7 secrets about 'RSI' experts don't want U to know!

RSI is the most referred, famous and discussed technical indicator.
You will find RSI's mention in almost every trade talk!
Every website, every channel, every forum refers to RSI every now or then.
Whenever anyone talks about RSI, all they have in mind is the 70/30 boundary!
Above 70 they take the stock or market as overbought
and below 30 they they take them as oversold!
That is all!
At best this 70/30 line is replaced with a 80/20 line!
Everyone starts waiting for the price to fall when rsi crosses above upper line
And they start waiting for the price to rise when rsi crosses below the lower line!
I don't know when or how it happened
but RSI 70/30 overbought/oversold myth has become a monster by now.
A wrong impression has been created.
Almost every trader has started looking for the wrong thing while using RSI.
They feel secure to short above 80 or 70 rsi and long below 30 or 20 rsi....
...and get trapped!
Given below are the 7 facts about RSI which are much more important than the 70/30 or 80/20 lines....so important that I look only at these rather than 70/30 lines!
1. Failure Swing Point
= If you must learn only one thing about RSI, this is it.
2. Retreat
= Just check how much the price has retreated versus the retreat of the rsi. This holds vital info.
3. Rally v/s Ranging
= RSI trigger points change depending upon whether the markets are trending or ranging.
4. Pro v/s Anti-Rally
= RSI effectiveness changes depending upon whether we are trading pro the trend or anti the trend!
5. RSI v/s William%R
= Like a Pizza with Cola, RSI's best friend is William % R. These two indicators make terrific company. You just can't mistake the signal when two are together!
6. Divergence
= This is the point where RSI rocket starts its reverse counting at the end of the rally (and not the 70 or 80 line!)
7. Outer RSI
= It matters less where the rsi stands. What matters more is where the outer RSI stands. e.g. RSI 14/1day on 3 month chart is the outer RSI of RSI 14/30min on 1 month chart!

When to square-off and reverse?

When to square-off and reverse?

A. If the rsi-run from lower to higher extreme or that from higher to lower extreme is stepped and not straight, it has been a rally and not a sell-off or buy-in.

B. If the rsi-run from lower to higher extreme or that from higher to lower is NOT stepped but straight, it has been a sell-off or buy-in and NOT a rally (unless it is coming out of a ranging/consolidation period, in which case it can be a rally)

square-off and take reverse positon

at the first lower high (in case of long unwinding)

at the first higher low (in case of short covering)

But in case A

do this after the divergence between rsi and priceline

and in case B

divergence is not likely to happen, so no need to wait for it.

Pl note: 1) Play with strict stoploss. You can always retake position.

2) When the market or stock is ranging/consolidating, you can square-off even before lower high or higher low, at the time of rsi touching extreme.

3) Only those graphs should be used which give high resolution tickers. The above mentioned observations have been derived using Google Finance charts. 1month chart with 30 min ticker and 3-6 month chart using 1 day ticker. I have seen that many other chart sources use much biger ticker and hence low sentivity.

Doing a SAR with RSI and William%R

See the peak on the left of A?

That was the peak when rsi 14/30min on 1 month chart was at the upper extreme.

Should U have squared-off at that time?

I suggest you don't. nobody knows whether Nifty rally will be stretched to more height.

In such cases, always sell on the lower high.

In this case peak A is the lower high after the peak rsi.

This is the clear hint that nifty is going to correct.

So at this point square off the longs and take fresh short position.

========

At point B, rsi has reached the lower extreme. Should you cover your shorts at this point?

Had it been a sell-off, u should have squared the shorts here.

But this has been a small rally.

What's the difference between a rally and a sell-off?

Sell-off is generally straight line, rally is a stepped fall or rise.

since this fall has been a rally (though small), u r likely to see a divergence between rsi and nifty before the rise starts again.

so, hold your shorts till that point.

That point comes at C when rsi is rising and nifty is falling (divergence).

Cover shorts here (profit of 70 points) and initiate fresh long position.

========

At X, rsi touches the higher extreme.

Should we square off long here?

But, as mentioned in case of point A, we are not sure whether the nifty may rally further.

so, here again we will square-off at the lower high during retreat (rsi already having touched the upper extreme).

Our "hold" decision proves good when we see the rsi falling but the nifty holding on.

This is a clear signal that rsi is making space for nifty ot climb further.

Then the nifty climbs to D.

So should we now unwind longs at D?

Again, we don't know whether nifty will rally even further.

(Although there is clear divergence between rsi and nifty. rsi has fallen, nifty has climbed)

However, we wait.

But the nifty falls and we unwind longs at Y (lower high) and go short.

(profit in this 2nd leg = 100 points, total profit so far in around 15 days = 170)

=================

We get some anxious moments when nifty climbs to Z after the william%r gives buy signal at J.

We hold the shorts with stop loss equal to height of D (anticipating double top).

Fortunately, nifty starts falling after Z all the way to E.

Notice that this fall is straight and not stepped, meaning thereby that this is a sell-off and not a rally.

This means that divergence is unlikely to happen between rsi adn nifty (as i mentioned earlier, divergence happens after rally and not sell-off)

So we cover shorts at E (profit in this 3rd leg=100 points, total profit so far in around 3 weeks= 270) and initiate fresh longs.

Notice that we have been always in the market, just like SAR.

We have been going long immediately when we cover shorts

and go short immediately when we unwind longs!

This milks the market to max!

