ADFFOODS - CUP FORMATIONCup formation seen in ADFFOODS.
Entry - 262
SL - 10%
TGT - 345
REASONS:
1. RS > 50
2. RS - POSITIVE
Relativestregthindex
RSI Indicator LIES! Untold Truth About RSI!
The Relative Strength Index (RSI) is a classic technical indicator that is applied to identify the overbought and oversold states of the market.
While the RSI looks simple to use, there is one important element in it that many traders forget about: it's a lagging indicator.
This means it reacts to past price movements rather than predicting future ones. This inherent lag can sometimes mislead traders, particularly when the markets are volatile or trade in a strong bullish/bearish trend.
In this article, we will discuss the situations when RSI indicator will lie to you. We will go through the instances when the indicator should not be relied and not used on, and I will explain to you the best strategy to apply RSI.
Relative Strength Index analyzes the price movements over a specific time period and displays a score between 0 and 100.
Generally, an RSI above 70 suggests an overbought condition, while an RSI below 30 suggests an oversold condition.
By itself, the overbought and overbought conditions give poor signals, simply because the market may remain in these conditions for a substantial period of time.
Take a look at a price action on GBPCHF. After the indicator showed the oversold condition, the pair dropped 150 pips lower before the reversal initiated.
So as an extra confirmation , traders prefer to look for RSI divergence - the situation when the price action and indicator move in the opposite direction.
Above is the example of RSI divergence: Crude Oil formed a sequence of higher highs, while the indicator formed a higher high with a consequent lower high. That confirmed the overbought state of the market, and a bearish reversal followed.
However, only few knows that even a divergence will provide accurate signals only in some particular instances.
When you identified RSI divergence, make sure that it happened after a test of an important key level.
Historical structures increase the probability that the RSI divergence will accurately indicate the reversal.
Above is the example how RSI divergence gave a false signal on USDCAD.
However, the divergence that followed after a test of a key level, gave a strong bearish signal.
There are much better situations when RSI can be applied, but we will discuss later on, for now, the main conclusion is that
RSI Divergence beyond key levels most of the time will provide low accuracy signals.
But there is one particular case, when RSI divergence will give the worst, the most terrible signal.
In very rare situations, the market may trade in a strong bullish trend, in the uncharted territory, where there are no historical price levels.
In such cases, RSI bullish divergence will constantly lie , making retail traders short constantly and lose their money.
Here is what happens with Gold on a daily.
The market is trading in the uncharted territory, updated the All-Time Highs daily.
Even though there is a clear overbought state and a divergence,
the market keeps growing.
Only few knows, however, that even though RSI is considered to be a reversal, counter trend indicator, it can be applied for trend following trading.
On a daily time frame, after the price sets a new high, wait for a pullback to a key horizontal support.
Your bullish signal, will be a bearish divergence on an hourly time frame.
Here is how the price retested a support based on a previous ATH on Gold. After it approached a broken structure, we see a confirmed bearish divergence.
That gives a perfect trend-following signal to buy the market.
A strong bullish rally followed then.
RSI indicator is a very powerful tool, that many traders apply incorrectly.
When the market is trading in a strong trend, this indicator can be perfectly applied for following the trend, not going against that.
I hope that the cases that I described will help you not lose money, trading with Relative Strength Index.
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Mastering the 70/30 RSI Trading Strategy - Plus Divergences!Mastering the 70/30 RSI Trading Strategy: A Comprehensive Guide
The 70/30 RSI technique stands out as a popular and effective method for making informed decisions in the financial markets. Leveraging the Relative Strength Index (RSI) indicator, this strategy empowers traders to navigate the complexities of buying and selling various financial instruments, from stocks to currencies. In this article, we delve into the intricacies of the 70/30 RSI trading strategy, exploring its fundamentals and practical application in forex trading.
Understanding the 70/30 RSI Trading Strategy:
Developed by renowned technical analyst J. Welles Wilder, the RSI indicator serves as a powerful tool for evaluating market strength and identifying overbought and oversold conditions. With a range from 0 to 100, the RSI provides traders with crucial insights into market dynamics, enabling them to make timely trading decisions.
At the heart of the 70/30 RSI strategy lies the establishment of two key threshold levels on the RSI indicator: 70 for overbought conditions and 30 for oversold conditions. These thresholds serve as crucial markers for generating buy or sell signals, offering traders valuable guidance in navigating market trends.
