Best Indicators To Use With Rsi

Hey, hey, what’s up my friend?

In today’s video, I’ll exist discussing the RSI indicator also known as the Relative Force Index.

Here’due south what yous’ll learn today:

  • The truth almost the RSI indicator and why information technology’s not just about overbought or oversold
  • How to increase the probability of your winning trade using this one unproblematic technique (that I’ve never seen anyone talk nearly)
  • The best market to use the RSI indicator since non all markets are created equal, some of them are very suited to utilise the RSI indicator due to the characteristic of the market place (I’ll share with you which marketplace it is)
  • How to time your entries with precision
  • How to time your exits before the marketplace reverses against you

Let’s get started…

The truth most RSI indicator

RSI stands for Relative Force Alphabetize and it’s an indicator, a momentum oscillator developed by J. Wilder. This is a momentum indicator, so let me prove it to y’all.

This is the breakup of the RSI formula:

Don’t be alarmed by it. I know you’re thinking:

“Oh human being, Rayner I suck at math, why did you evidence this to me?”

Don’t worry this is very simple to understand, even a x-yr-old can do it.

Let me walk you through footstep by step and explain to you why the RSI indicator is a momentum indicator. So nosotros’ll expect at how you can use this indicator for your own trading.

Looking at the formula, the first question is what is the boilerplate proceeds? Allow me requite you a very simple instance.

Allow’s employ a 10-menses RSI to make things uncomplicated. You’re essentially calculating the average gain over the last 10 periods or over the last 10 days if yous’re trading on a Daily nautical chart.

Permit’s say a stock moves $100 over the terminal 10 days the average gain of a stock is $10. You’ll just take $100 divided past x days because we’re using a 10-menses RSI.

And the average loss is just the same thing. You’ll compute the total loss over a given period and carve up by the number of periods. That’s your average loss.

The key affair to have note is that the higher your average gain, the higher your RSI is going to be. Make sense?

Let’s take for example:

  • Average gain = $x
  • Average loss = $i

Taking $ten divided by $1 your RS equals x. Put the values into the formula and you’ll get RSI of well-nigh 91. It’s showing you strong momentum because your average gain is much higher than your average loss. Tin can y’all see how this works?

Let’s say this time around…

  • Boilerplate gain = $x
  • Average loss = $twenty

$10 divided past $xx is 0.5. Pluck in the numbers and you’ll get RSI value of 33.34. The reason for this is considering the average loss is greater than the average gain. In that location’southward more surly momentum in the market, that’due south why your RSI value has fallen.

Can you see how this RSI formula works? Information technology’s nothing scary. It’due south actually relatively unproblematic. And let me just suspension it downwardly for you.

RSI goes upward:

When your boilerplate gain is greater than your average loss, and this pretty much ways that the size of your bullish candles is larger than the bearish candles.

RSI goes down:

When your boilerplate gains are smaller than your boilerplate loss. This ways the size of bearish candles is larger than the bullish candles. In other words, the RSI indicator measures momentum in the marketplace.

(Disclaimer: I used a very simplified version of calculation for the RSI indicator, I think their adding used is a little bit more than complicated with exponential involved. But again, the concept is the same. Information technology’s only that the way they calculate it is more complicated.)

At present that you know how RSI works, why it goes upwards and why it goes down, how tin you use it in your training?

Let’s motion on and observe out…

How to amend your win rate

You tin employ the RSI indicator to improve your winning rate past trading with the tendency.

It’s no surprise that when you trade with the trend you become a larger profit potential considering the trending move of the market, which is the stronger leg of the market place, ordinarily moves more compared to the pullback.

On tiptop of it, when you lot merchandise with the trend, the market tends to persist in that same direction when information technology’south trending. When you’re on the side of the trend, your win rate naturally goes up as well.

Simply now the question is, how would yous ascertain the trend? In that location are many ways to do it. Some traders talk almost higher highs and higher lows, lower highs, and lower lows, simply that’southward a little chip subjective.

What I’m going to share with you is a very objective way to define the trend using the RSI indicator. It’s something that, I’ve never seen anyone talk nearly before.

