The RSI Or, if you re fancy, the relative strength index.
The rsi is one of the most popular trading indicators out there.
If you even have the slightest clue about trading, you have heard about this indicator.
Books, websites, videos, there s tons of information about this one specific indicator.
Hell, even your uncle rob probably knows about it.
But with that said, 99% of people are actually using this indicator completely wrong.
For example, If I could guess correctly you probably have used the rsi for finding
overbought and oversold areas. The lower line being oversold and
the upper line being overbought. Now if you ve actually used it like
this you probably quickly figured out that sure it works sometimes but half
the time it doesn t work very well at all. But what if I told you, this is the completely
wrong way to use this indicator. And what if I also told you the
default settings for the rsi that everybody uses are actually not the best settings.
Well, im going to show you how to ACTUALLY use this indicator correctly and ill also go over
the most optimal settings for it. Lets get straight to it.
Okay, so the rsi indicator measures strength. After all, its call the relative strength index.
This indicator is a momentum oscillator. It measures the speed and change over a set number
of bars and it oscillates between 0 and 100. So heres the problem most traders have.
They plop the rsi on their chart and use it for mean reversion strategies.
For example, overbought and oversold. So if the rsi went like this. The normal
average trader would consider this oversold. So they would enter into a long position here.
But just because something is quote on quote oversold that doesn t mean
it can get more oversold. So there s an obvious flaw in
this style of thinking. But its not completely
wrong. We just have to perfect it. So here s the rsi chart and you can see if
we are doing with the original style of thinking. It gave us 5 signals and if you look closely 4 of
these 5 signals were losing trades. Now, every indicator ever is
going to provide false signals. That s just how the world works.
I know, its very sad. But our goals is to just limit those false signals so we don t get AS
many so it provides more winning signals. A way I found to do this with the rsi is
by making a couple tweaks. To the settings specifically.
But before we go over that, let me show you this site called fyntura.
Fyntura is a forex and crypto broker, but damn, its good one at that.
First of all they don t have kyc requirement. Which is nice.
So You can sign up literally if you re anywhere in the world.
Even if you re on an island with a volleyball, you can use fyntura.
They also have extremely low commissions and spreads so you re not wasting money like you
would with a normal broker. And to top it all off,
they have a 100% deposit bonus. All you have to do is use the link in my
description, and if it s your first time signing up they will match whatever you first deposit.
Yeah, I know, its literally free money. Go create an account with them if you trade
crypto or forex. At the very least get the deposit bonus and see if you like it.
Okay back to the video. To do this go to the settings of the rsi.
Now the default settings are 70 30 for the overbought and oversold areas.
I like to change these numbers to 80 20. Doing this will give us less signals but
these signals we do have our going to be stronger and less likely to be wrong.
The next step I like to do is confirm these signals with mutltiple timeframes.
For example, here this chart on the hourly time frame gave us 2 signals.
So were going to also check the rsi on the daily time frame and see what the signals are on that.
As you can see here, we have 0 signals. So we wouldn t enter any of these
trades because we don t have any confirmation on the higher timeframe.
So now that we have created a process to raise the quality of these signals,
how can we use this to spot some great trades? So here we are on the 1 minute time frame and
the does a parabolic move upwards and the rsi goes in the oversold area. A good sign to enter
a short. But then we do what we were talking about earlier and go to next highest timeframe.
The 5 minute. Here, the rsi has not reached the oversold area yet. So we wait some more.
We go back to the 1 minute and The price does a little pull back
and continues to head upwards. So good thing we waited on the short.
Price then hits the oversold area again. We then check the 5 minute and this time,
the rsi in the oversold area on the 5 minute. So that s good confirmation.
For good measure, we check the 15 minute as well and it also in the oversold area.
So these are all good signs to enter a short. But just because the rsi is providing signals
to enters a short on multiple timeframes doesn t quite mean its time to enter yet. We still need
some more confirmation on this trade to raise our odds of entering in good quality trade.
A nice way to do this is to add some price action confirmation.
Here the chart does a double bar break. Meaning there are two candles here showing
signs of hesitation. Then price breaks the low of both these bars to the downside.
Also as a side note, I do not wait for the close of this candle. We already have the confirmation.
We just need price to break the low of these 2 candles. Once it does, we enter immediately.
AS the cherry top right when this break happens, the rsi returns back to normal. So now instead
of being overbought it return to the middle zone. Which is also a bearish indication.
What I like to do is set my stop loss right above this bar. Now you can use your take profit in
multiple ways. I personally like to do this. Go to your indicators tab and the vwap.
The vwap on our chart is right here. So what I do is ill take partial profits
say 50% of my trade when price comes back to the mid line of the rsi. So right here, I would have
taken partial profits because the rsi returned to the mid line. Then I would take the rest of
my profits when price returns to the vwap. So this is a great way to use the rsi
CORRECTLY on how everyone likes to use it with oversold and overbought areas.
But this isn t actually my favorite way to use it.
The rsi actually wasn t made for finding overbought and
oversold areas like how everyone uses it. It was actually made as a way to find strength.
As the name suggests. Relative STRENGTH index. So you can usually the rsi for bullbacks.
Now when I started to use the rsi, I started to notice on very strong trends,
the rsi would just live between 50 and 80. If the chart was strong the rsi would live
in this upper quadrant and just bounce from the mid line to the upper line.
Same thing with weak charts. It would live in the lower quadrant.
Now for this strategy to work. The chart needs to be trending.
If the chart is moving sideways like this, this strategy will not work.
We need a chart that is trending like this. While the price is going up. Make sure its
living in this upper quadrant. We then want price to come down
to this mid line on the rsi. Once it does, we can enter the
trade expecting this to be a pullback and for price to bounce off this mid line.
And as you can see it works beautifully. Same thing with shorting.
You want to find a strong downtrend and you want the rsi to be living in the lower quadrant.
Wait for the rsi to hit the mid line Enter the trade expecting this to be a pull back.
And boom, you have a glorious short trade. Just like the other strategy though,
you shouldn t use this strategy just by itself. What I found, is if you incorporate some price
action signals with this, it works phenomenal. Well, hopefully you learned more about the
rsi by watching this video. Next im going to show you some
price action strategies you can use to pair with these rsi strategies.
If you do both what im about to teach you in this video AND
combine it with these rsi strategies. You re trading profits will skyrocket.
Thanks for watching and ill see you guys next time.