⭐️ Adding and Setting Up the RSI Indicator on Your Chart:
The RSI (Relative Strength Index) Indicator is a freely available tool accessible within your TradingView Platform, irrespective of your subscription plan. Whether you're using a Free membership or one of the Premium plans, you can easily find and add this indicator to your charts. Below, I'll guide you through the process of adding and customizing the RSI indicator on your platform with the help of the following images.
To begin adding the RSI indicator to your chart:👇
You can also customize the colors to your preference, just like I did by selecting your favorite ones.👇
Now, let's delve into what the RSI indicator is and how to interpret it.
Interpreting RSI Signals:
In essence, an RSI reading of 30 or lower signals an oversold market, suggesting that the prevailing downtrend may be ripe for reversal, presenting an opportunity to buy. Conversely, a reading of 70 or higher indicates overbought conditions, implying that the ongoing uptrend may be nearing exhaustion, presenting an opportunity to sell.
The Relative Strength Index (RSI) Explained:
As a momentum indicator, the RSI measures the speed and magnitude of recent price changes, providing traders with insights into whether a security is overvalued or undervalued. Displayed as an oscillator on a scale of zero to 100, the RSI not only identifies overbought and oversold conditions but also highlights potential trend reversals or corrective pullbacks in a security's price.
Practical Application of the RSI Strategy:
Traders employing the 70/30 RSI strategy must exercise caution, as sudden and sharp price movements can lead to false signals. While RSI readings of 70 or above indicate overbought conditions and readings of 30 or less indicate oversold conditions, traders must consider additional factors and use other technical indicators to validate signals and avoid premature trades.
Let's examine a few examples.
Example No. 1: EUR/USD Daily Timeframe
On the EUR/USD daily timeframe, we observed an overbought condition indicated by the RSI rising above the 70 level. This signaled a potential reversal in price direction. Subsequently, the price indeed reversed, confirming the overbought scenario.
It's crucial to emphasize that while scenarios above the 70 RSI level or below the 30 RSI level suggest potential reversals in price, it's essential to complement your analysis with additional filters. These may include consideration of the economic environment, effective risk management strategies, and identification of triggers or patterns before initiating a trade. Below, I'll illustrate a potential trigger that aligns with the RSI 70/30 strategy: the crossover of the RSI line with the RSI-based moving average (MA).
Example No. 2:
In this example, the RSI strategy proved effective as we observed the price falling below the 30 level, indicating potential oversold conditions and a forthcoming reversal from the market's potential bottom. Additionally, in the image below, you'll notice the introduction of white lines, known as "divergences." I'll provide a clearer explanation of divergences in the next example.
Example No. 3:
In this example, denoted as circle N.3, we encounter another instance of the RSI reaching the 70 level, indicating an overbought condition. Once again, the strategy proves effective, but this time, we notice a shallower reversal compared to the previous two examples.
Following this reversal, the price experiences growth, presenting a new opportunity for traders with a subsequent higher high. However, unlike before, this high does not breach the 70 RSI level, resulting in a deeper reversal.
This scenario exemplifies a "divergence."
But what exactly is divergence trading?
Divergence trading revolves around the concept of higher highs and lower lows.
When the price achieves higher highs, you would expect the oscillator (in this case, the RSI) to also record higher highs. Conversely, if the price makes lower lows, you anticipate the oscillator to follow suit, registering lower lows as well.
When they fail to synchronize, with the price and the oscillator moving in opposite directions, divergence occurs, hence the term "divergence trading."
I'm confident that the previous three examples were well explained to help you understand the 70/30 RSI strategy, along with the MA moving average trigger and the relative divergence strategy. Please share your thoughts in the comment section below.
Key Considerations and Limitations:
While the 70/30 RSI strategy offers valuable insights into market dynamics, traders must remain mindful of its limitations. True reversal signals can be rare and challenging to identify, necessitating a comprehensive approach that incorporates other technical indicators and aligns with the long-term trend.
In Conclusion:
The 70/30 RSI trading strategy represents a powerful framework for navigating the complexities of the financial markets. By leveraging the insights provided by the RSI indicator, traders can make well-informed decisions, identify lucrative trading opportunities, and optimize their trading strategies for success in various market conditions.
Unveiling the Dynamic Range of The RSI for Precision Trading
In the image below you can see the differences we can arrive to when comparing the regular version of the Relative Strength Index and this new study.
What was once known to be OB or OS levels is actually the strength you need for breakouts, continuations, and larger movements.
