Hi R0n1n,
The RSI is my number 1 indicator - it is never off the screen, all other indicators are basically filters which help me decide which stock to trade from my scan candidates
The RSI is ideally suited for providing my scan criteria to locate possible trades.
I do not use it in the conventional way but rather as a derivative of Constance Brown's definition and more recently that of John Hayden
PS if you delve into the RSI theory - you know what? - these famous fibonacci ratios appear!
I will not tell you how I actually trade (thats my beliefs), you have to put in the time experimenting and find what works for you. But what I do not mind telling you is what features I have fouind useful regarding my "toolbox", how you may use them is up to you
Before using any indicator, you should at least have an idea of how it works - then the signals you get will have more meaning.
There will always be sceptics who dismiss a theory/concept because it does not fit in with their beliefs, but if you have an open mind and at least check it out - you never know what you may find useful
When it comes to selecting trading stocks - if they meet your beliefs, then thats what will most likely "work for you" and you should have no problems trading the results
The RSI
The RSI is the ratio of the total daily changes in price in up moves, to the total daily changes in price in down moves, over the selected period
ie it measures the internal strength of a security
RSI=100-[100/1+(U/D)]
Where U=average upward price change over the selected period
D=average downward price change over the selected period
If U and D were equal, then RSI would be 50
If U was greater than D (up move), then RSI would be hIgher than 50
If D was greater than U (down move), then RSI would be less than 50
The RSI can be used to define the state of price action, ie uptrend, consolidation or downtrend
RSI attributes
Very good at defining support and resistance levels*****
Dow theory can be applied to the RSI
Trend lines can be drawn on the RSI
RSI /price divergence
To help you understand the following - it may be of help if you bring up the RSI on your monitor, in a window above the price chart
Set the RSI period to 7
Draw in green dotted lines at the 40 - 80 levels
Draw in red dotted lines at the levels of 60 and 20
Draw in a faint black dotted line at the 50 level
(I would have done this for you but I do not know how to post a chart)
Significant RSI levels
Consolidation(sideways price movement)
RSI 40-60
when the RSI trace is contained within the 40-60 levels, this tends to indicate sideways consolidation. Some indicators do not work in non trending situations, so these levels may be of interest to some traders
RSI 50-60
If the trace is contained within the 50-60 level, this indicates that the probable move following will be up
RSI 40-50
If the trace is contained within the 50-40 level, this indicates that the probable move following will be down
UPTREND
RSI 40+
An existing uptrend can be considered to be still in place as long as the RSI does not fall below 40
A fall below 40 would signal a trend reversal
RSI 40-80
An uptrend exists when the RSI trace is contained within the 40-80 levels
RSI 60-80
When the RSI trades above 60 the price is trending up
RSI 40-60
When the RSI trades in this range - price is trading sideways
RSI 40
If the trace falls below 40, this signals the expected price movement will be down, and thus indicates the start of a down move. This is confirmed when the subsequent trace is contained within the 60-20 levels
RSI 60
If the trace passes up thro 60, this signals the expected price movement will be up, and thus indicates the start of an up move. This is confirmed when the subsequent trace is contained within the 80-40 levels
RSI 80+
When the RSI trades over 80 and trending up, the recent price action up days moves far exceed price down moves, this is an abnormal condition that cannot last too long
This relates to fast explosive moves
When the RSI falls back below 80 - this is a good indication that the max price has been achieved and indicates a good time to exit the trade
Down trend
Follows the same principles as above and I am sure that you can work them out for yourself
I only trade long, but it would be
no big deal to figure out how to trade short
If you want to trade from the RSI on its own then possible buy signals are:
RSI levels rising up thro 40, 60 and 80
Sell signals : RSI levels falling thro 60
RSI 40 levels are usually associated with the comencement of an uptrend following a retracement of an uptrend.
RSI 60 and 80 are associated with uptrends from congestion
Thats it - easy and simple
All our analysis is doing is hopefully increase the probability of our entry being good - the exit is more important!!
Anyway, I hope the above rambling will be of use to you
Keep your position size and
RISK small while you are trying out something new
The above works for me - it may not work for you
Posting does not come naturally to me, I hope you can make some sense of the above and that it is something you can make use of
Posting is very time consuming for me - this is my last attempt. I'll leave the good stuff for the more experienced and talented posters
I hope your trading proves to be successful
Have a good day
Peter