This unorthodox RSI Indicator Trading Strategy actually contradicts traditional teaching. But it works!
What most teachers, books and courses instruct about how to trade the RSI indicator, is exactly the opposite of what you should be doing.
This is part 1 of 3 videos demonstrating how to correctly trade the RSI.
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Hey my friends, Barry Burns here with Top Dog Trading. Today I am going to show you an RSI Indicator Trading Strategy. I’m going to show you what not to do first, and this is the reason that lot of you are losing money. Let’s stop that right now and show you why it doesn’t work or lot of what you’ve been taught is bull.
Let’s plug the hole here of the money flow out of your accounts and then lets show you how to put it in. so this is the topic for today.
THIS RSI INDICATOR TRADING STRATEGY WORKS FOR OTHER INDICATORS TOO
This approach also applies to any, what we call bounded indicators. Whether they are stochastics, or others. They talk about the indicator getting oversold or overbought. Normally they’ll put the levels at 30 and 70 for overbought and oversold. Now, oversold being 30 of course. Let’s look at oversold first.
I hate that term oversold. It’s used by technicians all the time. So, I know that’s the classic term. When traders hear that term oversold, it implants in their mind an expectation that the market can’t go down any further. That’s the problem with using that term. If it’s “oversold,” it sounds like well then the market can’t go down anymore and it has to go up.
OVERBOUGHT AND OVERSOLD ARE FALSE CONCEPTS
Here’s the problem with that. Any bounded indicator like RSI or stochastic can only go from 0 to 100. Other bounded indicators have other perimeters but the problem therefore is once it gets down to zero or even not, for it to get down to 0, it’s got to be an extremely bearish move. Once it gets down even to that zone or that area, it’s very unlikely that it’s going to go any further. And if it goes to 0, then mathematically it can’t go any further. But the market still can go lower.
The signal is exactly the OPPOSITE of how you may have been taught. No, that’s a bearish signal because that’s showing the strength to the downside.
WHAT ABOUT RSI INDICATOR DIVERGENCES?
Now as you can see here, comes here for price and then price ends up making a lower low after that. So then there’s some people who will say, ‘Oh well yes that’s true.’ So what you want to do is wait for a divergence. So we wait for the higher low on the RSI and wait for that. Sometimes though you would say wait for the higher low to be above 30. And you get a lower low in price and you take that. Again not a great signal. Why not?
It does show a shift of momentum, that’s true. But the problem is that it’s a short term signal. And momentum is kind of a tricky thing, just because momentum is where the signal of momentum is going up, doesn’t mean that’s a real strong bullish. It just means the bearishness has come out.
ONLY TRADE IN THE DOMINANT DIRECTION OF THE MARKET
In this case, the market does go up a little bit, goes back up to 50 MA which is the red line. But that’s not really a major big trade. What happens after that is the market comes down and makes a much lower low. And again RSI gets supposedly oversold. So the point is this, what you’d rather do, so I will get into little bit of what you want to do, you want to do the exact opposite of that. You don’t want to be just buying oversold signals all the time. You want to take those as bearish, and trade in the dominant energy, or the dominant direction of the market.
Why? Because that’s where your big reward is. If you got in somewhere up here, and you got out somewhere down here, you’re making big money. Little risk, big reward. That’s where the big money is, that’s where the odds are too, that’s where better win loss ratio is and that’s where your better risk reward ratio is. If you took this that little divergence thing there, you are trading against that dominant energy. So your winners are small.
So why keep trading against the dominant direction of the market? That’s the point of this lesson today.
In fact let’s take a little look in, and see how far they went. There you go. This was our first divergence we looked at here. look how much further it still went down. Here we get another supposed oversold signal. what if you bought that? Not so good. Not much money made there. There is another divergence right. Well that would have been your profit. Really? No. these are signals of strength to the downside. You could have been short whole time. And made some real money, and just held it.
That’s why for some of you, it may seem like you’re always on the wrong side of the trade, that everything always goes against you.
There will be 3 parts of this video, so look for 2 more videos on the RSI indicator trading strategy that will pick up where this one left off.
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