=================

At F, rsi reaches near upper extreme and we unwind our longs as this is not a rally but a sharp buy-in (as the rise is straight and not stepped).

We unwind our longs and intiate fresh short.

Profit in this 4th leg = 60 points. total profit till now = 330 points.

=================

Nifty then falls to G when rsi reaches lower extreme.

Notice that william%R is always confirming the right points of buying and selling.

We cover shorts at G and initiate fresh longs.

Profit in this 5th leg = 50. Total profits so far in around 20 days = 380.

=================

From here rsi rises till nifty reaches H.

Since this has not been a straight rise but a stepped one, we should be expecting divergence to appear between rsi and nifty.

so we hold the longs.

Profit so far in this 6th leg =120 points.

total profit in 1 month since start of this analyses = 500.

For one lot this would have given Rs.25000/-.

=================

We have milked the market fluctuation to the max while always being in the market, using rsi supported by william%r.

When u miss the train...

Afraid of missing the train of the new trend about to start?

And thus losing when the new trend doesn't start immediately when u enter, rather the old one is still continuing?

Just like the Bank nifty where correction hasn't started as yet despite the indicators suggesting that it is severely over bought as of now (17th Aug 2010 closing)!

While there is no way to exactly pin point the start of the new trend when indicators are hinting

here is a simple way to avoid the pitfall of jumping into the trade, expecting the new trend, too early!

"When the new trend finally and mercifully starts

and if you are not on it

don't worry

it will retreat a good distance to pick you up."

This way you will not lose the train of the next trend except for a few yards!

e.g. just have a look at the CNX IT chart for 1 month. Here you will notice that from 12.30noon 14th Aug'2010 till 2pm the next day, both rsi as well as william%R were at overbought extremes and you could have erroneously and prematurely entered the short trade much earlier anticipating the down move.

Here, if you were to go as explained above,

though u would have seemingly missed the train at 2 pm on 15th Aug, it would have retreated

to pick u up at around 12.30pm on 16th Aug with hardly any loss of opportunity.

Also, note that by that time both rsi and william%R have started on the new journey (which incidently ended at 9.30am on Aug12th when both rsi and William%R met again at the other extreme.

So, when you missed the train of the new train, don't worry!

Just walk a few steps forward and expect the train to retreat to pick its most valuable commuter...

You!!!

Photographs of tired RSI

Many of my Mudraa friends have asked me to explain what I mean by "RSI exhaustion".

=When a bull rally starts, price increases sharply. RSI follows too.

A stage comes when RSI hits the overbought zone.

Will the price stop rising now?

Not necessarily.

Price is not in the service of RSI.

Overbought RSI only indicates the increasing pressure on the price to slow down.

Just as the car doesn't stop the second we start pressing our foot against the brakes. It keeps moving for some more distance depending upon its momentum.

Just like a pendulum doesn't stop the moment it crosses the centre-point!

So, the price can keep rising even when rsi has hit the speedbreaker of 80-90-95-100.

So, what does rsi do in such a situation?

Cross 100?

It can't.

So it keeps retreating somewhat and keep rising again and again!

I call this banging its head in the overbought wall again and again.

A stage comes when RSI starts diverging, i.e. it starts falling while the price is still rising.

Finally, the price slows down and stops rising. And then it is all set to fall!

This is the time when I say "RSI has exhausted,tired!"

This point is confirmed by a "sell" signal by Williams%R or hints of trend reversal in MACD!

Same is true in a bear rally.

I am sharing some graphs below where RSI exhaustion during an up or down rally are marked with dark thick lines.

8 stages of the Price-RSI rocket

Ascent

------

Stage I : RSI rises, Price rises

Stage II : RSI flat, Price rises

Stage III : RSI falls, Price rises

Descent

-------

Stage IV : RSI falls, Price falls

Stage VI : RSI flat, Price falls

Stage VII : RSI rises, Price falls

Stage VIII : RSI rises, Price rises

(Stage VIII is same as stage I.)

Caution:-

-------

1. Stage I starts from the deep valleys of oversold RSI.

2. Traders should keep the stages of the rocket in mind to plan their "journey"

3. The rocket can skip stage II &/or III during ascent if rally is weak

4. The rocket can skip stage VI &/or VII during descent if rally is weak

5. During bull runs, stage VI & VII are likely to be absent.

6. During bear runs, stage II & III are likely to be absent.

7. A stage has not ended till the next has started.

Exhausted RSI is worth a million dollars!

Watch the rsi of falling stock/nifty

If it rebounds from above 30, ignore!

If it rebounds from below 30, sit up and watch carefully!

If the price continues to fall, rsi continues to repeatedly (2-4 times) bang its head in the
very low rsi wall (say 30 to 5) and never rising more than 55-60 in-between,

get ready, your prey is in front of you!!

And when the stock or nifty has fallen "a lot", rsi has exhausted falling down and is starting
to move up while price is still down, pounce!!!

You have just entered a trade in which the odds are highly favourable to you and the stock is
extremely oversold in the given time frame.

Then hold till the base line becomes horizontal.

For weak hearts, hold till rsi crossess 80.

For Day Trading take rsi 14/2min

For Swing (1-3 months) trading take rsi 14/1d

U can verify the trade by ema 34/8 in swing trading and ema 10/50 in day trading (just to amuse
urself, otherwise verification is not required).

Similarly, reverse is true for the up moves.

Cautions :

1) Don't carry forward day trading.

2) If u don't get the exact signal as above, don't trade.