Thread by @Your_NLP_Coach

Few people know that J.Welles Wilders created a bunch of indicators, RSI was one of them. He passed away in April 2021. I am grateful for what he has brought to the trading community.

To honor his work. Here is a thread about #RSI that you won't find anywhere else

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Let's start first with what an RSI does. It measures up and down moves and calculates a ratio. It compares the strength of gains to losses over a period, which is by default 14.

The general premise is that too much in any direction is not sustainable which will induce a mean reversion. But what is too much? And what are the better triggers!

You don't need per se to know the formula. But it does give you a better understanding of where it is coming from:
100
RSI = 100 - --------
1 + RS

RS = Average Gain / Average Loss

In general, I use RSI to identify extremes and I use them normally as a timing tool to enter and exit trades. I often look for RSI breakouts and patterns on HTF. And there is a trick that Wilders used himself. I will break that down later in this thread.

#RSI is a beautiful indicator. But it's often misused. There is no such thing as one size fits all. RSI in a trending market needs to be used differently when the market is trending than when it is ranging. Period!

In a ranging market, you can use the RSI as a timing tool to find oversold and overbought areas. They normally give a good performance when you combine it with bullish or bearish divergence and solid S/R levels. Again, don't use RSI in isolation. Context is king context!

In a trending market, most of the magic happens when the RSI is in an "overbought" area. You need to take this "overbought" with a grain of salt. You must see the context first, and then any other oscillator. As long as the trend is strong, it can remain there for a long time

When the RSI reaches extreme levels in a trending market (up or down). Then I wanna see strong divergence on the weekly and 3D charts and weakness in PA. Double divergence is an extra warning. And if it aligns with 1.618 fib, then I have extra confluence to scale out or to short

When price and an oscillator (can be any oscillator) move in the opposite direction then a divergence has formed. Which suggests a change in trend.

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RSI trend line breakout is also something I often use. Here is a good example.

You can even find classical patterns such as falling and rising wedges on the RSI.

You can also use trend lines and patterns on lower time frames. Personally below 4h gives me less alhpa.

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A swing failure pattern is something people only relate to price action. One of the ways Wilders used the RSI was to identify failure swings on the RSI. This strategy gave me lots of alpha!

To identify reversals to the downside. You wanna see an SFP when the RSI is far above 70 and then makes a lower higher. When RSI travels thru the neckline, then that is a signal.

This could signal that the market was overbought and now it's time for a reversal

I just covered some of the strategies I use. There is much more to share. Follow @Your_NLP_Coach for more threads.

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