Use This New RSI Technique to Forecast Market Moves
Using the RSI to Forecast Reversals in TradingView
The Relative Strength Index (RSI) is a popular technical indicator used to measure the magnitude and velocity of recent price changes to evaluate overbought or oversold conditions in an asset. It’s based on the concept that when prices rise sharply, it’s likely that the asset is overbought, and when they fall sharply, it’s likely oversold.
This article shows how to create a technique called the deep three move on the RSI to forecast reversals.
A Gentle Refresher of the RSI
First introduced by J. Welles Wilder Jr., the RSI is one of the most popular and versatile technical indicators. Mainly used as a contrarian indicator where extreme values signal a reaction that can be exploited. Typically, we use the following steps to calculate the default RSI:
Calculate the change in the closing prices from the previous ones.
Separate the positive net changes from the negative net changes.
Calculate a smoothed moving average on the positive net changes and on the absolute values of the negative net changes.
Divide the smoothed positive changes by the smoothed negative changes. We will refer to this calculation as the Relative Strength — RS.
Apply the normalization formula shown below for every time step to get the RSI.
The RSI is used as follows:
An overbought indicator (values around 70–80) is saying that the bullish momentum should fade soon and we might see a correction or even a reversal on the downside.
An oversold indicator (values around 30–20) is saying that the bearish momentum should fade soon and we might see a correction or even a reversal on the upside.
The following chart shows an example of the RSI:
✨ Important note
The RSI is mathematically bounded between 0 and 100. Short-term RSI’s (with lookback periods such as 3 and 5) fluctuate more than long-term RSI’s (with lookback periods such as 14 and 21).
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The Deep Three Move
The deep three move is a timing technique that assumes a short-term reversal by following these conditions:
A bullish signal is generated whenever the recent four RSI’s are lower than their respective previous RSI’s all while being below 20. Additionally, the fifth RSI is greater than 20. The lookback period of the indicator is 8.
A bearish signal is generated whenever the recent four RSI’s are higher than their respective previous RSI’s all while being above 80. Additionally, the fifth RSI is lower than 80. The lookback period of the indicator is 8.
Use the following code in Pine Script (TradingView) to code the technique:
// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © Sofien-Kaabar
//@version=5
indicator("RSI Technique - Deep Three Move", overlay = true)
lookback = input(defval = 8, title = 'Lookback')
rsi = ta.rsi(close, lookback)
bullish_signal = rsi < rsi[1] and rsi[1] < rsi[2] and rsi[2] < rsi[3] and rsi[3] < 20 and rsi[4] > 20
bearish_signal = rsi > rsi[1] and rsi[1] > rsi[2] and rsi[2] > rsi[3] and rsi[3] > 80 and rsi[4] < 80
plotshape(bullish_signal, style = shape.triangleup, color = color.blue, location = location.belowbar, size = size.small)
plotshape(bearish_signal, style = shape.triangledown, color = color.orange, location = location.abovebar, size = size.small)The following chart shows an example of signals on EURAUD:
The following chart shows more signals from the technique:
The following chart shows more signals from the technique:
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