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Essential RSI Methods — The Conservative Technique
Presenting the RSI Conservative Technique
This article is based on a new series of studies that showcase a few trading techniques based on the RSI. A trading technique is a way to use an indicator. The study is based on Pine Script, TradingView’s coding language.
The Fibonacci Trading Book is finally out! Filled with Fibonacci-based trading methods (tools, indicators, patterns, and strategies), this book will guide you through improving your trading and analysis by incorporating an important technical analysis approach that is Fibonacci [PDF Version available, see end of article).
A Gentle Introduction to the RSI
The RSI stands for Relative Strength Index, a technical analysis indicator used to measure the strength and momentum of a security, such as a stock, currency, or commodity. The RSI is calculated using mathematical formulas and plotted on a graph to visually represent the level of strength or weakness of a security over a given period.
The RSI is based on the principle that as prices rise, the security becomes overbought, and as prices fall, the security becomes oversold. The RSI helps traders to identify potential trend reversals or price corrections.
The RSI calculation involves comparing the average gain of the security over a given period to the average loss of the security over the same period. The default version of the RSI is then plotted on a scale of 0 to 100, with readings above 70 considered overbought, and readings below 30 considered oversold. The RSI is a popular indicator among traders because it can provide early warning signals of potential market trends. For example, if the RSI of a security is consistently rising and reaches a level above 70, it could indicate that the security is overbought and due for a correction. On the other hand, if the RSI is consistently falling and reaches a level below 30, it could indicate that the security is oversold and due for a bounce-back.
It’s worth noting that the RSI should not be used in isolation as a sole basis for making trading decisions. Traders typically use the RSI in conjunction with other technical analysis tools and market indicators to gain a more comprehensive understanding of the market conditions and make informed trading decisions. Generally, the RSI is calculated over a rolling period of 14.
The Conservative Technique
The cnoservative way of using the RSI is actually just the confirmation that the RSI has exited the oversold/overbought levels. While the aggressive way generates the signal the moment the RSI penetrates the oversold/overbought levels, the conservative way is to generate the signal whenever it exits these levels. The trading conditions are as follows:
A bullish signal is detected whenever the RSI surpasses 30 after having been below it.
A bearish signal is detected whenever the RSI breaks 70 after having been above it.
A picture is worth a thousand words. The following Figure shows a bullish signal based on the technique:
The following Figure shows a bearish signal based on the technique:
The code in Pine Script (TradingView’s coding language) is as follows:
// 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 - Conservative", overlay = true) lookback = input(defval = 14, title = 'Lookback') rsi = ta.rsi(close, lookback) bullish_signal = rsi > 30 and rsi < 30 bearish_signal = rsi < 70 and rsi > 70 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 Figure shows a few signals based on the technique:
The link to the Fibonacci Trading Book (PDF version):
Notice how this technique has a lot of false signals which are also consecutive sometimes. You are bound to encounter a few bad signals, especially during trending periods as illustrated by the following Figure: