Rohit Katwal Profile picture
Oct 11 14 tweets 7 min read
Best way to use #RSI for Trading

What is RSI indicator?
RSI is used on price to identify oversold and overbought market conditions. In relative terms, when RSI line touches the 30 line, price is said to be oversold. When RSI touches the 70 line, price is said to be overbought.
Problem of using RSI traditionally is that in heavily trending market #RSI can remain oversold and overbought for a considerably long duration. Consider example of #TATACHEM for example. If you keep selling because of RSI Oversold, you can continue to make losses.
So the proper way is to use RSI + Divergence.

What is RSI Divergence? When price is moving in opposite direction of the RSI.

1. Near 70, Price is making Higher Highs & RSI is making Lower Highs; or
2. Near 30, Price is making Lower Lows & RSI is making Higher Lows.
Consider #LICHSGFIN for example on 2HR time frame. Price made lower highs and RSI made higher lows which is a Buy Side Divergence. I was actually short at this level and made a loss on this trade. I got a timely exit as I spotted divergence recently.
Consider example of #TATACOMM on 1HR timeframe. Price made a higher high and RSI made lower high which is a sell side divergence.
Two type of Main RSI Divergence
Wide Divergence
Tight Divergence

Wide Divergence is when difference between Higher Lows or Lower Highs of Price are wide noticeable to naked eyes.

Tight Divergence is when we have to shift to Line Chart to observe a divergence,
Attached are examples of Wide & Tight Divergence.

Wide Divergence - Notice how wide Divergence on #BHARTIARTL is visible.

Tight Divergence - If you look at #Nifty Hourly chart, tight divergence is not visible. But when we change it to line chart, there is a tight divergence.
Here is live commentary on RSI Tight Divergence.
Now that we know what divergence on RSI is, we need to understand how to use it.

Best way to use divergence is at Support and Resistance(S&R) Levels. If you do not know how to identify S&R, I recommend you read the thread on understanding price action.
Divergence at S&R Level.

1. Identify the S&R level.
2. Identify the RSI Divergence.
3. Identify the Entry Signal using trend line.
4. Exit at a predetermined target or trailing SL of 20 EMA.

Consider example of #LICHSGFIN and #EICHERMOT and important markers.
Divergence Inside Smaller Time Frame inside Bigger Time Frame.

Consider #TATAMOTORS on daily charts. From 12 Oct to 18 Nov, price is making double top. There is a slight divergence on Daily Charts but no entry.
Now look at the same chart on 1HR Chart. This is called divergence within divergence for further narrowing the entry.

RSI in conjunction with other indicators like MACD can be used to identify whether the trend breakout is genuine or can be a reversal.
In this method here I have used Trend Line for entry. Like any other system, trader must understand the importance of Risk Management & Position Sizing. One can use PSAR, Supertrend or EMA20 for trailing SL. It is a personal choice of trader for what works for them.
This was just a small effort from my side. If you have more examples of RSI Divergence, I request you to share here under comments in this thread itself.

Do share and retweet this thread if it helped you.

Do let me know what trading topic we should cover next in comments.

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More from @rohit_katwal

Oct 1
If you hate your job, I won't advise you to start full time trading. Better yet, dont do it with loan money.

But thats exactly what I did. Not many know this.

I left my job. Arranged for funds in notice period. Took a loan to trade. Traded and made profits after all expenses..+
Everybody advises to have 2 years salary buffer before you start. I had none. 0.

Whatever loan I picked for trading, I had 4 times bigger in default. Luckily had some land, portion of which I decided to dispose and sell to cut off debt. Land does not sell easily in distress.
In 2019 I just wanted an office and got myself one. No plan.

Finished some loans, took a new so that my brother can start new business. Business crashed due to covid19 in 2021 and finally closed in May 2022 leaving debt burden again.

In the mean time went into....+
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Sep 21
William's Alligator is probably the most underrated indicator in moving average category.

Alligator follows the premise that market is sideways for 70% of the time and trending only 30% of the time.

This is where William's Alligator can be a great tool for traders.

Thread 🧵 Image
Why William's Alligator can be a great tool for traders?

It can identify Bullish, Bearish and Sideways market pretty easily. Problem is, traders don't know how to use it effectively. Alligator has three lines:

1. Lips - Fastest Line
2. Teeth
3. Jaws - Slowest Line Image
Book Interpretation is when Lips Crosses above Jaws, it's a buying opportunity and when below its a shorting opportunity. And when three lines are crisscrossing, instrument is sideways.

BUT this does not make it a tradeable indicator in practice. Here is what should be done.
Read 12 tweets
Sep 12
One of the least talked topics in stock market is Winning Probability, Risk Management and Position Sizing.

Holy grail does exist but it's not a strategy. Its mindset. Ever wondered why top traders despite different trading styles average between 4-8% returns pm?

A Thread 🧵
Key to good trading is understanding your:
1. Winning Probability - How many trades you win out of 100?
2. Risk Management - How much you lose vs how much you win. Risk:Reward?
3. Position Sizing - How much quantity you execute which impacts your loss / profit?
What are the benchmarks of good returns for your trading style?

1. Investors look for 16-18% compounded returns.
2. Swing Traders are looking at 18-30% returns with passive trading and investing.
3. Traders across spectrum look at 4-8% per month in general.

But question is..
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Aug 8
How can you effectively do the "Covered Calls" ?

Here is a quick guide to help you. Don't worry if you dont have the 100% capital for covered call. I will show that covered call can be done with 60-70% capital also.

Here are my inputs.
What is a Covered Call ?

Selling OTM Call when you have the underlying in your stock holding.

If stock remains sideways, you earn rental income.

If stock appreciates above strike price, profit is capped.

Its the safest strategy for investors.
Why and What's the catch?

- Underlying / Stock is sideways for 70% of the time. It creates income generation or gains during such period.
- Stock price appreciation, bonus, dividends, premium are yours to keep.

- If price goes above strike, you have to part with stock.
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Jul 22
My Learnings from #OptionTrading this week....

1. Have a clear trading plan before you start your day
-- Support and Resistance
-- Trap Zones
-- Indicators on Multi TF analysis
-- Clear Bear/Bull Zone
-- Path of Least Resistance

Then decide where/which options to sell.

2. Traditional technical analysis may fail. Consolidation > Breakout > Consolidation may not work always. New trend is V-up, /\-down trends, fake breakouts and fake selloffs. Be prepared for all these when creating a position. Any Option Position can be challenged...2/n Image
3. As an Option Trader you can not predict where the market will go. You can only predict where market might not go.

4. Positions from carry forward point of view of smart money are highly masked. Any trending move is preceded by a lot of fake breakouts....3/n
Read 5 tweets
Jul 13
Thread on understanding OI Sparkline and how it can be used for Intraday Trading.

Market is all about trend. Trend is identifiable or visible on Open Interest also if one can track it. This trend is present in Change of OI with respect to OI on previous day.

Consider this Option Chain on Intraday time frame for example.
Strike 16000 CE, 13 Apr 2022
Total OI is - 62029
Change in OI is - 22439

What this tells us is: 22,439 contracts were added today. This is Intraday Buildup. 66,684 added to 16000 PE, Intraday. 2/n
Similarly when Change in OI goes negative for example in the attached option chain of #BANKNIFTY, 13 Jul 2022, 1:15 PM writers at 35500 PE at 35400 PE are covering their position as it is now In the Money.

This is positional unwinding. Traders who carried are now exiting. 3/n
Read 9 tweets

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