If you recall, RSI is all virtually measuring your boilerplate proceeds to boilerplate loss. If you think about this:

  • If the average gain is greater than the average loss, the market is essentially in an uptrend
  • If the average gain is smaller than the boilerplate loss, so the market is in a downtrend

Here’due south something to share with you lot…

I’ll exist using a 250-period RSI since there are 250 trading days in a twelvemonth. Instead of 250, if you but use 200 it’s fine, it’due south up to you lot.

If RSI above 50:

This tells you is that the boilerplate gain is larger than the boilerplate loss, you lot tin conclude that information technology’s in an uptrend and you wanna purchase look for buying opportunities.

If RSI below 50:

This tells you that the average loss is greater than the boilerplate gain, and y’all can conclude that information technology’s in a downtrend and yous want to await for selling opportunities.

Instance:

If you await at this, I have drawn this blue line over here at the RSI = 50 marks:

Every fourth dimension the market is above this blue line, yous can see that it’south in a long-term uptrend. And every time the market is below this blue line, you lot can conclude that it’due south in a long-term downtrend.

If you look at it this market, when the market went to a higher place this blue line the market is pretty in a very nicer uptrend because the average proceeds is greater than the average loss:

And likewise, if you just zoom back out a trivial bit, y’all tin can see that over here when the market traded below the bluish line, it’s telling you that the average loss is greater than average proceeds.

So y’all tin can use the RSI indicator to aid you, to ascertain the long-term trend using the technique that I simply shared with yous. It’south very objective. You don’t have to gauge if it’s a higher high or a college lower, etc.

Just use this to plot out the 50 marks on the RSI indicator, anything in a higher place it is a long-term uptrend. Anything below it is a long-term downtrend.

Then you can just merchandise in the direction of the trend symbol. That’s the showtime trading technique that I want to share with you.

The best market for the RSI indicator

I’ve done quite a fleck of research on this and I found out that the stock market works really well for the RSI indicator.

There’due south a reason for it:

The stock marketplace is in a long-term uptrend

If you look at whatever stock markets, the S&P, the NASDAQ, the Russell, or whichever country you’re from, you’ll come across at that place’s a very loftier chance that the market place is probably higher than information technology is since inception.

It’s because economies grow, GDPs increase, and countries do well. The stock marketplace is a barometer, it’s a reflection of the economy. That’due south why it’s in an uptrend. And 1 matter about the stock market is that the pullbacks are usually short-lived.

Yeah, the pullbacks can be pretty potent at times and the sell-off can be really quick. But it’s simply a matter of time before the pullback ends, and then the tendency resumes itself.

Since you know that pullbacks are commonly short-lived in the stock markets, yous tin can utilise the RSI indicator to fourth dimension the “farthermost pessimism” of the pullback. And that’s usually a pretty expert fourth dimension to be looking for buying opportunities.

Because the stock markets, in the long run, are in a long-term uptrend. The RSI indicator is very useful to help you time your entries on these pullbacks.

You’re looking to buy during this “farthermost pessimism” where traders, investors are panicking and are selling their holdings. That’s where you want to come in to buy and to be a contrarian.

How to time your entries with precision

I use a 10-menstruation RSI, which is about two weeks of price action information. If you’re gonna utilize 14-period, 15-period, it’s upward to you lot. Information technology’south not going to make much of a difference.

You lot want to await to purchase when RSI is below xxx. I’m not saying buy when RSI is beneath 30, but look to buy when RSI is beneath 30.

Because think when the RSI value goes down lower, there’due south a stronger bearish momentum in the markets equally the average loss is much larger than the average proceeds.

When RSI is below 30 it’s telling you that in that location is strong surly momentum in the market. And as yous know, pullbacks are usually brusk-lived, it doesn’t go down forever.

Yep, there are times the market goes into recession, the stock market is in a downtrend, but information technology doesn’t happen often, maybe in one case every 10 years.

And merely because the RSI is beneath 30 doesn’t mean you want to buy because you even so want to wait for confirmation that the buyers are stepping in before you enter the merchandise.

You don’t want to jump the gun too early on and then swallow the pullback as the market goes against you. You can consider entering your trade later the price has cleaved the previous mean solar day high, maybe using a purchase cease order.

