Leveraging The Candlestick RSI in Trading
Introducing and Coding The Candlestick RSI
The RSI has long been a trusted companion of traders and analysts, offering valuable insights into the momentum and potential reversals of financial assets. Yet, in the ever-evolving landscape of the financial markets, the quest for more effective trading tools and strategies never ceases. This pursuit of improvement and innovation has led to the exploration and development of variations on the classic RSI, opening up new dimensions of technical analysis.
In this article, we delve into the world of RSI variations and unveil the potential they hold for traders and investors. While the traditional RSI remains a cornerstone of technical analysis, the Candlestick RSI introduce exciting nuances that can enhance the precision and reliability of market predictions.
The Relative Strength Index (RSI)
The RSI is a popular momentum oscillator and technical indicator used by traders and investors to analyze and assess the strength and potential direction of a financial asset’s price movement. Developed by J. Welles Wilder, RSI is a widely used tool in technical analysis, particularly in the field of stock trading, but it is also applied to other financial markets like forex, commodities, and cryptocurrencies. It is based on the premise that prices tend to move in a certain way when they are overbought or oversold, and it aims to identify these overbought and oversold conditions to help traders make informed decisions. The RSI is typically displayed as a line graph that oscillates between 0 and 100 on a chart.
The RSI is presented as a line on a scale ranging from 0 to 100. It is often divided into three key zones:
Overbought zone (70+): When the RSI crosses above 70, it suggests that the asset may be overbought, meaning its price has risen too quickly and might be due for a correction or pullback. This can be a signal to sell or take profits.
Oversold zone (30-): When the RSI crosses below 30, it indicates that the asset may be oversold, implying that its price has fallen too quickly and could be due for a rebound or rally. This can be a signal to buy or enter a long position.
Neutral zone (between 30 and 70): When the RSI is within this range, it suggests that the asset is neither overbought nor oversold, and its price may be in a more stable phase. Traders often look for RSI crossovers within this range for potential trend confirmation.
You can also check out my other newsletter The Weekly Market Analysis Report that sends tactical directional views every weekend to highlight the important trading opportunities using technical analysis that stem from modern indicators. The newsletter is free.
If you liked this article, do not hesitate to like and comment, to further the discussion!
The Candlestick RSI
The Candlestick RSI is simply an RSI calculated on the open, high, low, and close data. After that, a candlestick is formed from these RSI calculations. The following chart shows the Candlestick RSI:
It is used as the regular RSI. However, due to it being a candlestick system, it may be clearer and may give better information regarding volatility and momentum.
The code for this indicator in Pine Script 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("K's Candlestick RSI", overlay = false)
lookback = input(defval = 13, title = 'Lookback')
open_price = ta.rsi(open, lookback)
high_price = ta.rsi(high, lookback)
low_price = ta.rsi(low, lookback)
close_price = ta.rsi(close, lookback)
open_price_final = math.min(open_price, high_price)
high_price_final = math.max(open_price, low_price, high_price, close_price)
low_price_final = math.min(open_price, low_price, high_price, close_price)
close_price_final = math.min(close_price, high_price)
palette = close_price > open_price ? color.rgb(117, 193, 255) : color.rgb(255, 118, 118)
plotcandle(open_price, high_price_final, low_price_final, close_price, color = palette)
hline(76.4)
hline(23.6)
hline(50)Candlestick RSIÂ Patterns
With candlesticks now available on an RSI, we can find new patterns. But what are candlestick patterns?
Candlestick patterns are a visual representation of price movements in financial markets, commonly used in technical analysis to help traders and investors make decisions about buying or selling assets. These patterns are created by the arrangement of candlesticks on a price chart and provide valuable insights into market sentiment, trend reversals, and potential future price movements. Here are some common candlestick patterns:
1. Doji: A Doji is a single candlestick with a small real body (the difference between the open and close prices) that opens and closes near the same level. It indicates uncertainty and potential market indecision.
2. Hammer: A Hammer has a small real body near the top of the candlestick and a long lower shadow, resembling a hammer. It is considered a bullish reversal pattern, signaling a potential price reversal to the upside.
3. Shooting star: The Shooting Star is the opposite of the Hammer. It has a small real body near the bottom of the candlestick with a long upper shadow, indicating a potential bearish reversal.
4. Engulfing: An Engulfing Pattern occurs when one candlestick completely engulfs the previous one. A bullish engulfing pattern forms after a downtrend and suggests a potential bullish reversal, while a bearish engulfing pattern forms after an uptrend and suggests a potential bearish reversal.
In previous articles, I have talked about some modern patterns on the Candlestick RSI. One of these patterns is the Five Spikes pattern as shown in the following charts.
The conditions of the pattern are as follows:
A bullish pattern occurs whenever there’s five consecutive spike-like structures that appear on the RSI where each of the low-RSI values are below 23.6.
A bearish pattern occurs whenever there’s five consecutive spike-like structures that appear on the RSI where each of the high-RSI values are above 76.4.
You can also check out my other newsletter The Weekly Market Sentiment Report that sends tactical directional views every weekend to highlight the important trading opportunities using a mix between sentiment analysis (COT reports, Put-Call ratio, Gamma exposure index, etc.) and technical analysis.