The 5 Benefits of Using the RSI in Trading
I have always said that you should not be using more than three indicators on your charts.
Three should be more than enough.
At the max, if you want to use the fourth one, go with a simple moving average.
It is one of the most powerful indicators or trend following indicators in technical analysis.
And out of those three indicators that I mentioned, one of them has to be Bollinger Bands, because it is too important to ignore.
Out of the remaining two, I would recommend using the RSI.
Here are five benefits of using RSI in your trading:
1) It confirms reversal trades with divergences.
RSI has the potential to identify bullish and bearish divergences with the price.
This will help you confidently take reversal trades.
Reversal trades are those trades which you take, when you are going against the trend.
2) It confirms the strength or weakness at a breakout area.
So, when the price breaks a support or resistance, the RSI can confirm that, by showing a higher or a lower reading.
Remember, the RSI is just a single line.
Its value fluctuates between 0 and 100.
So, it indicates the strength of the market.
3) It is a leading or a coincident indicator.
RSI is rarely a lagging indicator.
It will either give you the signal, at the same time the candle pattern gives you a signal or maybe two three candles prior to that.
For example, the RSI trendline breakout can happen before the price trendline breakout happens.
4) It is a finite number.
It fluctuates between 0 to 100, which means, it allows you to design a trading system.
So, for example, you could say that, anything above 70 is overbought and anything below 30 is oversold.
That way you can design systems using RSI.
5) It is simple to use and very effective.
The mathematical equation of RSI is very simple.
It is intuitive, easy to understand.
It is just a single line at the bottom of your chart.
And it is very effective in a sense that, it can identify divergences.
It can show you the strength of the market.
It can show you the overbought and oversold areas.
It can flash buy and sell signals.
What else do we want from an indicator?
So, along with Bollinger Bands, think of using RSI as a complement to Bollinger Bands.
By the way, I have taught the RSI in detail in Level 11 of my Japanese Candlesticks Trading Mastery Program.
Have a look at it.
In that course, I combine the RSI with the Bollinger Bands to identify powerful and high probability trade setups.
Preview some of the videos there.
Thank you so much.
Regards,
Rohit Musale, CFA
14 February 2023