Understanding the Dynamic Range
In the image below we can see the contrarian differences from the old and new version of the RSI. For example the standard range in the common RSI is a 40 - 60 area. However through more analysis we can see the range is actually a level of 39.6 as a low of the range and a 49.2 as the high part. This meaning we dont need to wait to cross above the RSI midline to start looking for long trades.
Scalping or Range Trading Within the Dynamic Range
In the image below we can see that using the new theory of the RSI, a range is created by the RSI entering down through the top of its previously created Range Bull Side. At the close of this candle we can determine this to be the top of the new range being created. As the RSI reaches a bottom of the new range within itself, we can also mark this value as the bottom of the price range. Once we drag this out forward, its easier to see when and were price will bounce off price levels.
We keep these price values until a new cross of the rsi over its range is found. If only one side is crossed we keep the old price value of the alternate side.
Introduction:
The Relative Strength Index (RSI) has long been a staple in the toolkit of traders, offering insights into overbought and oversold conditions in the market. Traditionally, traders have relied on static levels such as 30, 40, 50, 60, 70, and 80 to identify potential breakouts and reversals. However, a closer examination reveals that the RSI generates its own dynamic support and resistance levels, challenging the conventional wisdom that traders have adhered to for years.
Historical Perspective:
Before delving into the dynamic nature of the RSI, let's take a brief look at the historical information provided to traders. The traditional approach involved identifying specific RSI levels (e.g., 70 for overbought and 30 for oversold) as key points for making trading decisions. This static framework has been the cornerstone of RSI-based strategies for years.
The Dynamic Nature of RSI:
Contrary to popular belief, the RSI doesn't conform to fixed levels but rather establishes its own dynamic range. This range consists of a high part and a low part, both of which independently move within the oscillator. The intriguing aspect is that the high part can fluctuate irrespective of the position of the low part, leading to a constantly shifting dynamic range.
Understanding the Dynamic Range:
The dynamic range of the RSI introduces a paradigm shift in how traders interpret the oscillator. Unlike the traditional notion of range trading confined between 40 and 60, the dynamic range expands and contracts, creating a continuously evolving landscape. The upper and lower extremes of this range determine the prevailing market sentiment—bullish or bearish.
Implications for Trading:
Within this dynamic range, trading is not merely confined to buying at 40 and selling at 60. Instead, the goal is to identify the shifting bullish and bearish extremes. Breaking out of either extreme signifies a significant shift in market sentiment, eliminating resistance and presenting traders with clear opportunities to go long or short.
Trading Outside the Dynamic Range:
In instances when the RSI ventures outside its dynamic range, a different set of trading principles comes into play. Trading the RSI as it crosses above or below its own moving average provides valuable insights into potential market reversals and continuations. For instance, when trading on the bullish side above the dynamic range's bullish extreme, a trader should focus on taking long positions when the RSI dips below its previous low and subsequently crosses above this level or its moving average. This suggests a continuation of the upward momentum in the price.
Conversely, in a bearish scenario below the dynamic range's bearish extreme, traders can look for opportunities to enter short positions. This involves waiting for the RSI to make a high swing, followed by a cross below its previous low swing or its moving average. These conditions signify a resumption of the downtrend without encountering significant resistance. Additionally, observing the RSI moving up above its moving average and then crossing back down across it can further confirm the continuation of the downtrend.
It's crucial to note that these conditions are most effective when the RSI is operating outside its dynamic range. This underscores the idea that the RSI is not merely overbought or oversold at specific levels but rather indicates pullbacks and shifts in market sentiment. By interpreting the RSI's movements in relation to its moving average outside the dynamic range, traders can enhance their ability to identify key reversal and continuation points, contributing to a more nuanced and effective trading strategy.
Scalping Within the Dynamic Range:
Trading within the dynamic range involves scalping—capitalizing on short-term price fluctuations. The ever-changing nature of the range ensures that, even within the bounds of the oscillator, traders can engage in opportunistic long or short positions. This challenges the traditional notion that range trading is limited to a narrow band within the RSI.
Conclusion :
As we reassess the conventional wisdom surrounding RSI trading, it becomes evident that the dynamic range of the oscillator provides a nuanced perspective on market dynamics. Traders can benefit from embracing the ever-shifting nature of the RSI, adapting strategies to capitalize on the changing sentiment within this dynamic range. By understanding and leveraging the true potential of the RSI, traders can navigate markets with greater precision and agility.
