The RSI and its Buy and Sell Signals


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Video Transcript:

Hello traders. Welcome to the sixth module of the advanced technical analysis course, oscillators. In this lesson we’re going to teach you all about the RSI, how to look for entries with it, and how to exit your trades with it.

First of all, RSI stands for relative strength index, and it’s a momentum indicator. This indicator measures the speed and change of price movements. This indicator can also be used to identify the trend in the market. For example, when the RSI is above 50, we are in a bull market, but when it drops below 50 we are in a bear market.

RSI Explained

This is how it looks on your charts. As you can see, the indicator oscillates between 0 and 100 and has extreme readings above 70 and below 30. When the RSI reads below 30, the conditions in the market are oversold, and when it reads above 70 the conditions are overbought. Remember that overbought and oversold conditions are price levels that are unsustainable, meaning that the pressure that has gotten then there can not be sustained any more and we are due for a correction.

In extreme up trends the RSI can stay overbought for a long period of time. This is very important. If you are in a very strong up move, you are not going to use the RSI to counter trend trade, because the RSI can stay overbought for a long period of time and you are going to get false signals.

Contrarily, when we are in an extreme down move, the RSI can stay oversold for long periods of time, so this is the same case as an uptrend, but in a down trend if we are in a very strong move and the RSI is oversold, we are not going to use it to counter trend trade because we are going to get fake setups. Normally, we don’t encounter such strong movements that will keep the RSI readings at extra long periods of time.

We are going to teach you the setups that you are going to be looking for with the RSI. The first setup is the bull setup. The RSI is moving to the 30 level in a down move. You look for a bounce of the 30 level or a dip below and across above it for a long sale. This means that either the RSI can touch the 30 level and bounce from it, or it can cross below.

RSI Trade Setups

If it crosses below, you need to wait for it to cross above the 30 level for you to have the long setup. You exit the trade at a fail 50 crossover or on the next extreme level. This is important. Remember that the RSI is also a trend indicator, and if you are, for example, going long on a bounce at support and a bounce of the 30 level, if the RSI fails to cross above the 50 level, you need to exit your trade because we are still in bear country.

Here’s an example of what I’m talking about. You have the bounce of support right here and the bounce of the 30 level right here. Then the RSI moves to the 50 level and crosses above it. This means that we have switched to a bull market, and we are good to go for a long position. We exit at the next extreme level, which means that we exit here at this high.

Had the RSI failed to break the 50 level, it would mean that we are still in a down move and this is only just a correction to get for price to go lower and break with this low. You need to be careful, and you need to take a closer look at the 50 level always, and every time that you are in a trade.

On a bear setup in an up move the RSI is approaching the 70 level. You look for a bounce on the 70 level or a move above it and a cross below it for a short entry. This is the same system as before. You exit the trade at a failed 50 level break or at the next extreme.

Now, here’s an example of a great short setup on the US dollar flowchart. You can see here that we have hit a important level of resistance and the RSI is at an extreme level right here, but it has crossed above the 70 level. We need for the RSI to cross below the 70 level for us to get a short opportunity here, and we get it right here.

When it crosses below the 50 level, we know that we have switched from a bull market to a bear market and our short position is in play. We exit on the next extreme. Had the RSI failed to break the 50 level, it would mean that we are only in a correction for a move higher, and a break of these highs. This is why you need to pay attention to the 50 level break once you are in a position. The RSI is also great for exiting trades because it’s very accurate and you need to pay attention to it.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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