OKAY, maybe not every trader. However, this is a pretty cool thing about the RSI. Unlike many other indicators, it has mathematical support and resistance.
I don’t want to go into the mathematics of it here, but here’s the intuitive understanding. Basically, the RSI is bound between levels 0 and 100. Because of how it’s designed, the RSI, when used with its default 14 period setting, has difficulty rising above a certain level and falling below a certain level.
THIS OBSERVATION CAN ADD A LOT TO YOUR BOTTOM LINE!
I’ll make this brief: If RSI has natural difficulty rising above a level, yet manages to do so, doesn’t that indicate that momentum is trending up? Conversely, if RSI has natural difficulty falling below a level, yet manages to do, it indicates that momentum is trending down.
Here are the levels: 60 and 40. 60 is natural resistance, and 40 is natural support. I know other traders recommend 70 and 30. I don’t. 60 and 40 are the most valuable levels in my personal opinion.
HOW TO USE RSI TO DETERMINE THE TREND
Here’s a neat trick – can you tell what the trend was in a chart without looking at price? YES.
Just look at the last time where the RSI closed above 60. That will mark an uptrend all the way to the point where RSI closed below 40. From there, it will be a downtrend until RSI closes above 60 etc. etc. etc. You get the picture.
Before I go geeky on how cool that is, think about how this can help your trading. Trend and momentum (defined in this sense) are often aligned, so you can design trading systems that go with the trend based around this one fact, incorporating the other key elements of a successful system.
With best wishes for your trading,
Private Fund Trader/Head Trader Consultant
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