Or y’all can wait for a bullish reversal candlestick pattern earlier you enter a merchandise

Case:

Let’southward take a look at the Due south&P500, and I’m going to utilize the 10-menses RSI.

I’chiliad just going to zoom out a footling scrap and highlight to y’all the times when the RSI dips beneath 30. Y’all tin come across that information technology doesn’t happen often, but when the RSI goes below thirty, the stock market place would make a bounce higher:

Equally I mentioned, whenever the RSI is beneath xxx it’south a sign to you that the market place is a staging steep pullback and the last thing that yous desire to do is to go short.

Because the market is in a long-term uptrend, shorting when RSI is below 30 is commonly a bad thought. You want to await for buy opportunities instead. Simply equally I’ve mentioned earlier, you don’t want to but blindly purchase.

When the RSI is beneath 30, you tin see there are times where you would accept to really swallow this huge reversal against you:

Commonly, I’ll recommend to let the market testify you its hand, to permit it rally higher earlier y’all enter the trade. And ane technique that I can share with you is to utilize a buy terminate social club above the previous loftier to get on lath the merchandise.

The market breaks to a higher place this previous day and your stop loss tin can get below this swing depression and yous would take defenseless this huge reversal upward higher.  That’due south what I mean by having a buy stop order above the previous day loftier.

Here’south another example…

The market at the first point likewise had its RSI below 30, just it turned out to be a losing trade where the market rallied a little fleck before information technology reversed lower.

At side by side point, the RSI is below 30 and when you placed the buy stop club to a higher place the previous 24-hour interval high, yous would’ve caught the movement upwardly higher

Practice the backtest, don’t merely take my give-and-take for information technology. Validate the concepts that I’ve just shared with you lot and see whether it works for you or non.

But a primal idea here is, in the stock markets, the RSI indicator works well based on my own research.

So you’ll wait for ownership opportunities when RSI is below 30. You tin either:

  • Wait for the cost to break out of the previous twenty-four hours loftier using a buy terminate lodge
  • Wait for a bullish reversal candlestick pattern earlier you time your entry

At present, you don’t want to do this beyond every market considering not all markets behave the same. The stock market place is a different brute. It’s in a long-term uptrend and the pullbacks tend to be brusk-lived before the tendency resumes.

If y’all employ these other types of markets, similar maybe GBP/JPY and if you just purchase just because RSI is below 30, you lot’re going to endure quite a scrap.

You can meet that GBP/JPY can remain oversold for a long menstruum of time as well:

So don’t just blindly buy when RSI is below 30 and don’t merely blindly sell with RSI is above 70. Because the RSI is only a momentum indicator.

And the reason why I talk about the stock markets it’s because the stock market is a different beast. Its pullbacks tend to be short-lived earlier the trend resumes itself. The RSI is dandy to place this “maximum pessimism” to time your entries.

Moving on…

How to amend time your exits

For many traders, the market place goes in their favor but the next thing is the market place reverses and hits their stop loss. Why is that?

What you tin can do is you can wait to capture a swing in the market and leave the trade, you don’t attempt to ride the tendency. So that’due south called swing trading. And the RSI indicator can help y’all with it.

Long setups:

For example, let’due south say you’re long, you can exit when the RSI crosses above threescore. This means that the average gains are larger than the average loss.

The marketplace has fabricated a swing and so y’all’ll get out the trade after one bullish swing.

Brusque setups:

If y’all’re brusque, y’all tin can look to exit when the RSI crosses below forty you leave your trade when the market makes just one down move.

Example #ane:

For GBP/JPY, let’s say you went short at this cost rejection and you exit your trade when the RSI crosses below xl:

So you’re just capturing this 1 swing over there.

Case #ii:

Let’southward say you went long on crude oil at support, you tin leave your trade when RSI crosses to a higher place sixty:

Again you’re merely capturing this one swing in the market.

This is how you can use RSI to help you capture a swing in the marketplace, otherwise known as swing trading.

Recap

  • RSI measures momentum in the markets
  • You can use RSI to trade with the trend – above 50 for buying opportunities, beneath l for selling opportunities
  • RSI works well in the stock markets to assistance you lot time your entries on a pullback
  • RSI tin help you capture a swing in the markets

Source: https://www.tradingwithrayner.com/course/rsi-indicator-secrets/

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