Decoding RSI Range Shift Behavior
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As there are 101 ways to skin a cat, there are numerous techniques to trade. Trading frameworks, strategies and techniques always look awesome on paper, yet when it comes to real life trading on real time, market mayhem and human eccentrics frequently make even the best methodologies appear to be insufficient to the assignment. There is no single technique defined as the best. This is on the grounds that each of us have a unique makeup of traits like temperament, ego, risk tolerance, experience and available of time. A few trades require a shorter time allotment, for example, intraday; on the other hand, few traders prefer staying invested for long. Some are less intrigued by pattern trading and more inspired by counter-trend trading.
It would be arrogant for this section to imply that the technique talked about herein is one of the best fit for everybody. For newcomers, this technique targets aggressive-growth shares showing high relative price strength, and looks to hold winning positions for a few weeks to a while. Misfortunes are aimed to cut short. During an intermediate-term correction or outright bear market, cash is raised to protect precious capital.
Successful trading depends on the 3 M’s- Mind, Method and Money. This article will talk about the 2nd M which is ‘Method’. If you are not where you like to be as a trader, the solution is this method which we are going to talk about or else if you have already found a method or strategy that fits you and you are satisfied with your progress, congratulations. But in addition to your method you can use this method for confirmation or running your profit long.
Andrew Cardwell named as "The RSI Guy" is well known for exhaustive usage of RSI for his trading and he is also famous for introducing this modern concept of RSI Range Shift Behavior to the world of trading. All credit for range shift concept goes to this guy.
To start with let us talk about what is RSI:
Investopedia defines RSI as “The Relative Strength Index (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset”. It is calculated using the following formula: RSI=100-100/(1+RS*). *Where RS=Average of X days up closes/Average of X days down closes.
The usual application of the RSI (Relative Strength index) consists mainly at looking for overbought and oversold levels with regard to a particular asset. RSI can be used to help determine whether a security is in a bullish or a bearish mode. In other words, the RSI can be used to identify trend, which goes against common wisdom that the indicator is only effective in non-trending markets. The default setting of RSI indicator is 14.
Following are 5 types of RSI range which helps to determine the trend of the asset.
RSI trends in 5 types of ranges which are as below
1) Bullish Range
2) Super Bullish Range
3) Bearish Range
4) Super Bearish Range
5) Sideways Range
Based on these 5 RSI range concepts one can easily trade indices/stocks. This concept works on all kind of charts whether it’s of Index, Stocks, Commodities, Currencies etc.
Now let's discuss in details what these Range of RSI are
Bearish Range: It has been observed in Bearish Range RSI tends to oscillate between 20-65 zones. Under this condition, Whenever RSI reaches 60-65 zone it's an overbought zone (good selling point for targets of 40 and 20 on RSI) and RSI reaches up to 20 is an oversold zone and this could be used to enter into a long position for a pullback.
Sideways Range: It has been observed in sideways range RSI trends to oscillate between 40 to 60-65 zones, this aspect helps us to determine that an asset or market is in sideways phase and trade is prone to whipsaw. Hence, we should avoid trading when RSI is under sideways range.
In the above range shift cases we have taken additional 5 points range i.e. 60-65 and this is taken due to some stock works with level of 65 as resistance and some works with 60 levels as resistance, hence, a cushion of 5 point in the range is taken.
Now we are coming to an important part i.e. how to apply range shift behavior on the chart and how to utilize this behavior to maximize gains and to enter and exit the position. We will take examples from liquid stock i.e. Nifty50 stocks. We have taken all the time frame i.e. Daily, Weekly and Monthly. As this concept works on all the time frames.
1. Reliance Industries: Index bellwether Reliance Industries is the first chart we are going to highlight. The chart below is of monthly time frame.
RELIANCE Monthly chart
Bullish Range: In above example we can see the green box its an bullish range, under this RSI behaviour RSI tend to oscillate between range of 40-80, where, 80 is an overbought condition. In the above example its evident, whenever RSI touched 80 mark, price tends to slow its momentum and turns down.
Super Bullish Range: In above example, Super Bullish Range is marked in Blue Box, under this RSI behaviour RSI tends to oscillate between range of 60-80. It is evident the move is clear and one way up. This is the reason its know as super bullish range.
