V For Very Accurately Predicted Reversal
Showing The V Reversal Technique on The RSI
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 V reversal on the RSI.
The Relative Strength Index (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 V Reversal Technique
The name V reversal refers to the shape that the RSI makes when validating a directional signal based on this technique. The intuition is quite clear. The conditions for the technique are as follows:
A bullish signal is generated whenever the current 8-period RSI is above 15 but below 50, the previous RSI value is below 15, and the one prior to it is above 15.
A bearish signal is generated whenever the current 8-period RSI is below 85 but above 50, the previous RSI value is above 85, and the one prior to it is below 85.
The following chart shows a few signals generated by the indicator:
Use this code in Pine Script (TradingView) to create the indicator):
// 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 - V", overlay = true)
lookback = input(defval = 8, title = 'Lookback')
rsi = ta.rsi(close, lookback)
bullish_signal = rsi > 15 and rsi < 50 and rsi[1] < 15 and rsi[2] > 15
bearish_signal = rsi < 85 and rsi > 50 and rsi[1] > 85 and rsi[2] < 85
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)✨ Important note
The bullish signal is validated when the RSI shapes a V configuration as seen with the conditions. The bearish signal resembles an inverted V.
The following chart shows more signals generated by the indicator:
The following chart shows more signals generated by the indicator. Notice that sometimes the signals are quite rare.
It is up to you to tweak the lookback period of the RSI, but the default 8 periods seems to be adequate across many markets.
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