I write this tiny article to share the basics or my use of ths RSI indicator, coupled to supports and resistances levels, as well as trend lines (or any indicator you want to use as SUP/RES (moving averages, vwap ...))
This use implies a bit of practice in spotting divergences, but let's be honest, many of them appear on previous supports or resistances, just look at these levels and you can be sure you'll find them if a reversal is about to occur.)
The second specificity is the use of a moving average applied to the RSI (in my exmaple, a 50 periods EMA)
I developped my own RSI+MovingAverage script, but I'm sure you can find similar scripts that have already been shared within the community, thats why I don't publish it for now.
Anyway, feel free to ask if you're interested in my script, it's obviously free.
Lets consider two different contexts:
In trends, there are two things to take into consideration.
Let's explain what we need to work on a bullish trend:
- If the price is on an interesting level (moving average, trend line, support), you can try to long upon the RSI crosses its moving average,
indicating the potential end of the current retracement (even better if a bullish divergence appears close to this price)
- If the price gets close to a resistance, and moreover if a bearish divergence appears on the RSI, you can consider it as a good exit price,
or wait for the next retracement in order to pyramide your trade (depending on your approach).
In a bearish trend, you obviously need to do the exact opposite, wait for retracements (flags or other), and find bearish divergences OR sell when the RSI is clearly crossing down its moving average.
Of course you can wait for the RSI crossing above/under its moving average to get another confirmation that the movement is starting.
You can see a few examples on the following screen
In ranges, it's even simpler. Once you found your support and resistance levels (it can be old levels that have already generated good reactions)
all you need is to spot bearish divergences on the resistance, and bullish divergence on the support.
I personally like to cut at least a part of my position when we reach 50% of the range, which can be often considered as a support/resistance.
It's totally up to you to exit on this point or not, depending on your preferences (simple scalping, anticipations of a range breakout to make a new trend, lower timeframe trend following, etc...)
Range example:
Additional notes
This use implies a bit of practice in spotting divergences, but let's be honest, many of them appear on previous supports or resistances, just look at these levels and you can be sure you'll find them if a reversal is about to occur.)
The second specificity is the use of a moving average applied to the RSI (in my exmaple, a 50 periods EMA)
I developped my own RSI+MovingAverage script, but I'm sure you can find similar scripts that have already been shared within the community, thats why I don't publish it for now.
Anyway, feel free to ask if you're interested in my script, it's obviously free.
Lets consider two different contexts:
- Trends (Bullish/Bearish)
- Ranges
In trends, there are two things to take into consideration.
Let's explain what we need to work on a bullish trend:
- If the price is on an interesting level (moving average, trend line, support), you can try to long upon the RSI crosses its moving average,
indicating the potential end of the current retracement (even better if a bullish divergence appears close to this price)
- If the price gets close to a resistance, and moreover if a bearish divergence appears on the RSI, you can consider it as a good exit price,
or wait for the next retracement in order to pyramide your trade (depending on your approach).
In a bearish trend, you obviously need to do the exact opposite, wait for retracements (flags or other), and find bearish divergences OR sell when the RSI is clearly crossing down its moving average.
Of course you can wait for the RSI crossing above/under its moving average to get another confirmation that the movement is starting.
You can see a few examples on the following screen
In ranges, it's even simpler. Once you found your support and resistance levels (it can be old levels that have already generated good reactions)
all you need is to spot bearish divergences on the resistance, and bullish divergence on the support.
I personally like to cut at least a part of my position when we reach 50% of the range, which can be often considered as a support/resistance.
It's totally up to you to exit on this point or not, depending on your preferences (simple scalping, anticipations of a range breakout to make a new trend, lower timeframe trend following, etc...)
Range example:
Additional notes
- When you trade a divergence, try to always open your position when the RSI rebounds on the divergence line, and not after, remember that opportunities are everywhere, don't mind if you missed the last one, don't enter too late in a movement.
- Even if a range is a global horizontal movement, it's still composed of alternations of bullish and bearish movements between the same supports and resistances, therefore, you're of course able to trade it as trends on lower timeframes
- Don't forget to look at candles, which can also give you strong signals on important levels, on current or lower/higher timeframes. The price is always the key
- Of course, think about the DOW theory.