High Altitude Trading with RSI

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High Altitude Trading with RSI

I have seen a lot of talk lately about RSI being overbought as it crosses the 70 level.  I often get some pretty heated feedback when I post my charts suggesting something has room to move higher when the RSI is near this level.   Many technicians and traders take this as a reason to worry or avoid a trade, today I want to show you why that might not be the best way to look at it.  I will admit, it is not easy to buy up here and you certainly can have a pullback at any time, but I have found that some of the best breakouts and strongest runs don’t even start until you get over this level.  Many of you know already know that I use RSI more for trend following than as an oscillator.  This is based on Bull and Bear Range Rules (from the RSI Series) that I use to define the trend. I have also written about how we can see a chart accelerate higher when the 9sma of RSI moves above 60.  Keeping it very simple, today let’s just deal with the indicator itself.

First we need to think about how this indicator is calculated (note Investopedia totally disagrees with what I am telling you here).  Any indicator that is bound from 0 to 100 will slow its ascent (descent) as it reaches an extreme.  This allows price to move much great distances than the oscillator will.  I think this is the key most overlook when using an indicator such as RSI.

Below I have quite a few recent examples that will show how well this can work.  Of course it won’t all the time, but that is what your risk management plan is for.  All of these charts have lines through the point at which RSI moved over 70.  You will notice, it doesn’t have to stay over 70 for the run to continue.  Part of my risk management plan is making sure it stays over 50 (marked by arrows in some charts) on any pullbacks. 40 is the actual threshold for the bull range, so longer term traders and investors or those with big cushions in the trade are better using that number. (click on chart to open larger in a new window)

10-20-2013 XEC rsi10-20-2013 MPEL rsi

10-20-2013 PXD rsi

10-20-2013 LUV rsi

10-20-2013 CLB rsi

Yes, it also works on weekly charts.

10-20-2013 FSS rsi wkly…and when both the daily and weekly move above this level it can get really exciting

10-20-2013 TSLA rsi

The arrow on the above daily chart of $TSLA lines up with the arrows on the weekly chart

10-20-2013 TLSA rsi Wkly

$LNG another good example.

10-20-2013 LNG rsi

10-20-2013 LNG rsi wklyIt can be an amazing move.  I have a dozens of charts like this from a scan I did today, but this post is already getting long so I will end with a chart you should think about in context of this post.

10-20-2013 GOOG rsi

What is next for the $GOOG?

Good Luck, it is there for the making!

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(All market data above are derived from Stockcharts.com, Esignal, and Reuters datalink)
The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.  Neither the information, nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities. I or my affiliates may hold positions or other interests in securities mentioned in the blog.  Full Disclaimer
There is no guarantee that the views expressed in this communication will become reality,  Investing in the stock market involves risk and potential loss of principal, Investment strategies should be thoroughly researched and understood before implementing and none of this should be construed as a recommendation

About Author

Tommy

is a Chartered Market Technician (CMT) and Certified Financial Planner (CFPr) in Greensboro Georgia (Outside Atlanta). Founding partner of Barber Lackey Financial Group, LLC, a Registered Investment Advisor. However, this blog is not affiliated with BLFG and does not make recommendations to buy sell or hold any securities.

2 Comments

Kayson Chan

March 5, 2016at 4:15 am

Hi Thomas. I am Kayson Chan from Singapore. Currently a 24 yo part-time private system trader. I am into engineering field but have a strong passion about the exchange markets and quant crazy.

Thanks for sharing your intuitive ideas to the contrarian use of RSI. I have been using RSI for quite sometime too (not the usual 20/80 overbought or sold way). I typically look for breakout in the monthly chart above 60, usually either a very strong bear signals or a resistance rejection. I heard about the RSI range and reversals in both Constance brown and john’s books, and of course the creator of this wonderful theory, Andrew Cardwell. Too bad, many of their books are now out of print. it is really wonderful and interesting to find traders like you putting them into practical use. Till now, i havent heard of anyone successfully traded this system with proven track records.

I know this method generally works (similar to many other methods i tested out there) – The uniqueness i find with this system is that it has a chance of giving a higher winning probability, but i believe it can be further enhanced by modelling with better entry/exit signals, and importantly portfolio sizing base on risk R*.

I am trying to model this into a systemic strategy (base on monthly, weekly or daily signals). Some conditions are easy to handle through AFL programming, however reversals divergence are quite discrete and might not be fully accurate base on system itself.

I have some questions for you, and it will be really nice if we can work something out together. I will be more than happy to test this system out with historical data and design a porfolio management / risk management solely for this system. Any optimistic results and credits will be directly given to you. Hope we can get in contact through emails and other social medias. If you dont mind me sending you a private message.

Marnie

May 21, 2017at 9:39 am

Witaj Natalko, cieszę się, że miałaś taki fajny dzień wczoraj A ja wczoraj reoawfrełam książkę, w której autor zadał pytanie: jak to jest, że małe dzieci chętnie słuchają bajek i potem je czytają, a potem nastolatki i dorośli ludzie nie lubią czytać? Odpowiedzi znalazłam sporo i nie jest to miejsce, żeby je opisywać, ale i referat, i sama książka wyszły ogólnie super Miłego dnia Ci życzę Natalko

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