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http://www.financial-spread-betting.com/How To Best Use RSI (Relative Strength Index)
http://www.financial-spread-betting.com/course/introduction-relative-strength-analysis.html The next thing we are going to look at is the RSI. PLEASE SUPPORT US BY LIKING THIS VIDEO IF YOU FOUND IT USEFUL
Moving averages is what is called a trending indicator.
Actually, before we move on to the RSI, let me just explain that when the market is rangebound and choppy, moving averages are not going to help you much, because they are going to be tightly wound together even the short or longs are going to be tightly wound together, they are going to be crossing very frequently, they are going to give you false signals loads of the time. Let’s pop on something a bit thicker like the DAX, I prefer the DAX to the FTSE as personal preference.
The amount of times you end up crossing the larger timeframe moving average or the longer period moving average, you have got to be careful, the disadvantage of it is that if you are using it during choppy markets, you are going to get chopped up. However, the advantage is, if you can identify a trending market and then get on the end of it – let’s zoom out a little bit – then the moving average is going to help you time that trade because it is far cleaner the signals that you get as opposed to a choppy or rangebound market. So, that is one word of caution with the moving average.
So, let’s take those off now and let’s put on the RSI, so we insert the indicator and as I say the link to this free charting package is at the end, very handy little charts. So, these are called what is known as oscillators, we have gone past it, RSI relative strength index, so, we put that on. Let’s just close these off so we can get a better glimpse of what is going on with this and let’s make it a nicer colour. I think that is probably not the best colour for us, shall we go with a nice white, thick line.
Yes, let’s do that.
Easy enough to put on as you can see. Now, RSI is basically – there is a reasonably complicated formula with it – but, ultimately it is giving us what is called over bought or oversold condition. It is trying to tell us if the market is stretched, so when the price goes above – and everyone has got their own parameters for this again – let’s put our daily because I think we will probably get a clearer picture here. When the price goes above 60/65 it is considered overbought, so if the market is oscillating back and forth it is going to go into an overbought situation and if we start to go down a lot very, very quickly – this is very simplified – if we go down very, very quickly quite a lot we are going to get an oversold condition where the RSI is going to go below 40. So, anything below 40 or below 30 is very oversold, above 70 is very overbought and the theory goes, is that when the market is overbought you are looking for it to roll back again so you are looking for short setups for the market to roll back down into sort of neutral condition where it is about 50.
So, as we stand now on the DAX, we are about 43 so we are pretty neutral, you know the beginning of August when we spiked right back up and had that good run we were very overbought and we unwound that condition by doing a bit of consolidating and now we are coming down a little bit and we have sort of gone into a little bit of neutral territory. If we run down very, very quickly we are going to go into oversold. So, that is the theory that goes with that. You are looking to trade against the move, for overbought you are looking to sell it, if we are oversold you are looking to buy it.
Also, before we move on to some of the strategies with that, you change your upper bands obviously 70/30, so you can choose where your overbought or oversold is.
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