This video on RSI Indicator Buy and Sell Signals will contradict some of the classic teachings. RSI is commonly referred to as a momentum indicator … but it really ISN’T! This video is part 3 of a 3 part series on the RSI indicator strategy.
The links for part 1 and part 2 of this series of videos on RSI indicator buy and sell signals are below, but watch this video first.
What most teachers, books and courses instruct about RSI indicator buy and sell signals, 180 degrees wrong!
Enjoy the video and please leave your comments below (even if they’re negative!).
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Welcome to part 3 of this series. This is going to be the final installation of this series on RSI Indicator Trading Strategy. In the first 2, we covered some good ground and today I promised that I am going to show you, how to really make the RSI Indicator a momentum indicator because even though it’s called a momentum indicator, it’s really not.
The reason that RSI isn’t a momentum indicator just for review, is because momentum requires mass. Momentum is the product of mass and velocity. RSI only measures velocity or rate of change. But it does not include mass, or as we refer to in the markets, volume. That’s why I say, controversially, it’s not a momentum indicator.
WHY THE RSI ISN’T A TRUE MOMENTUM INDICATOR
So here’s the RSI, it’s the blue line. Now below it, I have put a different indicator, MFI. That stands for Money Flow Index. Now the Money Flow Index is also an oscillator that goes between 0 and 100. Some people refer to it as a volume weighted RSI because it does incorporate volume into the RSI indicator.
You’ll notice that actually it’s very similar. It moves in very similar ways but there are sometimes when it is quite different and those are the key times. For example, let’s take a look right here. We put in a high on the market, by the way this is my rubber band trade. If you want my rubber band trade, I do offer that trade setup for free. And little more than I can go into right now, but I’ve got a video that shows you how to trade that setup in about 26 short minutes. So feel free to go ahead and click on the box in top left corner there, and I’ll get that to you.
Notice how, in this situation here, the RSI is still going up. But the MFI is trending down. That means that there’s a lack of volume pushing this up, so velocity is up, but actually momentum, when you incorporate the volume aspect of that, which is down, and therefore in my opinion, the MFI gives us so much better signal here, saying this is moving up on weakness, and therefore we can expect a high and come back in the direction of the trend.
HOW TO DETERMINE IF THE STOCK MARKET (OR FUTURES OR FOREX) IS RETRACING OR REVERSING
So to me, this gives us a better signal, I say that, ‘Oh, okay. We are doing a retrace here,’ but that move up is on weakness, therefore I don’t expect the trend to reverse and go up. Actually I think that’s just a complex retrace up in and overall downtrend which is exactly what it was. So by incorporating volume, you see the weakness in the up move, whereas just with the RSI, without the volume incorporated into the formula, you don’t see that. You’re blind to that.
Now to support that, in the last 2 videos, I wanted to say that even with the MFI, as I said with the RSI, just reaching these so-called overbought or oversold areas, typically 70 and 30, does not mean you are putting in a high and should go short, it’s not really over bought here. Therefore the market continues to go, making higher high. Well guess what, the same thing applies with the MFI. So here it gets well over. In fact it gets even a little more above 70 than the RSI does. And then the market still continues to go up.
RSI INDICATOR BUY AND SELL SIGNALS WORK BEST IN THE DIRECTION OF THE TREND
I would only trade it in the direction of the trend, not looking for reversals. I’ll look for trend reversals. Lot of people actually do say that the MFI is better than the RSI indicator buy and sell signals, looking for trend reversals. And they’ll add some other qualifications in there as well which is good. Sometimes they look for divergences. Things like that. Personally, historically, I have not seen that to be very accurate, so I only use it to trade it in the direction of the trend.
Now here is an exception to that rule. It’s not really an exception to the rule, it actually supports the rule I just said. But it combines the two, which is very interesting. So here we have a situation where we do get the indicator being oversold. Reaches 30, that’s the magenta dashed line there of course. So but here’s the thing, we’re in an uptrend.
WHEN OVERBOUGHT AND OVERSOLD EXTREMES DO MATTER
So the one time that I would look for these extremes, these overbought, oversold conditions in order to take a trade is only if we are oversold in an uptrend, or conversely if we are overbought in a downtrend. So still, I am looking for a trend continuation though, that’s the key.
I’ll give you one last little tip here and again it’s still for trend continuations. Another signal you can use to get back in the direction of the trend.
USING TREND LINES WITH RSI INDICATOR STRATEGIES
Here we have an uptrend that’s and you can draw trend lines on this thing. And if you draw trend lines on it works a little better than with the RSI indicator buy and sell signals. Its forming a different pattern here. If you draw a trend line there and you wait for the breakout of the trend line that often indicates a shift of momentum. In other words we want to be trading a strong trend, not a weak trend. So we want strength to come back into this trend.
There are couple ways you can just do it on the break of the trend line if you want to. Or some people will draw a line above these highs. Wait for the price action to actually breakout above there. But only if it’s accompanied with the break of the trend line.
You can draw a trend line there and wait for the breakout here. Now if you wait for breakout, I wouldn’t wait for it to breakout of that high. I would say, well put it in here, but then at the same time you want to make sure, again trend continuation on strengths.
If you drew it on the RSI here, it didn’t really quite work out quite as well. Would have come in at this low, and I guess you’ll be okay. But again it’s just a matter of the MFI incorporating volume, making it more literally and accurately, a momentum indicator. So test it for yourself. Don’t take my word for it. Put it on your charts. Paper trade it or trade it on a demo account for a while. See if you like it. And if you do, great. And if you don’t, that’s alright. There’s plenty of other great indicators out there.
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For part 1 of the RSI Indicator Buy and Sell Signals video simply click here: http://www.topdogtrading.com/unusual-rsi-indicator-trading-strategy-rarely-taught/
For part 2 of the RSI Indicator Buy and Sell Signals video simply click here:
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