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Ultimate RSI Trading Guide For Beginners + BEST Strategies To Trade With RSI Indicator - YouTube
Channel: The Secret Mindset
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The relative strength index.
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Every time i read an article or see a video
about it, there’s the same misconception
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every single time: it’s an overbought/oversold
indicator, you buy when the RSI is oversold
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and sell when it’s overbought.
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No, this doesn’t work, not by itself.
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You will not make money using the RSI in this
way.
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There’s a lot more about the RSI besides
the overbought and oversold levels and in
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the following minutes I’ll show you everything
you must know about the RSI, how to correctly
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trade with it and how to avoid bad signals
so you don’t get stuck in overbought or
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oversold territory for weeks or months.
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Before we continue, if you are new to the
channel, make sure you subscribe, hit the
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bell notifications and leave a like to show
your support.
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Now, the relative strength index is one of
the most popular technical indicators and
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is adjusted by the amount by which the market
increased or fell.
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The RSI values range from 0 to 100.
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A high RSI occurs when the market has been
increasing rapidly.
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A low RSI occurs when the market has been
selling off sharply.
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On lower time frames, the relative strength
index is very volatile, frequently reaching
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extreme highs and lows, and generating contradicting
signals.
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In flat markets, the RSI will generate signals
while prices trade in a range, with no clear
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direction.
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So, used in a wrong way, RSI is useless for
many traders.
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Let’s see what are the main techniques involving
the RSI and how to correctly use it to maximize
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you trading results.
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First, you could use RSI as an overbought/oversold
indicator.
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The RSI is indeed useful for gaining an overview
of the overbought/oversold conditions of the
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market but it should not be used as a trading
signal without a confirmation.
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Don’t let the 70/30 RSI levels fool you
into entering countertrend positions.
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Simply because a market reaches overbought
or oversold levels, doesn’t mean that prices
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will immediately reverse in the opposite direction.
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During periods of strong upward trends or
downward trends, markets can remain in the
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overbought or oversold areas for days, weeks
or even months.
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Just look at this example.
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A short here would have been a very bad trading
decision, because the price continued to increase
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aggressively.
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Here’s an important tip to increase your
chances for trading overbought and oversold
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levels.
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Combine support and resistance levels with
the RSI and look for area of confluence between
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the RSI and strong areas of support and resistance.
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An overbought RSI at 75 level means nothing,
but at RSI at 75 and the price at an important
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level of resistance has a higher probability
for a successful short.
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Here is a simple example.
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We have the Apple stock on the 30 min chart.
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The RSI hit 70 level and the price was trading
at a resistance level, which also coincided
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with an area of breakout from previous price
action.
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So we had 3 major forces around that area.
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This is a no-brainer short, at an area of
confluence.
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We have almost an identical trade on this
tesla chart.
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The price broke the support to the downside,
and came back to the breakout level, with
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the RSI reaching overbought areas.
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As soon as the price hit that area, was unable
to go higher and continued its downward direction.
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Here is a buy example.
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Remember that the markets are not perfect
and not all the time the price will stop right
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at the support level.
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Here we had some stop loss hunting or a false
breakout and the price reversed.
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If we look a little back in the chart, we
have another buy opportunity, when the RSI
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was oversold and the price met support.
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Another great use of the relative strength
index is to look for divergences between the
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RSI and the price of the security/stock.
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For example, when prices rallies to a new
high but the RSI cannot increase to a new
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high, then we have a divergence.
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However, a divergence between the RSI and
price is not an exceptional signal.
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Just because an RSI divergence appears on
the charts, that doesn’t mean that you should
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automatically enter a reverse position.
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Here the price was in an aggressive downtrend
and the RSI formed a divergence.
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Many traders bought here and got stopped out
very soon, because the price continued to
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decrease sharply.
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So don’t trade divergences blindly, look
for confirmation from price action.
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A valid way to trade RSI divergences is to
wait for a trend line breakout.
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In this example, we have a bearish RSI divergence,
with the price forming a double top, but the
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RSI making lower highs.
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A smart entry would be to wait for the price
to break the lower trend line of the upward
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channel.
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The price indeed rallied downward after the
price broke the trend line.
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And here is a bullish RSI divergence.
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We have a double bottom this time, and a RSI
making higher lows.
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Once the price broke the upward trend line,
the market opened with a gap up and pushed
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the price upward.
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Another strategy you could use is to take
signals on RSI around the 50 level.
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When RSI indicator crosses above 50, a buy
signal is generated
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When RSI indicator crosses below 50, a sell
signal is generated
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This leads some people to think when the RSI
crosses the 50 level to the upside that the
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trend up, and when the RSI drops below the
50 level, the trend is down.
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But here is what you need to know: during
trending conditions, the RSI indicator will
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offer very good signals.
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If you look at this Apple chart, you can clearly
see some excellent signals but what about
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when the markets are not trending?
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You would get chopped out.
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So try to use this technique when the markets
are trending.
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In order to smooth the signals offered by
the RSI indicator, you could add a moving
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average on the indicator.
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By adding a moving average on the RSI, you
could search for crossovers, for better quality
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signals.
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Now, when you want to trade a crossover between
the RSI and a moving average, you should be
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aware of an important thing.
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A crossover will catch good movements when
markets are trending.
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When markets are trading in a range, this
approach is will lead to a lot of losing trades.
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A longer-term moving average added on RSI
will work better than short-term moving average
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and will produce fewer false signals.
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So, instead of adding a 10 moving average
on the RSI for example, try adding a 50 moving
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average or a 100 moving average and see what
the market tells you.
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The RSI indicator can also be useful for drawing
trend lines.
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The technique of drawing trend lines is subjective,
is not a precise science.
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This method is simple: you draw straight lines
on the RSI indicator connecting support points
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for an uptrend or resistance points for a
downtrend.
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A valid trend line should connect two or more
support points that define the trend.
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Now, here’s what you should consider.
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If you will start drawing trend lines on lower
time frames, it will not work.
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There is too much noise and you will record
lots of false signals.
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So never use this technique on a time frame
lower than H1 (one hour).
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Since the RSI is one of the most popular indicators,
traders always tweak their RSI settings, depending
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on their favorite timeframe or trading style.
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RSI indicator is excellent at generating buy
and sell signals.
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Most of them use the standard settings, RSI
set on a 14 period.
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RSI of 5, 7 and 50 period are also popular
among traders.
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A shorter RSI period – below 10 - will be
very volatile and will generate a lot of false
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signals
A longer RSI period – above 20 - smooths
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out the plotted line and will generate fewer,
but more accurate signals.
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Now that we saw how to trade with the RSI,
let’s consider the pros and the cons of
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using this indicator.
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The RSI is good during a trending market condition,
combined with moving averages.
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Also, is excellent at identifying divergences
on the chart and overbought and oversold areas.
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At the same time, the RSI is a lagging indicator
and does not contain all of the data necessary
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for proper analysis of price action, so it
should be used in combination with other tools.
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If you liked this video, make sure you hit
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Until next time.
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