that they are analyzing, particularly when these divergences occur after overbought or oversold conditions in the market. These divergences can act as a sign that a move is loosing momentum and often occur before reversals in the market. As such traders will watch for divergences as a potential opportunity to trade a reversal in the stock, futures or forex markets or to enter in the direction of a trend on a pullback. Example of RSI Divergence: The third way that traders look to use the RSI is to identify bullish and bearish changes in the market by watching the RSI line for when it crosses above or below the center line. Although traders will not normally look to trade the crossover it can be used as confirmation for trades based on other methods. Example of the RSI Centerline Crossover: That's our lesson for today. You should now have a good understanding of the RSI and how traders use this indicator in their trading. In tomorrows lesson we will look at another Oscillator which is known as the Stochastic Oscillator so we hope to see you in that lesson. As always if you have any questions please feel free to leave them in the comments section below, and have a great day!

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  3. well explained thanks
  4. Hi David, how do you go about choosing the more appropriate period (time frame) for the RSI indicator? I day trade and rarely hold overnight, would you recommend 9, 14 days or another RSI timeframe? Thank you very much for any help.
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  7. I thought that MACD was a trend indicator not an Oscillator? Why did you mention briefly that MACD was an Oscillator? Thanks
  8. RSI doesn't say the price will reverse. i can share examples where RSI is above 80 and stays that way and makes a straight line.
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  11. whether it is possible to use rsi indicator in a live market? we can only use it only at the day end right?
  12. 1) Which period to use for 3 minutes trades?
    2) At which level is it safe to say over sold or over bought? For example: 40 on low side and 60 on high side?
  13. Excellent video on RSI
  14. Thanks for this explanation I am using forex indicators since 3 years on vertex fx trader, all the results as expected
  15. so rsi is a momentum indicators right? please reply!
  16. What does the RSI parameter 14 mean? Please explain...
  17. Thank you David...you're really good at explaining...crystal clear...don't have to look at any other ones!... Tania UK
  18. A.
  19. Thank you David for these very clear and informative videos.
  20. What is the backtesting results of bearish / bullish divergences between RSI and price? Is this signal statistically robust? 


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