Description: A quick but effective demonstration about how to use the relative strength index (RSI) indicator. Showing to traders how to combine a basic market principle with the RSI oscillator to make better trade decisions.
Keywords: RSI indicator, RSI oscillator, demonstration of RSI indicator, market principles and RSI, how to use RSI indicator a basic market principle, trend line, price move
A weekly chart with the relative strength index indicator period fourteen.
The relative strength index indiactor period fourteen is primarily for the weekly chart because the financial year has fifty two weeks and there are four seasons of thirteen weeks.
Instead of using thirteen weeks, an average of fourteen weeks period is used.
It is essential that traders test different RSI settings for each time frame and to understand the indicator's purpose.
US Dollar/Singapore Dollar weekly chart showing how to use the relative strength index
indicator with the market principle of minimum three moves in a channel.
Market principle: the minimum price's moves in a channel is three. It is crucial that traders align the RSI indicator with a market principle to make profitable decisions. The common trading mistake is the violation of a market principle.
Looking on the USDSGD weekly chart on the left hand side, one can see the first move in orange color, 2nd in green and the 3rd move in pink.
If after three moves, the common sense trendline of the 3rd move is violated after the RSI indicator has reached 70 zone, the price has a high chance to pull back to the primary trendline (colored in blue).
Notice that once the price goes below the primary trendline (blue line on the chart), it can easily reach the starting point of the third move. The inverse is also true in a down trend. Using a market principle and the RSI indicator will allow traders and investors to avoid costly mistakes.
I would like to remind traders that a market principle is not a scientific principle and one should never assume anything.
TS RSI PRO is coming soon
To use use the TS RSI Pro successfully, one must thoroughly read the system. Do not leave anything unchecked. One must be disciplined to follow and apply its simple rules.
All indicators give warnings but the price must confirm them. Trading the RSI indicator with the price and understanding basic market patterns will lead to better trading results.
A trading system is not a magic formula but a trading guide that professional traders use to avoid irrational emotional reactions. They are essential but the most important trading tool is the trader who is actively making decisions and managing the trades.
The TS RSI Pro is not a software or a trading robot but a simple written trading method that one can apply.
We prefer patient and serious traders that are willing to improve their ability to trade.
A weekly chart with RSI indicator highlighting an effective trading strategy.
This about knowing how to combine the RSI indicator and a basic market principle in a down trend. We are focusing on how to understand this indicator. It does not matter how long it will take.
We want traders to master the technical oscillator to make successful trades.
Notice that the RSI 14 on the weekly chart (picture on left) is oversold (below 30) after a minimum three moves in a down trend.
If a buy signal occurred at this junction, the first target is the edge of the blue negative slope trend line. If the blue line is not violated and the common sense trend line of the fourth move is broken, we will expect another price move to the down side.
Another market principle is if the price failed to cross the primary trend line after the fourth move, one will expect the trend to continue; at least down to the end of the third phase (but up to the end of the 3rd stage in an up trend).
With this in mind, it is paramount to combine the relative strength index indicator with market principle without disregarding other trading rules.
The RSI indicator is a technical oscillator that is mimicking the price to a certain degree.
However, it does not replace the price. It is an essential technical trading instrument but one should avoid
trading the indicator instead of the price.
To use it more accurately, one must recognize that when the RSI crosses above the 50 level, the price will also cross the moving average 50 (either SMA or EMA). When the oscillator reaches the overbought zone, it indicates that the price has deviated away from the moving period fifty and has reached a resistance level (often on the edge of the upper band Bollinger (50,2)). On the other hand, an oversold RSI usually corresponds to the price that has deviated from the moving average 50; down to the lower Bollinger band (50,2) or at least down to a support level. The overbought RSI zone is often near the upper band but the oversold zone is often on or near the lower Bollinger (50,2).
The chart above confirm these observations. It is possible to have divergence between the RSI oscillator and the moving average 50 but there is a fundamental correlation between the indicator and the moving average. Note that the orange horizontal line on the chart is the 50 level for the oscillator and the orange indicator on the price itself is the simple moving average 50 (SMA 50). The two vertical black lines highlight a trading phase when the oscillator has crossed above the 50 level at the same time when the price is also crossing the simple moving average 50.
To use the RSI indicator, traders must first grasp both its anatomy and physiology. In this instance the moving average represents the dynamic fair value (not the static or fundamental true value).
According to our RSI observations, after a deviation from its dynamic fair value (moving average 50), the price frequently returns to the mean. It is vital to understand that if the intrinsic value is dynamically increasing or decreasing (trending phase) and both market sentiment and patterns are not balanced (predominantly bullish or bearish), the financial instrument (price) will not return to its fair value straight away but only after the market sentiment has substantially changed or the asset is more than five times its core value.
Traders and investors must always check the fundamentals at Yahoo finance or Google finance to avoid being purely technical or show total disrespect to other market participants. Most oscillators such as the relative strength index (RSI) or the commodity channel index (CCI indicator) are very useful during balanced market phases.
One should never buy (or sell) just because the oscillator is oversold (or overbought). Please check our RSI indicator to learn more about how to use the relative strength index.
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