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Decoding RSI Range Shift Behavior

| 5/26/2016 4:40 PM Thursday

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

 

  • Bullish Range: It has been observed in the Bullish Range RSI tends to oscillate between 40-80 zones. Where, RSI reaches 40 it's a oversold zone and whenever RSI reaches 80 it’s an overbought zone.

  • Super Bullish Range:  It has been observed in the Super Bullish range RSI tends to oscillate between 60-80 zones. In this condition, whenever RSI reaches 60-65 it's a good opportunity to buy and its likely market may bounce back from these levels.

  • 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.

  • Super bearish range: It has been observed in the super bearish range RSI tends to oscillate between 20-40 zones. Under this condition, whenever RSI reaches 40 levels it's a sell for 20 RSI as target.

  • 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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