Sideways Range: In above example, Sideways Range is marked in Red box, under this RSI behaviour RSI tends to oscillate between 40 to 60-65 zones. It is evident that under this condition a trader can witness a lot of whipsaw as stock price tend to move sideways.
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1. Bharti Airtel: Telecom major Bharti Airtel is the second chart we are going to highlight. The chart below is of monthly time frame.
BHARTI AIRTEL Monthly Chart
Super Bullish Range: In above example, Super Bullish Range is marked in Blue Box, under this RSI behaviour RSI tends to oscillate between range of 60-80. It is evident the move is clear and one way up. This is the reason its know as super bullish range.
Sideways Range: In above example, Sideways Range is marked in Red box, under this RSI behaviour RSI tends to oscillate between 40 to 60-65 zones. It is evident that under this condition a trader can witness a lot of whipsaw as stock price tend to move sideways.
1. Bhel is the third chart we are going to highlight. The chart below is of monthly time frame.
BHEL Monthly Chart
Sideways Range: In above example, Sideways Range is marked in Red box, under this RSI tends to oscillate between 40 to 60-65 zones. It is evident that under this condition a trader can witness a lot of whipsaw as stock price tend to move sideways.
Super Bullish Range: In above example, Super Bullish Range is marked in Blue Box, under this RSI tends to oscillate between range of 60-80. It is evident the move is clear and one way up. This is the reason its know as super bullish range.
Sideways Range: After moving in Super bullish Range, stock entered again in Sideways range. Under this RSI tends to oscillate between 40 to 60-65 zones. It is evident that under this condition a trader can witness a lot of whipsaw as stock price tend to move sideways.
Super Bearish Range: In above example, Super Bearish Range is marked in Purple box, under this RSI tends to oscillate between 20-40 zones and price moves downwards with accelerated speed.
Bearish Range: In above example Bearish Range is marked in Green box, under this RSI tends to oscillate between 20-65 zones. We can observe in the above chart as soon as the RSI touches the upper band of this range the price flatten and start correcting.
1. Pharmaceuticals major Cipla is featured in the fourth chart we are going to highlight. The chart below is of weekly time frame.
.CIPLA Weekly Chart
Sideways Range: In above example of Cipla weekly time frame, Sideways Range is marked in Red box, under this RSI tends to oscillate between 40 to 60-65 zones. It is evident that under this condition a trader can witness a lot of whipsaw as stock price tend to move sideways and there is no clear trend visible to trade.
Super bullish range: In above example of Cipla Weekly time frame, Super Bullish Range is marked in Blue Box, under this RSI tends to oscillate between range of 60-80. The stock started to move from level of Rs 430-440 and scaled up to levels of 700 plus in quick span. Under this range, intiating a long position is the best strategy.
1. Hybderabad based Pharmaceuticals Company Dr Reddy’s Laboratories is the fifth chart we are going to highlight. The chart below is of daily time frame.
DRREDDY Daily Chart
Bullish and Super Bullish: On the daily time frame the stock entered into a bullish and super bullish range from 3300 odd levels it went on to touch levels of 4300. Bullish and Super Bullish range marked in Blue box.
Sideways Range: After witnessing Bullish and Super Bullish range, stock entered into a sideways range and the price moved into a tight band. Sideways Range marked in Red box.
Super Bearish Range: After moving under sideways range for some time, the stock entered into a super bearish range and stock witnessed a sharp correction. Super Bearish range marked in purple box.
Conclusion:-
It takes years or even decade to decode the mystery of trading, this is because sometimes a trader is caught on the wrong end of the trend or sometimes trapped on the top of the trend or sometimes in anticipation of buying low and selling high trader is caught buying at wrong price. Hence, to become a successful trader it’s important to understand the trend of the asset class you are trading in. Under this method or techniques an average or even a professional trader can understand the trend of the market i.e. whether the market is in super bullish mode, bullish mode, sideways, bearish or super bearish mode.
How to use it effectively? It has been observed that the RSI tends to oscillate between 40 to 80 in an uptrend and 20 to 60-65 in a downtrend. Hence, look for buying opportunities in an uptrend when the RSI dips around the 40-50 range, look for initiating a short position in a downtrend when the RSI scales up to the level of 60-65 which is upper boundary of the bear market.