WEBVTT 0 00:09.750 --> 00:18.180 RSI stands for Relative Strength Index and it is one of the most popular oscillators. Before talking 1 00:18.180 --> 00:25.510 about the relative strength index, I need to spend a couple of words about the oscillators. 2 00:25.530 --> 00:33.030 What is an oscillator? An oscillator is a technical analysis tool that confines the price between two 3 00:33.030 --> 00:36.480 extremes: 0 and 100. 4 00:36.750 --> 00:44.760 So the oscillator uses an algorithm to convert the price on the market into a value that ranges between 5 00:44.760 --> 00:46.880 0 and 100. 6 00:46.950 --> 00:53.400 This time I'm not going to analyze the formula to build the relative strength index even if it is not 7 00:53.400 --> 00:59.970 complicated but I think that I can give you some guidelines to use it, that are much better than the 8 00:59.970 --> 01:01.260 formula. 9 01:01.680 --> 01:10.020 The RSI is calculated comparing the gains of the up sessions with the losses of the down sessions over 10 01:10.080 --> 01:11.950 a given period. 11 01:12.150 --> 01:15.470 What does this mean in a practical way? 12 01:15.540 --> 01:21.720 This means that the relative strength index is very sensitive to candlestick movements, 13 01:21.750 --> 01:28.040 so the bigger the candle, the greater the variation of the RSI line. 14 01:28.230 --> 01:31.030 Let's see an example on the Meta trader. 15 01:31.200 --> 01:38.880 We have dollar-Swiss franc on a 30-minute chart and you can see how this candle moves the RSI. 16 01:39.660 --> 01:42.010 With just one big red candle, 17 01:42.090 --> 01:49.770 the RSI goes from 56 to 32, 24 points with just one candle. 18 01:49.770 --> 01:56.330 You can notice that no other candle has such a strong power to move the oscillator in the same way. 19 01:56.580 --> 02:00.660 So the RSI is very sensitive to candlestick movements. 20 02:00.690 --> 02:08.190 A big candle can have a huge impact on the calculation of the value. Before checking how to use this 21 02:08.190 --> 02:09.330 oscillator, 22 02:09.330 --> 02:14.790 I'm going to share an interesting research about the set up of the RSI. 23 02:15.120 --> 02:21.450 When you open the oscillator on the meta trader, you can see that the standard set up is "apply to" 24 02:21.720 --> 02:23.080 and then "close". 25 02:23.430 --> 02:29.770 In this way the prices that are going to be included in the calculation are the closing prices. 26 02:30.030 --> 02:36.600 But I want you to think about this: when you have a trend and the price is forming new highs and new 27 02:36.600 --> 02:37.370 lows, 28 02:37.590 --> 02:42.450 do you check them on the closing prices or on the shadows? 29 02:42.450 --> 02:47.580 We check the highs and lows on the shadows not on the real body. 30 02:47.580 --> 02:55.470 So long time ago I tried to use the RSI in a more logical way or at least more logical to me. 31 02:55.500 --> 03:03.390 I went beyond the standard setup of this indicator and I decided to apply the RSI to high when there's 32 03:03.450 --> 03:07.230 an uptrend and to low when there is a downtrend. 33 03:07.680 --> 03:09.430 Let's check on the Meta trader 34 03:09.540 --> 03:12.290 how the RSI changes. 35 03:12.330 --> 03:18.230 Here we have euro-dollar on a daily chart and you can see that there is a clear up trend. 36 03:18.510 --> 03:22.240 The RSI is calculated on closing prices. 37 03:22.540 --> 03:27.400 Let's draw a vertical line when we have new highs on the market. 38 03:27.480 --> 03:32.750 So starting from here, we have the first high here. Then 39 03:32.790 --> 03:41.940 another one on this green candle. Going on, we have another high on this red candle, then another one 40 03:41.940 --> 03:42.900 here. 41 03:43.200 --> 03:51.960 And last one here on this green candle. I zoom in and we can check if the new highs on the chart match 42 03:51.960 --> 03:55.340 with the new highs on the RSI. 43 03:55.380 --> 04:00.330 Here we have the first high and the line on the RSI is going down. 44 04:00.480 --> 04:03.090 So it doesn't match. Here, 45 04:03.140 --> 04:08.280 the high on the chart matches with the high on the oscillator. Going on, 46 04:08.280 --> 04:17.350 we have a new high here and the line on the RSI, once again, is going down. Again on this new high. 47 04:17.370 --> 04:25.450 The same situation. Then, on the last high, the RSI is going up but it doesn't form a high. 48 04:25.500 --> 04:30.120 You can see that the high is here on the next candle. 49 04:30.120 --> 04:37.890 Now let's go back and see what changes if we apply the algorithm to highs and not to closes. The first 50 04:37.890 --> 04:45.290 vertical line matches; the second matches; the same for the third. 51 04:45.630 --> 04:48.520 The fourth is the same. 52 04:48.540 --> 04:51.150 The fifth matches once again. 53 04:51.720 --> 04:54.290 It is far more accurate. 54 04:54.420 --> 05:02.460 So when you open your RSI, I suggest to leave all the settings like that, a period of 14 candles is 55 05:02.460 --> 05:08.050 fine but adjust this setting according to the trend on the market. 56 05:08.130 --> 05:14.340 If there's an uptrend, you will have a better view selecting high. If there is a downtrend, you 57 05:14.340 --> 05:17.610 will have a better view selecting low. 58 05:17.610 --> 05:22.210 Having said that, it's time to check how to use this oscillator. 59 05:22.260 --> 05:24.770 There are two main uses of it. 60 05:24.810 --> 05:29.440 The first one is as an overbought and oversold indicator. 61 05:29.520 --> 05:34.150 This is the most common and it is typical of all the oscillators. 62 05:34.380 --> 05:41.220 When the line approaches the 70 level, we say that the couple is overbought and a down move could start. 63 05:41.790 --> 05:44.530 When the price approaches the 30 level, 64 05:44.550 --> 05:52.200 we say that the couple is oversold and an up move could start. This kind of analysis usually works when 65 05:52.200 --> 06:00.740 the market is in a sideways trend but it's not very useful in situations of strong uptrend or downtrend. 66 06:00.750 --> 06:09.690 The second way to use this oscillator is as a divergence tool. What is a divergence? A divergence happens 67 06:09.690 --> 06:16.620 when the oscillator is not giving us the same information of the chart. When the price makes a new high 68 06:16.860 --> 06:20.310 and the RSI fails to make a concurrent high, 69 06:20.340 --> 06:26.910 we have a negative divergence, that is a bearish signal. When the price forms a new low, 70 06:26.970 --> 06:28.920 but the RSI doesn't, 71 06:29.070 --> 06:31.110 we have a positive divergence, 72 06:31.110 --> 06:36.000 that is a bullish signal. Here on euro-dollar, daily chart, 73 06:36.000 --> 06:40.850 we have a down move and I have the RSI applied to lows. 74 06:40.980 --> 06:44.540 We have a first low here on this candle. 75 06:44.580 --> 06:52.620 Another low is here on this candle and the last low is on this red candle. On the chart, 76 06:52.680 --> 06:54.200 we have lower lows, 77 06:54.330 --> 07:01.550 but if we are going to check the RSI, we can see that the value is increasing at each new low. 78 07:01.560 --> 07:03.480 This is a positive divergence. 79 07:03.480 --> 07:07.160 The RSI is telling us the opposite of the chart. 80 07:07.380 --> 07:11.720 So on these two candles we could consider a long position. 81 07:11.820 --> 07:15.810 And actually you can see that the price then starts to go up.